SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF1934 - For the fiscal year ended December 31, 2001
Commission file number 1-5467
VALHI, INC.
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(Exact name of registrant as specified in its charter)
Delaware 87-0110150
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common stock New York Stock Exchange
($.01 par value per share) Pacific Stock Exchange
9.25% Liquid Yield Option Notes, New York Stock Exchange
due October 20, 2007
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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
As of February 28, 2002, 114,773,617 shares of common stock were outstanding.
The aggregate market value of the 7.3 million shares of voting stock held by
nonaffiliates of Valhi, Inc. as of such date approximated $86.6 million.
Documents incorporated by reference
The information required by Part III is incorporated by reference from the
Registrant's definitive proxy statement to be filed with the Commission pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
[INSIDE FRONT COVER]
A chart showing, as of December 31, 2001, (i) Valhi's 61% ownership of NL
Industries, Inc., (ii) Valhi's 69% ownership of CompX International Inc., (iii)
Valhi's 90% ownership of Waste Control Specialists LLC, (iv) Valhi's and NL's
80% and 20%, respectively, ownership in Tremont Group, Inc., (v) Tremont Group's
80% ownership of Tremont Corporation, (vi) Tremont's 39% ownership of Titanium
Metals Corporation and (vii) Tremont's 21% ownership of NL.
PART I
ITEM 1. BUSINESS
As more fully described on the chart on the opposite page, Valhi, Inc.
(NYSE: VHI), has operations through majority-owned subsidiaries or less than
majority-owned affiliates in the chemicals, component products, waste management
and titanium metals industries. Information regarding the Company's business
segments and the companies conducting such businesses is set forth below.
Business and geographic segment financial information is included in Note 2 to
the Company's Consolidated Financial Statements, which information is
incorporated herein by reference. The Company is based in Dallas, Texas.
Chemicals NL is the world's fifth-largest producer,
NL Industries, Inc. and Europe's second-largest producer, of
titanium dioxide pigments ("TiO2"), which
are used for imparting whiteness,
brightness and opacity to a wide range of
products including paints, plastics,
paper, fibers and other "quality-of-life"
products. NL had an estimated 11% share
of worldwide TiO2 sales volume in 2001.
NL has production facilities throughout
Europe and North America.
Component Products CompX is a leading manufacturer of
CompX International Inc. ergonomic computer support systems,
precision ball bearing slides and
security products for office furniture,
computer-related applications and a
variety of other products. CompX has
production facilities in North America,
Europe and Asia.
Waste Management Waste Control Specialists owns and
Waste Control Specialists LLC operates a facility in West Texas for the
processing, treatment, storage and
disposal of hazardous, toxic and certain
types of low-level radioactive wastes.
Waste Control Specialists is seeking
additional regulatory authorizations to
expand its treatment and disposal
capabilities for low-level and mixed
radioactive wastes.
Titanium Metals Titanium Metals Corporation ("TIMET") is
Titanium Metals Corporation the world's largest integrated producer
of titanium sponge, melted products
(ingot and slab) and mill products. TIMET
had an estimated 24% share of worldwide
industry shipments of titanium mill
products in 2001. TIMET has production
facilities in the U.S. and Europe. TIMET
is continuing its efforts to develop new
applications for titanium in the
automotive and other emerging markets.
Valhi, a Delaware corporation, is the successor of the 1987 merger of LLC
Corporation and another entity. Contran Corporation holds, directly or through
subsidiaries, approximately 94% 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 the sole trustee. Mr. Simmons is Chairman of
the Board and Chief Executive Officer of Contran and Valhi and may be deemed to
control such companies. NL (NYSE: NL), CompX (NYSE: CIX), Tremont (NYSE: TRE)
and TIMET (NYSE: TIE) each file periodic reports with the Securities and
Exchange Commission. The information set forth below with respect to such
companies has been derived from such reports.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Annual Report on Form 10-K relating to matters that are not historical facts,
including, but not limited to, statements found in this Item 1 - "Business,"
Item 3 - "Legal Proceedings," Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 7A - "Quantitative and
Qualitative Disclosures About Market Risk," are forward-looking statements that
represent management's beliefs and assumptions based on currently available
information. Forward-looking statements can be identified by the use of words
such as "believes," "intends," "may," "should," "could," "anticipates,"
"expected" or comparable terminology, or by discussions of strategies or trends.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it cannot give any assurances that
these expectations will prove to be correct. Such statements by their nature
involve substantial risks and uncertainties that could significantly impact
expected results, and actual future results could differ materially from those
described in such forward-looking statements. While it is not possible to
identify all factors, the Company continues to face many risks and
uncertainties. Among the factors that could cause actual future results to
differ materially are the risks and uncertainties discussed in this Annual
Report and those described from time to time in the Company's other filings with
the Securities and Exchange Commission including, but not limited to, future
supply and demand for the Company's products, the extent of the dependence of
certain of the Company's businesses on certain market sectors (such as the
dependence of TIMET's titanium metals business on the aerospace industry), the
cyclicality of certain of the Company's businesses (such as NL's TiO2 operations
and TIMET's titanium metals operations), the impact of certain long-term
contracts on certain of the Company's businesses (such as the impact of TIMET's
long-term contracts with certain of its customers and such customers'
performance hereunder), customer inventory levels (such as the extent to which
NL's customers may, from time to time, accelerate purchases of TiO2 in advance
of anticipated price increases or defer purchases of TiO2 in advance of
anticipated price decreases, or the relationship between inventory levels of
TIMET's customers and such customer's current inventory requirements and the
impact of such relationship on their purchases from TIMET), changes in raw
material and other operating costs (such as energy costs), the possibility of
labor disruptions, general global economic 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),
competitive products and substitute products, customer and competitor
strategies, the impact of pricing and production decisions, competitive
technology positions, the introduction of trade barriers, fluctuations in
currency exchange rates (such as changes in the exchange rate between the U.S.
dollar and each of the euro and the Canadian dollar), operating interruptions
(including, but not limited to, labor disputes, leaks, fires, explosions,
unscheduled or unplanned downtime and transportation interruptions), recoveries
from insurance claims and the timing thereof (such as NL's insurance claims with
respect to the fire it suffered at one of its German TiO2 production facilities
in 2001), potential difficulties in integrating completed acquisitions,
uncertainties associated with new product development (such as TIMET's ability
to develop new applications for titanium), environmental matters (such as those
requiring emission and discharge standards for existing and new facilities),
government laws and regulations and possible changes therein (such as a change
in Texas state law which would allow the applicable regulatory agency to issue a
permit for the disposal of low-level radioactive wastes to a private entity such
as Waste Control Specialists, or changes in government regulations which might
impose various obligations on present and former manufacturers of lead pigment
and lead-based paint, including NL, with respect to asserted health concerns
associated with the use of such products), the ultimate resolution of pending
litigation (such as NL's lead pigment litigation and litigation surrounding
environmental matters of NL, Tremont and TIMET) and possible future litigation.
Should one or more of these risks materialize (or the consequences of such a
development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected. The
Company disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of new information, future events
or otherwise.
CHEMICALS - NL INDUSTRIES, INC.
General. NL Industries is an international producer and marketer of TiO2 to
customers in over 100 countries from facilities located throughout Europe and
North America. NL's TiO2 operations are conducted through its wholly-owned
subsidiary, Kronos, Inc. Kronos is the world's fifth-largest TiO2 producer, with
an estimated 11% share of worldwide TiO2 sales volumes in 2001. Approximately
one-half of Kronos' 2001 sales volumes were attributable to markets in Europe,
where Kronos is the second-largest producer of TiO2 with an estimated 18% share
of European TiO2 sales volumes. Kronos has an estimated 13% share of North
American TiO2 sales volumes. Ti02 accounted for substantially all of NL's net
sales in 2001.
Pricing within the global TiO2 industry is cyclical, and changes in
industry economic conditions can significantly impact NL's earnings and
operating cash flows. NL's average TiO2 selling prices (in billing currencies)
were generally decreasing during each quarter of 2001 as compared to the
respective prior quarter. This compared with generally increasing TiO2 selling
prices during each quarter of 2000 as compared to the respective prior quarter,
which continued the upward trend in prices that began in the fourth quarter of
1999.
Products and operations. Titanium dioxide pigments are chemical products
used for imparting whiteness, brightness and opacity to a wide range of
products, including paints, paper, plastics, fibers and ceramics. TiO2 is
considered to be a "quality-of-life" product with demand affected by the gross
domestic product in various regions of the world.
TiO2 is produced in two crystalline forms: rutile and anatase. Rutile TiO2
is a more tightly bound crystal that has a higher refractive index than anatase
TiO2 and, therefore, better opacification and tinting strength in many
applications. Although many end-use applications can use either form of TiO2,
rutile TiO2 is the preferred form for use in coatings, plastics and ink. Anatase
TiO2 has a bluer undertone and is less abrasive than rutile TiO2, and it is
often preferred for use in paper, ceramics, rubber and man-made fibers.
Per capita Ti02 consumption in the United States and Western Europe far
exceeds that in other areas of the world and these regions are expected to
continue to be the largest consumers of TiO2. Significant regions for TiO2
consumption could emerge in Eastern Europe, the Far East or China if the
economies in these countries develop to the point that quality-of-life products,
including TiO2, are in greater demand. Kronos believes that, due to its strong
presence in Western Europe, it is well positioned to participate in potential
growth in consumption of Ti02 in Eastern Europe.
NL believes that there are no effective substitutes for TiO2. However,
extenders such as kaolin clays, calcium carbonate and polymeric opacifiers are
used in a number of Kronos' markets. Generally, extenders are used to reduce to
some extent the utilization of higher-cost TiO2. The use of extenders has not
significantly changed TiO2 consumption over the past decade because, to date,
extenders generally have failed to match the performance characteristics of
TiO2. As a result, NL believes that the use of extenders will not materially
alter the growth of the TiO2 business in the foreseeable future.
Kronos currently produces over 40 different TiO2 grades, sold under the
Kronos trademark, which provide a variety of performance properties to meet
customers' specific requirements. Kronos' major customers include domestic and
international paint, paper and plastics manufacturers. Kronos and its
distributors and agents sell and provide technical services for its products to
over 4,000 customers with the majority of sales in Europe and North America.
Kronos distributes its TiO2 by rail, truck and ocean carrier in either dry or
slurry form. Kronos and its predecessors have produced and marketed TiO2 in
North America and Europe for over 80 years. As a result, Kronos believes that it
has developed considerable expertise and efficiency in the manufacture, sale,
shipment and service of its products in domestic and international markets. By
volume, approximately one-half of Kronos' 2001 TiO2 sales were to Europe, with
about 38% to North America and the balance to export markets.
Kronos is also engaged in the mining and sale of ilmenite ore (a raw
material used in the sulfate pigment production process described below), and
Kronos has estimated ilmenite reserves that are expected to last at least 20
years. Kronos is also engaged in the manufacture and sale of iron-based water
treatment chemicals (derived from co-products of the pigment production
processes). Kronos' water treatment chemicals are used as treatment and
conditioning agents for industrial effluents and municipal wastewater, and in
the manufacture of iron pigments.
Manufacturing process, properties and raw materials. TiO2 is manufactured
by Kronos using both the chloride process and the sulfate process. Approximately
70% of Kronos' current production capacity is based on its chloride process,
which generates less waste than the sulfate process. The sulfate process is a
batch chemical process that uses sulfuric acid to extract TiO2. Sulfate
technology normally produces either anatase or rutile pigment. The chloride
process is a continuous process in which chlorine is used to extract rutile
Ti02. In general, the chloride process is also less intensive than the sulfate
process in terms of capital investment, labor and energy. Because much of the
chlorine is recycled and higher titanium-containing feedstock is used, the
chloride process produces less waste. Once an intermediate TiO2 pigment has been
produced by either the chloride or sulfate process, it is finished into products
with specific performance characteristics for particular end-use applications
through proprietary processes involving various chemical surface treatments and
intensive milling and micronizing. Due to environmental factors and customer
considerations, the proportion of TiO2 industry sales represented by
chloride-process pigments has increased relative to sulfate-process pigments,
and chloride-process production facilities in 2001 represented approximately 60%
of industry capacity.
During 2001, Kronos operated four TiO2 facilities in Europe (Leverkusen and
Nordenham, Germany; Langerbrugge, Belgium; and Fredrikstad, Norway). In North
America, Kronos has a facility in Varennes, Quebec and, through a manufacturing
joint venture discussed below, a one-half interest in a plant in Lake Charles,
Louisiana. Kronos also owns a Ti02 slurry facility in Louisiana and leases
various corporate and administrative offices in the U.S. and various sales
offices in Europe. All of Kronos' principal production facilities are owned,
except for the land under the Leverkusen facility. Kronos also has a
governmental concession with an unlimited term to operate its ilmenite mine in
Norway. During a portion of 2001, production at Kronos' Leverkusen, Germany TiO2
facility was halted due to the effects of a March fire. See Note 12 to the
Consolidated Financial Statements.
Kronos' principal German operating subsidiary leases the land under its
Leverkusen production facility pursuant to a lease expiring in 2050. The
Leverkusen facility, representing about one-third of Kronos' current aggregate
TiO2 production capacity, is located within an extensive manufacturing complex
owned by Bayer AG, and Kronos is the only unrelated party so situated. Under a
separate supplies and services agreement expiring in 2011, Bayer provides some
raw materials, auxiliary and operating materials and utilities services
necessary to operate the Leverkusen facility. Both the lease and supplies and
services agreement restrict Kronos' ability to transfer ownership or use of the
Leverkusen facility.
Kronos produced 412,000 metric tons of TiO2 in 2001, down 7% from the
record 441,000 metric tons of TiO2 in 2000 and just slightly higher than the
411,000 metric tons of TiO2 Kronos produced in 1999. The decline in TiO2
production in 2001 was due in part to the effects of the fire discussed above.
Kronos' average production capacity utilization rate in 2001 was 91%, compared
to near full capacity utilization in 2000 and about 93% utilization in 1999.
Kronos believes its current annual attainable production capacity is
approximately 455,000 metric tons, including the production capacity relating to
its one-half interest in the Louisiana plant. Kronos expects to be able to
increase its production capacity (primarily at its chloride-process facilities)
to approximately 480,000 metric tons during 2005 with only moderate capital
expenditures.
The primary raw materials used in the TiO2 chloride production process are
chlorine, coke and titanium-containing feedstock derived from beach sand
ilmenite and natural rutile ore. Chlorine and coke are available from a number
of suppliers. Titanium-containing feedstock suitable for use in the chloride
process is available from a limited number of suppliers around the world,
principally located in Australia, South Africa, Canada, India and the United
States. Kronos purchases slag refined from ilmenite sand from Richards Bay Iron
and Titanium (Proprietary) Ltd. (South Africa) under a long-term supply contract
that expires at the end of 2006. Natural rutile ore is purchased primarily from
Iluka Resources, Limited (Australia) under a long-term supply contract that
currently expires at the end of 2005. Kronos does not expect to encounter
difficulties obtaining long-term extensions to existing supply contracts prior
to the expiration of the contracts. Raw materials purchased under these
contracts and extensions thereof are expected to meet Kronos' chloride feedstock
requirements over the next several years.
The primary raw materials used in the TiO2 sulfate production process are
sulfuric acid and titanium-containing feedstock derived primarily from rock and
beach sand ilmenite. Sulfuric acid is available from a number of suppliers.
Titanium-containing feedstock suitable for use in the sulfate process is
available from a limited number of suppliers around the world. Currently, the
principal active sources are located in Norway, Canada, Australia, India and
South Africa. As one of the few vertically-integrated producers of
sulfate-process pigments, Kronos operates a Norwegian rock ilmenite mine which
provided all of Kronos' feedstock for its European sulfate-process pigment
plants in 2001. Kronos also purchases sulfate grade slag for its Canadian plant
from Q.I.T. Fer et Titane Inc. (Canada) under a long-term supply contract which
expires in 2006.
Kronos believes the availability of titanium-containing feedstock for both
the chloride and sulfate processes is adequate for the next several years.
Kronos does not expect to experience any interruptions of its raw material
supplies because of its long-term supply contracts. However, political and
economic instability in certain countries from which Kronos purchases its raw
material supplies could adversely affect the availability of such feedstock.
Should Kronos' vendors not be able to meet their contractual obligations or
should Kronos be otherwise unable to obtain necessary raw materials, Kronos may
incur higher costs for raw materials or may be required to reduce production
levels, which may have a material adverse effect on NL's financial position,
results of operations or liquidity.
TiO2 manufacturing joint venture. Subsidiaries of Kronos and Huntsman
International Holdings ("HICI") each own a 50%-interest in a manufacturing joint
venture. The joint venture owns and operates a chloride-process TiO2 plant in
Lake Charles, Louisiana. Production from the plant is shared equally by Kronos
and HICI pursuant to separate offtake agreements. The manufacturing joint
venture operates on a break-even basis, and accordingly Kronos' transfer price
for its share of the TiO2 produced is equal to its share of the joint venture's
costs. A supervisory committee, composed of four members, two of whom are
appointed by each partner, directs the business and affairs of the joint
venture, including production and output decisions. Two general managers, one
appointed and compensated by each partner, manage the operations of the joint
venture acting under the direction of the supervisory committee.
Competition. The TiO2 industry is highly competitive. Kronos competes
primarily on the basis of price, product quality and technical service, and the
availability of high performance pigment grades. Although certain TiO2 grades
are considered specialty pigments, the majority of Kronos' grades and
substantially all of Kronos' production are considered commodity pigments with
price generally being the most significant competitive factor. During 2001,
Kronos had an estimated 11% share of worldwide TiO2 sales volumes, and Kronos
believes that it is the leading seller of TiO2 in a number of countries,
including Germany and Canada.
Kronos' principal competitors are E.I. du Pont de Nemours & Co. ("DuPont"),
Millennium Chemicals, Inc., HICI, Kerr-McGee Corporation and Ishihara Sangyo
Kaisha, Ltd. These five largest competitors have estimated individual worldwide
shares of TiO2 production capacity ranging from 5% to 23%, and an aggregate
estimated 70% share of worldwide TiO2 production volume. DuPont has about
one-half of total U.S. TiO2 production capacity and is Kronos' principal North
American competitor.
Worldwide capacity additions in the TiO2 market resulting from construction
of greenfield plants require significant capital expenditures and substantial
lead time (typically three to five years in NL's experience). No greenfield
plants have been announced, and certain competitors have announced that they
have either idled or shut down facilities, but NL expects industry capacity to
increase as Kronos and its competitors debottleneck existing facilities. Based
on factors described above, NL expects that the average annual increase in
industry capacity from announced debottlenecking projects will be less than the
average annual demand growth for TiO2 during the next three to five years.
However, no assurance can be given that future increases in the TiO2 industry
production capacity and future average annual demand growth rates for TiO2 will
conform to NL's expectations. If actual developments differ from NL's
expectations, NL and the TiO2 industry's performance could be unfavorably
affected.
Research and development. Kronos' annual expenditures for research and
development and certain technical support programs have averaged approximately
$6 million during the past three years. TiO2 research and development activities
are conducted principally at Kronos' Leverkusen, Germany facility. Such
activities are directed primarily towards improving both the chloride and
sulfate production processes, improving product quality and strengthening
Kronos' competitive position by developing new pigment applications.
Patents and trademarks. Patents held for products and production processes
are believed to be important to NL and to the continuing business activities of
Kronos. NL continually seeks patent protection for its technical developments,
principally in the United States, Canada and Europe, and from time to time
enters into licensing arrangements with third parties. NL's major trademarks,
including Kronos, are protected by registration in the United States and
elsewhere with respect to those products it manufactures and sells.
Customer base and seasonality. NL believes that neither its aggregate sales
nor those of any of its principal product groups are concentrated in or
materially dependent upon any single customer or small group of customers.
Kronos' largest ten customers accounted for about one-fourth of chemicals sales
during 2001. Neither NL's business as a whole nor that of any of its principal
product groups is seasonal to any significant extent. Due in part to the
increase in paint production in the spring to meet spring and summer painting
season demand, TiO2 sales are generally higher in the second and third calendar
quarters than in the first and fourth calendar quarters.
Employees. As of December 31, 2001, NL employed approximately 2,500 persons
(excluding employees of the Louisiana joint venture), with 100 employees in the
United States and 2,400 at non-U.S. sites. Hourly employees in production
facilities worldwide, including the TiO2 joint venture, are represented by a
variety of labor unions, with labor agreements having various expiration dates.
NL believes its labor relations are good.
Regulatory and environmental matters. Certain of NL's businesses are and
have been engaged in the handling, manufacture or use of substances or compounds
that may be considered toxic or hazardous within the meaning of applicable
environmental laws. As with other companies engaged in similar businesses,
certain past and current operations and products of NL have the potential to
cause environmental or other damage. NL has implemented and continues to
implement various policies and programs in an effort to minimize these risks.
NL's policy is to maintain compliance with applicable environmental laws and
regulations at all of its facilities and to strive to improve its environmental
performance. It is possible that future developments, such as stricter
requirements of environmental laws and enforcement policies thereunder, could
adversely affect NL's production, handling, use, storage, transportation, sale
or disposal of such substances as well as NL's consolidated financial position,
results of operations or liquidity.
NL's U.S. manufacturing operations are governed by federal environmental
and worker health and safety laws and regulations, principally the Resource
Conservation and Recovery Act ("RCRA"), the Occupational Safety and Health Act
("OSHA"), the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act,
the Toxic Substances Control Act ("TSCA"), and the Comprehensive Environmental
Response, Compensation and Liability Act, as amended by the Superfund Amendments
and Reauthorization Act ("CERCLA"), as well as the state counterparts of these
statutes. NL believes that the Louisiana Ti02 plant owned and operated by the
joint venture and a slurry facility owned by NL are in substantial compliance
with applicable requirements of these laws or compliance orders issued
thereunder. From time to time, NL's facilities may be subject to environmental
regulatory enforcement under such statutes. Resolution of such matters typically
involves the establishment of compliance programs. Occasionally, resolution may
result in the payment of penalties, but to date such penalties have not involved
amounts having a material adverse effect on NL's consolidated financial
position, results of operations or liquidity.
NL's European and Canadian production facilities operate in an
environmental regulatory framework in which governmental authorities typically
are granted broad discretionary powers which allow them to issue operating
permits required for the plants to operate. NL believes all of its European and
Canadian plants are in substantial compliance with applicable environmental
laws. While the laws regulating operations of industrial facilities in Europe
vary from country to country, a common regulatory denominator is provided by the
European Union ("EU"). Germany and Belgium, each members of the EU, follow the
initiatives of the EU; Norway, although not a member, generally patterns its
environmental regulatory actions after the EU. Kronos believes it is in
substantial compliance with agreements reached with European regulatory
authorities and with an EU directive to control the effluents produced by its
TiO2 production facilities.
NL has a contract with a third party to treat certain German
sulfate-process effluents. Either party may terminate the contract after giving
four years notice with regard to the Nordenham plant. Under certain
circumstances, Kronos may terminate the contract after giving six months notice
with respect to treatment of effluents from the Leverkusen plant.
NL's capital expenditures related to its ongoing environmental protection
and improvement programs were approximately $5 million in 2001, and are
currently expected to approximate $5 million in 2002 and $4 million in 2003.
NL has been named as a defendant, potentially responsible party ("PRP") or
both, pursuant to CERCLA and similar state laws in approximately 75 governmental
and private actions associated with waste disposal sites, mining locations and
facilities currently or previously owned, operated or used by NL or its
subsidiaries and their predecessors, certain of which are on the U.S.
Environmental Protection Agency's Superfund National Priorities List or similar
state lists. See Item 3 - "Legal Proceedings."
COMPONENT PRODUCTS - COMPX INTERNATIONAL INC.
General. CompX is a leading manufacturer of precision ball bearing slides,
ergonomic computer support systems and security products (cabinet locks and
other locking mechanisms) for office furniture, computer-related applications
and a variety of other products. CompX's products are principally designed for
use in medium- to high-end applications, where product design, quality and
durability are critical to CompX's customers. CompX believes that it is among
the world's largest producers of ergonomic computer support systems for office
furniture manufacturers, precision ball bearing slides and security products. In
2001, precision ball bearing slides, security products and ergonomic computer
support systems accounted for approximately 44%, 35% and 17% of net sales,
respectively, with the remaining sales generated from other products.
In 1999, CompX acquired two slide producers. In 2000, CompX acquired a lock
producer. See Note 3 to the Consolidated Financial Statements. These
acquisitions have expanded CompX's product lines and customer base.
Products, product design and development. Precision ball bearing slides are
used in such applications as file cabinets, desk drawers, tool storage cabinets,
imaging equipment and computer network server cabinets. These products include
CompX's Integrated Slide Lock in which a file cabinet manufacturer can reduce
the possibility of multiple drawers being opened at the same time, and the
adjustable Ball Lock which reduces the risk of heavily-filled drawers, such as
auto mechanic tool boxes, from opening while in movement.
Security products, or locking mechanisms, are used in applications such as
computers, vending and gaming machines, ignition systems, motorcycle storage
compartments, hotel room safes, parking meters, electrical circuit panels and
transportation equipment as well as office and institutional furniture. These
include CompX's KeSet high security system, which has the ability to change the
keying on a single lock 64 times without removing the lock from its enclosure.
Ergonomic computer support systems include adjustable computer keyboard
support arms, designed to attach to office desks in the workplace and home
office environments to alleviate possible strains and stress and maximize usable
workspace, adjustable computer table mechanisms which provide variable workspace
heights, CPU storage devices which minimize adverse effects of dust and moisture
and a number of complementary accessories, including ergonomic wrist rest aids,
mouse pad supports and computer monitor support arms. These products include
CompX's Leverlock ergonomic keyboard arm, which is designed to make the
adjustment of the keyboard arm easier for all (including physically-challenged)
users.
CompX's precision ball bearing slides and ergonomic computer support
systems are sold under the Waterloo Furniture Components Limited, Thomas Regout
and Dynaslide brand names, and its security products are sold under the National
Cabinet Lock, Fort Lock, Timberline Lock and Chicago Lock brand names. CompX
believes that its brand names are well recognized in the industry.
Sales, marketing and distribution. CompX sells components to original
equipment manufacturers ("OEMs") and to distributors through a dedicated sales
force. The majority of CompX's sales are to OEMs, while the balance represents
standardized products sold through distribution channels. Sales to large OEM
customers are made through the efforts of factory-based sales and marketing
professionals and engineers working in concert with salaried field salespeople
and independent manufacturer's representatives. Manufacturers' representatives
are selected based on special skills in certain markets or relationships with
current or potential customers.
A significant portion of CompX's sales are made through distributors. CompX
has a significant market share of cabinet lock sales to the locksmith
distribution channel. CompX supports its distributor sales with a line of
standardized products used by the largest segments of the marketplace. These
products are packaged and merchandised for easy availability and handling by
distributors and the end user. Based on CompX's successful STOCK LOCKS inventory
program, similar programs have been implemented for distributor sales of
ergonomic computer support systems and to some extent precision ball bearing
slides. CompX also operates a small tractor/trailer fleet that provides delivery
for products manufactured at its Canadian operations.
CompX does not believe it is dependent upon one or a few customers, the
loss of which would have a material adverse effect on its operations. In 2001,
the ten largest customers accounted for about 36% of component products sales
(2000 - 35%; 1999 - 33%). In each of the past three years, none of such largest
customers individually represented over 10% of sales.
Manufacturing and operations. At December 31, 2001, CompX operated six
manufacturing facilities in North America (two in each of Illinois and Ontario,
Canada and one in each of South Carolina and Michigan), one facility in The
Netherlands and two facilities in Taiwan. Ergonomic products or precision ball
bearing slides are manufactured in the facilities located in Canada, The
Netherlands, Michigan and Taiwan and security products are manufactured in the
facilities located in South Carolina and Illinois. All of such facilities are
owned by CompX except for one of the facilities in Taiwan and the facility in
The Netherlands, which are leased. See Note 12 to the Consolidated Financial
Statements. CompX also leases a distribution center in California. CompX
believes that all its facilities are well maintained and satisfactory for their
intended purposes.
Raw materials. Coiled steel is the major raw material used in the
manufacture of precision ball bearing slides and ergonomic computer support
systems. Plastic resins for injection molded plastics are also an integral
material for ergonomic computer support systems. Purchased components, including
zinc castings, are the principal raw materials used in the manufacture of
security products. These raw materials are purchased from several suppliers and
readily available from numerous sources.
CompX occasionally enters into raw material arrangements to mitigate the
short-term impact of future increases in raw material costs. While these
arrangements do not commit CompX to a minimum volume of purchases, they
generally provide for stated unit prices based upon achievement of specified
volume purchase levels. This allows CompX to stabilize raw material purchase
prices, provided the specified minimum monthly purchase quantities are met.
Materials purchased outside of these arrangements are sometimes subject to
unanticipated and sudden price increases. Due to the competitive nature of the
markets served by CompX's products, it is often difficult to recover such
increases in raw material costs through increased product selling prices.
Consequently, overall operating margins can be affected by such raw material
cost pressures.
Competition. The office furniture and security products markets are highly
competitive. CompX competes primarily on the basis of product design, including
ergonomic and aesthetic factors, product quality and durability, price, on-time
delivery, service and technical support. CompX focuses its efforts on the
middle- and high-end segments of the market, where product design, quality,
durability and service are placed at a premium.
CompX competes in the ergonomic computer support system market with one
major producer and a number of smaller domestic and foreign manufacturers that
compete primarily on the basis of product quality, features and price. CompX
competes in the precision ball bearing slide market with two large manufacturers
and a number of smaller domestic and foreign manufacturers that compete
primarily on the basis of product quality and price. CompX competes in the
security products market with a variety of relatively small domestic and foreign
competitors, which makes significant selling price increases difficult. Although
CompX believes that it has been able to compete successfully in its markets to
date, there can be no assurance that it will be able to continue to do so in the
future.
Patents and trademarks. CompX holds a number of patents relating to its
component products, certain of which are believed by CompX to be important to
its continuing business activities, and owns a number of trademarks and brand
names, including National Cabinet Lock, Fort Lock, Timberline Lock, Chicago
Lock, Thomas Regout, STOCK LOCKS, ShipFast, Waterloo Furniture Components
Limited and Dynaslide. CompX believes these trademarks are well recognized in
the component products industry.
Regulatory and environmental matters. CompX's operations are subject to
federal, state, local and foreign laws and regulations relating to the use,
storage, handling, generation, transportation, treatment, emission, discharge,
disposal and remediation of, and exposure to, hazardous and non-hazardous
substances, materials and wastes. CompX's operations are also subject to
federal, state, local and foreign laws and regulations relating to worker health
and safety. CompX believes that it is in substantial compliance with all such
laws and regulations. The costs of maintaining compliance with such laws and
regulations have not significantly impacted CompX to date, and CompX has no
significant planned costs or expenses relating to such matters. There can be no
assurance, however, that compliance with such future laws and regulations will
not require CompX to incur significant additional expenditures, or that such
additional costs would not have a material adverse effect on CompX's
consolidated financial condition, results of operations or liquidity.
Employees. As of December 31, 2001, CompX employed approximately 2,000
employees, including 790 in the United States, 710 in Canada, 340 in The
Netherlands and 160 in Taiwan. Approximately 79% of CompX's employees in Canada
are covered by a collective bargaining agreement which expires in 2003. CompX
believes its labor relations are satisfactory.
WASTE MANAGEMENT - WASTE CONTROL SPECIALISTS LLC
General. Waste Control Specialists LLC, formed in 1995, completed
construction in early 1997 of the initial phase of its facility in West Texas
for the processing, treatment, storage and disposal of certain hazardous and
toxic wastes, and the first of such wastes were received for disposal in 1997.
Subsequently, Waste Control Specialists has expanded its permitting
authorizations to include the processing, treatment and storage of low-level and
mixed radioactive wastes and the disposal of certain types of low-level
radioactive wastes. To date, Valhi has contributed $75 million to Waste Control
Specialists in return for its 90% membership equity interest, which cash capital
contributions were used primarily to fund construction of the facility and fund
Waste Control Specialists' operating losses. The other owner contributed certain
assets, primarily land and operating permits for the facility site, and Waste
Control Specialists also assumed certain indebtedness of the other owner.
Facility, operations, services and customers. Waste Control Specialists has
been issued permits by the Texas Natural Resource Conservation Commission
("TNRCC") and the U.S. EPA to accept hazardous and toxic wastes governed by RCRA
and TSCA. The ten-year RCRA and TSCA permits initially expire in 2004, but are
subject to renewal by the TNRCC assuming Waste Control Specialists remains in
compliance with the provisions of the permits. While there can be no assurance,
Waste Control Specialists believes it will be able to obtain extensions to
continue operating the facility for the foreseeable future.
In November 1997, the Texas Department of Health ("TDH") issued a license
to Waste Control Specialists for the treatment and storage, but not disposal, of
low-level and mixed radioactive wastes. The current provisions of this license
generally enable Waste Control Specialists to accept such wastes for treatment
and storage from U.S. commercial and federal facility generators, including the
Department of Energy ("DOE") and other governmental agencies. Waste Control
Specialists accepted the first shipments of such wastes in 1998. Waste Control
Specialists has also been issued a permit by the TNRCC to establish a research,
development and demonstration facility in which third parties could use the
facility to develop and demonstrate new technologies in the waste management
industry, including possibly those involving low-level and mixed radioactive
wastes. Waste Control Specialists has also obtained additional authority that
allows Waste Control Specialists to dispose of certain categories of low-level
radioactive materials, including naturally-occurring radioactive material
("NORM") and exempt-level materials (radioactive materials that do not exceed
certain specified radioactive concentrations and which are exempt from
licensing). Although there are other categories of low-level and mixed
radioactive wastes which continue to be ineligible for disposal under the
increased authority, Waste Control Specialists will continue to pursue
additional regulatory authorizations to expand its treatment and disposal
capabilities for low-level and mixed radioactive wastes. There can be no
assurance that any such additional permits or authorizations will be obtained.
The facility is located on a 1,338-acre site in West Texas owned by Waste
Control Specialists. The 1,338 acres are permitted for 11.3 million cubic yards
of airspace landfill capacity for the disposal of RCRA and TSCA wastes.
Following the initial phase of the construction, Waste Control Specialists had
approximately 400,000 cubic yards of airspace landfill capacity in which
customers' wastes can be disposed. Waste Control Specialists constructed during
2001 an additional 100,000 cubic yards of airspace landfill capacity. As part of
its current permits, Waste Control Specialists has the authorization to
construct separate "condominium" landfills, in which each condominium cell is
dedicated to an individual customer's waste materials. Waste Control Specialists
owns approximately 15,000 additional acres of land surrounding the permitted
site, a small portion of which is located in New Mexico. This presently
undeveloped additional acreage is available for future expansion assuming
appropriate permits could be obtained. The 1,338-acre site has, in Waste Control
Specialists' opinion, superior geological characteristics which make it an
environmentally-desirable location. The site is located in a relatively remote
and arid section of West Texas. The ground is composed of triassic red bed clay
for which the possibility of leakage into any underground water table is
considered highly remote.
While the West Texas facility operates as a final repository for wastes
that cannot be further reclaimed and recycled, it also serves as a staging and
processing location for material that requires other forms of treatment prior to
final disposal as mandated by the U.S. EPA or other regulatory bodies. The
facility, as constructed, provides for waste treatment/stabilization, warehouse
storage, treatment facilities for hazardous, toxic and dioxin wastes, drum to
bulk, and bulk to drum materials handling and repackaging capabilities. Waste
Control Specialists' policy is to conduct these operations in compliance with
its current permits. Treatment operations involve processing wastes through one
or more thermal, chemical or other treatment methods, depending upon the
particular waste being disposed and regulatory and customer requirements.
Thermal treatment uses a thermal destruction technology as the primary mechanism
for waste destruction. Physical treatment methods include distillation,
evaporation and separation, all of which result in the separation or removal of
solid materials from liquids. Chemical treatment uses chemical oxidation and
reduction, chemical precipitation of heavy metals, hydrolysis and neutralization
of acid and alkaline wastes, and basically results in the transformation of
wastes into inert materials through one or more chemical processes. Certain of
such treatment processes may involve technology which Waste Control Specialists
may acquire, license or subcontract from third parties.
Once treated and stabilized, wastes are either (i) placed in the landfill
disposal site, (ii) stored onsite in drums or other specialized containers or
(iii) shipped to third-party facilities for further treatment or final
disposition. Only wastes which meet certain specified regulatory requirements
can be disposed of by placing them in the landfill, which is fully-lined and
includes a leachate collection system.
Waste Control Specialists takes delivery of wastes collected from customers
and transported on behalf of customers, via rail or highway, by independent
contractors to the West Texas site. Such transportation is subject to
regulations governing the transportation of hazardous wastes issued by the U.S.
Department of Transportation.
In the U.S., the major federal statutes governing management, and
responsibility for clean-up, of hazardous and toxic wastes include RCRA, TSCA
and CERCLA. Waste Control Specialists' business is heavily dependent upon the
extent to which regulations promulgated under these or other similar statutes
and their enforcement require wastes to be managed and disposed of at facilities
of the type constructed by Waste Control Specialists.
Waste Control Specialists' target customers are industrial companies,
including chemical, aerospace and electronics businesses and governmental
agencies, including the DOE, which generate hazardous and other wastes. A
majority of the customers are expected to be located in the southwest United
States, although customers outside a 500-mile radius can be handled via rail
lines. Waste Control Specialists employs its own salesmen to market its services
to potential customers.
Competition. The hazardous waste industry (other than low-level and mixed
radioactive waste) currently has excess industry capacity caused by a number of
factors, including a relative decline in the number of environmental remediation
projects generating hazardous wastes and efforts on the part of generators to
reduce the volume of waste and/or manage it onsite at their facilities. These
factors have led to reduced demand and increased price pressure for
non-radioactive hazardous waste management services. While Waste Control
Specialists believes its broad range of permits for the treatment and storage of
low-level and mixed radioactive waste streams provides certain competitive
advantages, a key element of Waste Control Specialists' long-term strategy to
provide "one-stop shopping" for hazardous, low-level and mixed radioactive
wastes includes obtaining additional regulatory authorizations for the disposal
of a broad range of low-level and mixed radioactive wastes.
Competition within the hazardous waste industry is diverse. Competition is
based primarily on pricing and customer service. Price competition is expected
to be intense with respect to RCRA and TSCA-related wastes. Principal
competitors are Envirocare of Utah, American Ecology Corporation and Envirosafe
Services, Inc. These competitors are well established and have significantly
greater resources than Waste Control Specialists, which could be important
competitive factors. However, Waste Control Specialists believes it may have
certain competitive advantages, including its environmentally-desirable
location, broad level of local community support, a public transportation
network leading to the facility and capability for future site expansion.
Employees. At December 31, 2001, Waste Control Specialists employed
approximately 105 persons. Waste Control Specialists reduced its employee level
by approximately 25 individuals in February 2002.
Regulatory and environmental matters. While the waste management industry
has benefited from increased governmental regulation, the industry itself has
become subject to extensive and evolving regulation by federal, state and local
authorities. The regulatory process requires businesses in the waste management
industry to obtain and retain numerous operating permits covering various
aspects of their operations, any of which could be subject to revocation,
modification or denial. Regulations also allow public participation in the
permitting process. Individuals as well as companies may oppose the grant of
permits. In addition, governmental policies are by their nature subject to
change and the exercise of broad discretion by regulators, and it is possible
that Waste Control Specialists' ability to obtain any desired applicable permits
on a timely basis, and to retain those permits, could in the future be impaired.
The loss of any individual permit could have a significant impact on Waste
Control Specialists' financial condition, results of operations and liquidity,
especially because Waste Control Specialists owns and operates only one disposal
site. For example, adverse decisions by governmental authorities on permit
applications submitted by Waste Control Specialists could result in the
abandonment of projects, premature closing of the facility or operating
restrictions. Waste Control Specialists' RCRA and TSCA permits and its license
from the TDH expire in 2004, although such permits and licenses are subject to
renewal if Waste Control Specialists is in compliance with the required
operating provisions of the permits and licensing.
Federal, state and local authorities have, from time to time, proposed or
adopted other types of laws and regulations with respect to the waste management
industry, including laws and regulations restricting or banning the interstate
or intrastate shipment of certain wastes, imposing higher taxes on out-of-state
waste shipments compared to in-state shipments, reclassifying certain categories
of hazardous wastes as non-hazardous and regulating disposal facilities as
public utilities. Certain states have issued regulations which attempt to
prevent waste generated within that particular state from being sent to disposal
sites outside that state. The U.S. Congress has also, from time to time,
considered legislation which would enable or facilitate such bans, restrictions,
taxes and regulations. Due to the complex nature of the waste management
industry regulation, implementation of existing or future laws and regulations
by different levels of government could be inconsistent and difficult to
foresee. Waste Control Specialists will attempt to monitor and anticipate
regulatory, political and legal developments which affect the waste management
industry, but there can be no assurance that Waste Control Specialists will be
able to do so. Nor can Waste Control Specialists predict the extent to which
legislation or regulations that may be enacted, or any failure of legislation or
regulations to be enacted, may affect its operations in the future.
The demand for certain hazardous waste services expected to be provided by
Waste Control Specialists is dependent in large part upon the existence and
enforcement of federal, state and local environmental laws and regulations
governing the discharge of hazardous wastes into the environment. The waste
management industry could be adversely affected to the extent such laws or
regulations are amended or repealed or their enforcement is lessened.
Because of the high degree of public awareness of environmental issues,
companies in the waste management business may be, in the normal course of their
business, subject to judicial and administrative proceedings. Governmental
agencies may seek to impose fines or revoke, deny renewal of, or modify any
applicable operating permits or licenses. In addition, private parties and
special interest groups could bring actions against Waste Control Specialists
alleging, among other things, violation of operating permits.
TITANIUM METALS - TITANIUM METALS CORPORATION
General. Titanium Metals Corporation ("TIMET") is the world's largest
integrated producer of titanium sponge, melted products (ingot and slab) and
mill products. TIMET is the only integrated producer with major production
facilities in both the United States and Europe, the world's principal markets
for titanium. TIMET estimates that in 2001 it accounted for approximately 24% of
worldwide industry shipments of mill products and approximately 13% of worldwide
sponge production.
Titanium was first manufactured for commercial use in the 1950s. Titanium's
unique combination of corrosion resistance, elevated-temperature performance and
high strength-to-weight ratio makes it particularly desirable for use in
commercial and military aerospace applications in which these qualities are
essential design requirements for certain critical parts such as wing supports
and jet engine components. While aerospace applications have historically
accounted for a substantial portion of the worldwide demand for titanium and
were approximately 40% of industry mill product shipments in 2001, the number of
non-aerospace end-use markets for titanium has expanded substantially.
Established industrial uses for titanium include chemical plants, industrial
power plants, desalination plants and pollution control equipment.
Titanium continues to gain acceptance in many emerging market applications
including automotive, military armor, energy, architecture, and consumer
products. Although titanium is generally higher cost than other competing
metals, in many cases customers find the physical properties of titanium to be
attractive from the standpoint of performance, design alternatives, life cycle
value and other factors. Although emerging market demand currently represents
only about 10% of industry-wide demand for titanium mill products, TIMET
believes the emerging market demand, in the aggregate, could grow at healthy
double-digit rates over the next few years. TIMET is actively pursuing these
markets.
Although difficult to predict, the most attractive emerging segment appears
to be automotive, due to its potential for sustainable long-term growth.
Titanium is now used in several consumer car applications including the Toyota
Alteeza, Infinity Q45, Corvette Z06, Volkswagen Lupo FSI, Honda S2000 and
Mercedes S Class. At the present time, titanium is primarily used for exhaust
systems and suspension springs in consumer vehicles. In exhaust systems,
titanium provides for significant weight savings, while its corrosion resistance
provides life-of-vehicle durability. In suspension spring applications, titanium
saves weight, and its combination of low mass and low modulus of elasticity
allows the spring's height to be reduced by 20% to 50% compared to a steel
spring.
Titanium is also making inroads into other automotive applications,
including turbo charger wheels, brake parts, pistons, valves and internal engine
components. Titanium engine components provide mass-reduction benefits, allowing
a corresponding weight and size reduction in crankshaft counterbalance weights
and resultant improvements in noise, vibration and harshness. The additional
cost associated with titanium's use for internal engine parts can be offset by
the elimination of balance shafts and the ability to replace sophisticated
engine mounts with low cost, compact, simple designs. All of this can translate
into greater styling and structural design freedom for automotive designers and
engineers. Titanium is also advantageous compared to alternative materials in
that it typically can be formed and fabricated on the same tooling used for the
steel component it is replacing.
The decision to select titanium components for consumer car, truck and
motorcycle components remains highly cost sensitive; however, TIMET believes
titanium's acceptance in consumer vehicles will expand as the automotive
industry continues to better understand the benefits it offers.
Industry conditions. The titanium industry historically has derived the
majority of its business from the aerospace industry. The cyclical nature of the
aerospace industry has been the principal cause of the historical fluctuations
in performance of titanium manufacturing. Over the past 20 years, the titanium
industry had cyclical peaks in mill products shipments in 1980, 1989, 1997 and
2001 and cyclical lows in 1983, 1991 and 1999. Demand for titanium reached its
highest peak in 1997 when worldwide industry mill product shipments reached an
estimated 60,000 metric tons. Industry mill product shipments subsequently
declined approximately 5% to an estimated 57,000 metric tons in 1998. After
falling 16% from 1998 levels to 48,000 metric tons in 1999 and 2000, total
industry shipments climbed to an estimated 51,000 metric tons in 2001. TIMET
expects total industry mill product shipments will decrease in 2002 by
approximately 16% to about 43,000 metric tons.
During the latter part of 2001, an economic slowdown in the U.S. and other
regions of the world began to negatively affect the commercial aerospace
industry as evidenced by, among other things, a decline in airline passenger
traffic, reported operating losses by a number of airlines, and a reduction in
the forecasted deliveries of large commercial aircraft from both Boeing and
Airbus. The terrorist attacks on September 11, 2001, exacerbated these trends
and had a significant adverse impact on the global economy and the commercial
aerospace industry. The major U.S. airlines reported significant financial
losses in the fourth quarter of 2001, and profits for European and Asian
airlines declined. In response, airlines have announced a number of actions to
reduce both costs and capacity including, but not limited to, the early
retirement of airplanes, the deferral of scheduled deliveries of new aircraft
and allowing purchase options to expire. These events have resulted in the major
commercial airframe and jet engine manufacturers substantially reducing both
their forecast of engine and aircraft deliveries over the next few years and
their production levels in 2002. Although certain recently reported economic and
airline industry data may indicate some modest levels of recovery, TIMET expects
the current slowdown in the commercial aerospace sector will last for about two
years.
TIMET believes that demand for mill products for the commercial aerospace
sector could decline by up to 40% in 2002, primarily due to a combination of
reduced aircraft production rates and excess inventory accumulated throughout
the supply chain since September 11, 2001. The aerospace supply chain is
fragmented and decentralized, making it difficult to quantify excess
inventories. However, TIMET roughly estimates that excess inventory throughout
the supply chain might be in the range of 3,200 to 5,500 metric tons at the end
of 2001, and believes it may take up to two years for such excess inventory to
be substantially absorbed.
According to The Airline Monitor, a leading aerospace publication, the
worldwide commercial airline industry reported an estimated operating loss of
approximately $13 billion in 2001, compared with operating income of $11 billion
in 2000 and $12 billion in 1999. According to The Airline Monitor, large
commercial aircraft deliveries for the 1996 to 2001 period peaked in 1999 with
889 aircraft including 254 wide body aircraft. Wide body aircraft use
substantially more titanium than their narrow body counterparts. Large
commercial aircraft deliveries totaled 834 (including 202 wide bodies) in 2001,
and the most recent forecast of aircraft deliveries by The Airline Monitor calls
for 660 deliveries in 2002, 505 deliveries in 2003 and 515 deliveries in 2004.
After 2004, The Airline Monitor calls for a continued increase each year in
large commercial aircraft deliveries with forecasted deliveries of 920 aircraft
in 2008 exceeding 2001 levels. Compared to 2001, these forecasted delivery rates
represent anticipated declines of about 20% in 2002 and just under 40% in each
of 2003 and 2004. Additionally, TIMET's discussions with jet engine
manufacturers and related suppliers suggest that they are expecting production
declines in 2002 relative to 2001 in the range of 25% to 30%. The demand for
titanium generally precedes aircraft deliveries by about one year, although this
varies considerably by titanium product. Accordingly, TIMET's cycle historically
precedes the cycle of the aircraft industry and related deliveries. TIMET can
give no assurance as to the extent or duration of the current commercial
aerospace cycle or the extent to which it will affect demand for TIMET's
products.
Products and operations. TIMET's products include: (i) titanium sponge, the
basic form of titanium metal used in processed titanium products, (ii) melted
products comprised of titanium ingot and slab, the result of melting sponge and
titanium scrap, either alone or with various other alloying elements and (iii)
milled products that are forged and rolled products produced from ingot or slab,
including long products (billet and bar), flat products (plate, sheet, and
strip), pipe and pipe fittings.
Titanium sponge (so called because of its appearance) is the commercially
pure, elemental form of titanium metal. The first step in sponge production
involves the chlorination of titanium-containing rutile ores, derived from beach
sand, with chlorine and coke to produce titanium tetrachloride. Titanium
tetrachloride is purified and then reacted with magnesium in a closed system,
producing titanium sponge and magnesium chloride as co-products. TIMET's
titanium sponge production capacity in Nevada incorporates vacuum distillation
process ("VDP") technology, which removes the magnesium and magnesium chloride
residues by applying heat to the sponge mass while maintaining vacuum in the
chamber. The combination of heat and vacuum boils the residues from the reactor
mass into the condensing vessel. The titanium mass is then mechanically pushed
out of the original reactor, sheared and crushed, while the residual magnesium
chloride is electrolytically separated and recycled.
Titanium ingots and slabs are solid shapes (cylindrical and rectangular,
respectively) that weigh up to 8 metric tons in the case of ingots and up to 16
metric tons in the case of slabs. Each is formed by melting titanium sponge or
scrap or both, usually with various other alloying elements such as vanadium,
aluminum, molybdenum, tin and zirconium. Titanium scrap is a by-product of the
forging, rolling, milling and machining operations, and significant quantities
of scrap are generated in the production process for most finished titanium
products. The melting process for ingots and slabs is closely controlled and
monitored utilizing computer control systems to maintain product quality and
consistency and meet customer specifications. Ingots and slabs are both sold to
customers and further processed into mill products.
Titanium mill products result from the forging, rolling, drawing, welding
and/or extrusion of titanium ingots or slabs into products of various sizes and
grades. These mill products include titanium billet, bar, rod, plate, sheet,
strip, pipe and pipe fittings. TIMET sends certain products to outside vendors
for further processing before being shipped to customers or to TIMET's service
centers. Many of TIMET's customers process TIMET's products for their ultimate
end-use or for sale to third parties.
During the production process and following the completion of
manufacturing, TIMET performs extensive testing on its products, including
sponge, ingot and mill products. Testing may involve chemical analysis,
mechanical testing and ultrasonic and x-ray testing. The inspection process is
critical to ensuring that TIMET's products meet the high quality requirements of
customers, particularly in aerospace components production. TIMET certifies its
products meet customer specification at the time of shipment for substantially
all customer orders.
TIMET is reliant on several outside processors to perform certain rolling
and finishing steps in the U.S., and to perform certain melting, forging and
finishing steps in France. In the U.S., one of the processors that performs
these steps in relation to strip production and another as relates to plate
finishing are owned by a competitor. One of the processors as relates to
extrusion is operated by a customer. These processors are currently the sole
source for these services. Other processors used in the U.S. are not
competitors. In France, the processor is also a joint venture partner of TIMET's
majority-owned subsidiary. Although TIMET believes that there are other metal
producers with the capability to perform these same processing functions,
arranging for alternative processors, or possibly acquiring or installing
comparable capabilities, could take several months and any interruption in these
functions could have a material and adverse effect on TIMET's, results of
operations, financial condition and cash flows in the near term.
Raw materials. The principal raw materials used in the production of
titanium products are titanium sponge, titanium scrap and alloying materials.
TIMET processes rutile ore into titanium tetrachloride and further processes the
titanium tetrachloride into titanium sponge. During 2001, approximately 32% of
TIMET's production was made from sponge internally produced, 40% was from
purchased sponge, 21% was from titanium scrap and 7% from alloying elements.
The primary raw materials used in the production of titanium sponge are
titanium-containing rutile ore, chlorine, magnesium and petroleum coke.
Titanium-containing rutile ore is currently available from a number of suppliers
around the world, principally located in Australia, South Africa, India and the
United States. A majority of TIMET's supply of rutile ore is currently purchased
from Australian suppliers. TIMET believes the availability of rutile ore will be
adequate for the foreseeable future and does not anticipate any interruptions of
its raw material supplies, although political or economic instability in the
countries from which TIMET purchases its raw materials could materially and
adversely affect availability. Although TIMET believes that the availability of
rutile ore is adequate in the near-term, there can be no assurance that TIMET
will not experience interruptions. Should TIMET be unable to obtain the
necessary raw materials, TIMET may incur higher costs to purchase sponge which
could have a material adverse effect on TIMET's results of operations, financial
condition and cash flows.
Chlorine is currently obtained from a single source near TIMET's Nevada
plant. That supplier is currently reorganizing under Chapter 11 bankruptcy.
While TIMET does not presently anticipate any chlorine supply problems, there
can be no assurances the chlorine supply will not be interrupted. TIMET has
taken steps to mitigate this risk, including establishing the feasibility of
certain equipment modifications to enable it to utilize alternative chlorine
suppliers or to purchase and successfully utilize an intermediate product which
will allow TIMET to bypass the purchase of chlorine if needed. Magnesium and
petroleum coke are generally available from a number of suppliers. Various
alloying elements used in the production of titanium ingot are available from a
number of suppliers.
While TIMET was one of six major worldwide producers of titanium sponge
during 2001 (and the only active producer in the U.S.), it cannot produce all of
its needs for all grades of titanium sponge internally and is dependent,
therefore, on third parties for a portion of its sponge needs. Titanium mill and
melted products require varying grades of sponge and/or scrap depending on the
customers' specifications and expected end use. Presently, TIMET and certain
suppliers in Japan are the only producers of premium quality sponge required for
more demanding aerospace applications. However, one additional sponge supplier
is presently undergoing qualification tests of its product for premium quality
applications and is expected to be qualified for such during 2002.
Historically, TIMET has purchased sponge predominantly from producers in
Japan and Kazakhstan. During late 2000 and throughout 2001, TIMET also purchased
sponge from the U.S. Defense Logistics Agency ("DLA") stockpile. In 2002, TIMET
expects to continue to purchase sponge from Japan, Kazakhstan and the DLA.
TIMET has a ten-year long-term supply agreement for the purchase of
titanium sponge produced in Kazakhstan. The sponge contract runs through 2007,
with firm pricing through 2002 (subject to certain possible adjustments and
possible early termination in 2004). While the contract provides for annual
purchases by TIMET of 6,000 metric tons, the supplier agreed to reduced
purchases by TIMET since 1999 and certain other modified terms. TIMET is
currently working under an agreement in principle that provides for a minimum of
1,500 metric tons in 2002. TIMET has no other long-term sponge supply
agreements.
Properties. TIMET currently has manufacturing facilities in the United
States in Nevada, Ohio, Pennsylvania and California, and also has two facilities
in the United Kingdom and one facility in France. Titanium sponge is produced at
the Nevada facility while ingot, slab and mill products are produced at the
other facilities. TIMET also maintains eight service centers (five in the United
States and three in Europe), which sell TIMET's products on a just-in-time
basis. The facilities in Nevada, Ohio and Pennsylvania, and one of the U.K.
facilities, are owned, and the remainder of the facilities are leased.
In addition to its U.S. sponge capacity discussed below, TIMET's 2002
worldwide melting capacity presently aggregates approximately 45,000 metric tons
(estimated 30% of world capacity), and its mill products capacity aggregates
approximately 20,000 metric tons (estimated 16% of world capacity).
Approximately 35% of TIMET's worldwide melting capacity is represented by
electron beam cold hearth melting furnaces, 63% by vacuum arc remelting ("VAR")
furnaces and 2% by a vacuum induction melting furnace.
TIMET has operated its major production facilities at varying levels of
practical capacity during the past three years. In 1999, TIMET's plants operated
at 55% of practical capacity, increasing to about 60% in 2000 and 75% in 2001.
In 2002, TIMET's plants are expected to operate at about 60% of practical
capacity. However, practical capacity and utilization measures can vary
significantly based upon the mix of products produced.
TIMET's VDP sponge facility is expected to operate at approximately 95% of
its annual practical capacity of 8,600 metric tons during 2002, which is up
slightly from the 2001 level of utilization of about 94%. VDP sponge is used
principally as a raw material for TIMET's ingot melting facilities in the U.S.
and Europe. Approximately 1,200 metric tons of VDP production from the TIMET's
Nevada facility was used in its European operations during 2001, which
represented about 20% of the sponge consumed in TIMET's European operations.
TIMET expects the consumption of Nevada-produced VDP sponge in its European
operations will increase to about 40% of its sponge requirements in 2002. The
raw materials processing facilities in Pennsylvania primarily process scrap used
as melting feedstock, either in combination with sponge or separately.
TIMET's U.S. melting facilities produce ingots and slabs both sold to
customers and used as feedstock for its mill products operations. These melting
facilities are expected to operate at approximately 50% of aggregate capacity in
2002.
Titanium mill products are produced at TIMET's forging and rolling facility
in Ohio, which receives intermediate titanium products (ingots and slabs)
principally from TIMET's U.S. melting facilities. This facility is expected to
operate at 60% of practical capacity in 2002. Production capacity utilization
across TIMET's product lines varies.
One of TIMET's facilities in the United Kingdom produces VAR ingots which
are used primarily as raw material feedstock at the same facility. The forging
operation at this facility principally processes the ingots into billet product
for sale to customers or for further processing into bar and plate at TIMET's
other facility in the United Kingdom. TIMET's United Kingdom melting and mill
products production in 2002 is expected to be approximately 60% and 45%,
respectively, of practical capacity. Sponge for melting requirements in both the
United Kingdom and France that is not supplied by TIMET's Nevada facility is
purchased principally from suppliers in Japan and Kazakhstan.
Distribution, market and customer base. TIMET sells its products through
its own sales force based in the U.S. and Europe, and through independent agents
worldwide. TIMET's marketing and distribution system also includes the eight
TIMET-owned service centers. TIMET believes that it has a competitive sales and
cost advantage arising from the location of its production plants and service
centers, which are in close proximity to major customers. These centers
primarily sell value-added and customized mill products including bar and
flat-rolled sheet and strip. TIMET believes its service centers give it a
competitive advantage because of their ability to foster customer relationships,
customize products to suit specific customer requirements and respond quickly to
customer needs.
Approximately 50% of TIMET's 2001 sales were to customers within North
America, about 40% to European customers and the balance to other regions. Over
70% of TIMET's sales were generated by sales to the aerospace industry. Sales
under TIMET's long-term supply agreements (discussed below) accounted for
approximately 40% of its aggregate sales in 2001. Sales to Rolls Royce and other
customers under the Rolls Royce long-term supply agreement represented
approximately 15% of TIMET's aggregate sales in 2001. TIMET expects that while a
majority of its 2002 sales will be to the aerospace industry, other markets will
continue to represent a significant portion of sales.
The primary market for titanium products in the commercial aerospace
industry consists of two major manufacturers of large (over 100 seats)
commercial aircraft (Boeing Commercial Airplanes Group and European Aeronautic
Defense and Space Company, parent company of the Airbus consortium) and four
major manufacturers of aircraft engines (Rolls-Royce, Pratt & Whitney (a United
Technology company), General Electric and SNECMA). TIMET's sales are made both
directly to these major manufacturers and to companies (including forgers such
as Wyman-Gordon) that use TIMET's titanium to produce parts and other materials
for such manufacturers. If any of the major aerospace manufacturers were to
significantly reduce build rates from those currently expected, there could be a
material adverse effect, both directly and indirectly, on TIMET.
TIMET has long-term agreements with certain major aerospace customers,
including, but not limited to, The Boeing Company, Rolls-Royce, United
Technologies Corporation (and related companies) and Wyman-Gordon Company (a
unit of Precision Castparts Corporation). These agreements initially became
effective in 1998 and 1999 and expire in 2007 through 2008, subject to certain
conditions. The agreements generally provide for (i) minimum market shares of
the customers' titanium requirements or firm annual volume commitments and (ii)
fixed or formula-determined prices generally for at least the first five years.
Generally, the agreements require TIMET's service and product performance to
meet specified criteria and contain a number of other terms and conditions
customary in transactions of these types. In certain cases, the long-term
agreements may be terminated early if the parties are unable to reach agreement
on pricing after an initial pricing period, in certain events of nonperformance
by TIMET or in certain other instances. These agreements were designed to limit
pricing volatility (both up and down) for the long-term benefit of both parties,
while providing TIMET with a committed base of aerospace volume. They also, to
varying degrees, effectively obligate TIMET to bear part of the risks of
increases in raw material and other costs, but allow TIMET to benefit in part
from decreases in such costs. These contracts and others represent the core of
TIMET's long-term aerospace strategy.
In April 2001, TIMET reached a settlement of the litigation between TIMET
and Boeing related to the parties' 1997 long-term agreement. Pursuant to the
settlement, TIMET received a cash payment of $82 million from Boeing. In
addition, TIMET and Boeing also entered into an amended long-term agreement
that, among other things, allows Boeing to purchase up to 7.5 million pounds of
titanium product annually from TIMET through 2007, subject to certain maximum
quarterly volume levels. Under the amended agreement, Boeing will advance TIMET
$28.5 million annually from 2002 through 2007. The agreement is structured as a
take-or-pay agreement such that Boeing, beginning in calendar year 2002, will
forfeit a proportionate part of the $28.5 million annual advance, or effectively
$3.80 per pound, in the event that its orders for delivery for such calendar
year are less than 7.5 million pounds. Under a separate agreement, TIMET will
establish and hold buffer stock for Boeing at TIMET's facilities, for which
Boeing will pay TIMET as such stock is produced.
TIMET also has a long-term agreement with VALTIMET, a manufacturer of
stainless steel, copper, nickel and welded titanium tubing principally for
industrial markets. TIMET owns 44% of VALTIMET at December 31, 2001. The
agreement was entered into in 1997 and expires in 2007. Under the agreement,
VALTIMET has agreed to purchase a certain percentage of its titanium
requirements from TIMET. Selling prices are formula determined, subject to
certain conditions. Certain provisions of this contract have been renegotiated
in the past and may be renegotiated in the future to meet changing business
conditions.
As of December 31, 2001, the estimated firm order backlog for Boeing and
Airbus, as reported by The Airline Monitor, was 2,919 planes, versus 3,224
planes at the end of 2000 and 2,943 planes at the end of 1999. The backlogs for
Boeing and Airbus reflect orders for aircraft to be delivered potentially over
several years. For example, the first deliveries of the A380 are anticipated to
begin in 2006. Additionally, changes in the economic environment and financial
condition of airlines can result in rescheduling and/or cancellation of
contractual orders. Accordingly, aircraft manufacturer backlogs alone are not
necessarily a reliable indicator of near-term business activity, but may be
indicative of potential business levels over a longer-term horizon.
The newer wide body planes, such as the Boeing 777 and the Airbus A-330,
A-340 and A-380, tend to use a higher percentage of titanium in their frames,
engines and parts (as measured by total fly weight) than narrow body planes.
"Fly weight" is the empty weight of a finished aircraft with engines but without
fuel or passengers. The Boeing 777, for example, utilizes titanium for
approximately 9% of total fly weight, compared to between 2% to 3% on the older
737, 747 and 767 models. The estimated firm order backlog for wide body planes
at year-end 2001 was 801 (27% of total backlog) compared to 751 (23% of total
backlog) at the end of 2000. At year-end 2001, the A380 had received a total of
85 firm orders. TIMET estimates that approximately 65 metric tons of titanium
will be purchased for each A380 manufactured, the most of any aircraft.
Outside of aerospace markets, TIMET manufactures a wide range of industrial
products including sheet, plate, tube, bar, billet and skelp for customers in
the chemical process, oil and gas, consumer, sporting goods, automotive, power
generation and armor/armament industries. Approximately 15% of TIMET's sales in
2001 were sold into the industrial markets, including sales to VALTIMET for the
production of condenser tubing. For the oil and gas industries, TIMET provides
seamless pipe for downhole casing, risers, tapered stress joints and other
offshore oil production equipment, including fabrication of subsea manifolds. In
armor and armament, TIMET sells plate products for fabrication into door hatches
on fighting vehicles as well as tank/turret protection.
TIMET's order backlog was approximately $225 million at December 31, 2001,
compared to $245 million at December 31, 2000 and $195 million at December 31,
1999. Substantially all of the 2001 year-end backlog is scheduled to be shipped
during 2002. However, TIMET's order backlog may not be a reliable indicator of
future business activity. Since September 11, 2001, TIMET has received a number
of customer requests to defer or cancel previously scheduled orders and believes
such requests will continue into 2002.
Through various strategic relationships, TIMET seeks to gain access to
unique process technologies for the manufacture of its products and to expand
existing markets and create and develop new markets for titanium. TIMET has
explored and will continue to explore strategic arrangements in the areas of
product development, production and distribution. TIMET also will continue to
work with existing and potential customers to identify and develop new or
improved applications for titanium that take advantage of its unique qualities.
Competition. The titanium metals industry is highly competitive on a
worldwide basis. Producers of mill products are located primarily in the United
States, Japan, Europe, Russia, China and the United Kingdom. TIMET is one of
four integrated producers in the world, with "integrated producers" being
considered as those that produce at least both sponge and ingot. There are also
a number of non-integrated producers that produce mill products from purchased
sponge, scrap or ingot.
TIMET's principal competitors in aerospace markets are Allegheny Teledyne
Inc., RTI International Metals, Inc. and Verkhanya Salda Metallurgical
Production Organization ("VSMPO"). These companies, along with the Japanese
producers and other companies, are also principal competitors in industrial
markets. TIMET competes primarily on the basis of price, quality of products,
technical support and the availability of products to meet customers' delivery
schedules.
In the U.S. market, the increasing presence of non-U.S. participants has
become a significant competitive factor. Until 1993, imports of foreign titanium
products into the U.S. had not been significant. This was primarily attributable
to relative currency exchange rates, tariffs and, with respect to Japan,
Kazakhstan and Ukraine, existing and prior duties (including antidumping
duties). However, imports of titanium sponge, scrap, and mill products,
principally from Russia and Kazakhstan, have increased in recent years and have
had a significant competitive impact on the U.S. titanium industry. To the
extent TIMET has been able to take advantage of this situation by purchasing
sponge, ingot or intermediate and finished mill products from such countries for
use in its own operations during recent years, the negative effect of these
imports on TIMET has been somewhat mitigated.
Generally, imports into the U.S. of titanium products from countries
designated by the U.S. Government as "most favored nation" are subject to a 15%
tariff (45% for other countries). Titanium products for tariff purposes are
broadly classified as either wrought or unwrought. Wrought products include bar,
sheet, strip, plate and tubing. Unwrought products include sponge, ingot, slab
and billet. For most periods since 1993, imports of titanium wrought products
from Russia were exempted from this duty under the generalized system of
preferences, or GSP, program designed to aid developing economies. TIMET has
successfully resisted efforts to date to expand the scope of the GSP program to
eliminate duties on sponge and other unwrought titanium products from Russia and
Kazakhstan. Antidumping duties on imports of titanium sponge from Japan and the
former Soviet Union were revoked in 1998, and TIMET's appeal of that revocation
was not successful.
Further reductions in, or the complete elimination of, all or any of these
tariffs, including expansion of the GSP program to unwrought titanium products,
could lead to increased imports of foreign sponge, ingot, and mill products into
the U.S. and an increase in the amount of such products on the market generally,
which could adversely affect pricing for titanium sponge and mill products and
thus the business, financial condition, results of operations and cash flows of
TIMET. However, TIMET has, since 1993, been a large importer of foreign titanium
sponge and mill products into the U.S. To the extent TIMET remains a substantial
purchaser of these products, any adverse effects on product pricing as a result
of any reduction in, or elimination of, any of these tariffs would be partially
ameliorated by the decreased cost to TIMET for these products to the extent it
currently bears the cost of the import duties.
Producers of other metal products, such as steel and aluminum, maintain
forging, rolling and finishing facilities that could be modified without
substantial expenditures to process titanium products. TIMET believes, however,
that entry as a producer of titanium sponge would require a significant capital
investment and substantial technical expertise. Titanium mill products also
compete with stainless steels, nickel alloys, steel, plastics, aluminum and
composites in many applications.
Research and development. TIMET's research and development activities are
directed toward improving process technology, developing new alloys, enhancing
the performance of TIMET's products in current applications, and searching for
new uses of titanium products. TIMET conducts the majority of its research and
development activities at its Nevada laboratory. Additional research and
development activities are performed at a TIMET facility in the United Kingdom.
Patents and trademarks. TIMET holds U.S. and non-U.S. patents applicable to
certain of its titanium alloys and manufacturing technology. TIMET continually
seeks patent protection with respect to its technical base and has occasionally
entered into cross-licensing arrangements with third parties. However, most of
the titanium alloys and manufacturing technology used by TIMET do not benefit
from patent or other intellectual property protection. TIMET believes that the
trademarks TIMET and TIMETAL, which are protected by registration in the U.S.
and other countries, are significant to its business.
Employees. As of December 31, 2001, TIMET employed approximately 2,410
persons (1,460 in the U.S. and 950 in Europe), compared to 2,220 persons at the
end of 2000 and 2,350 at the end of 1999. During 2002, TIMET expects to decrease
employment, principally in its manufacturing operations, due to the previously
discussed decline in demand for titanium products. TIMET's production and
maintenance workers at its Nevada facility and its production, maintenance,
clerical and technical workers in its Ohio facility are represented by the
United Steelworkers of America ("USWA") under contracts expiring in October 2004
and June 2002, respectively. Employees at TIMET's other U.S. facilities are not
covered by collective bargaining agreements. About 62% of the salaried and
hourly employees at TIMET's European facilities are represented by various
European labor unions, generally under annual agreements. While TIMET currently
considers its employee relations to be satisfactory, it is possible that there
could be future work stoppages that could materially and adversely affect
TIMET's financial condition, results of operations or cash flows.
Regulatory and environmental matters. TIMET's operations are governed by
various federal, state, local and foreign environmental and worker safety laws
and regulations. In the U.S., such laws include the federal Clean Air Act, the
Clean Water Act, RCRA and OSHA. TIMET uses and manufactures substantial
quantities of substances that are considered hazardous or toxic under
environmental and worker safety and health laws and regulations. In addition, at
TIMET's Nevada facility, TIMET produces and uses substantial quantities of
titanium tetrachloride, a material classified as extremely hazardous under
Federal environmental laws. TIMET has used such substances throughout the
history of its operations. As a result, risk of environmental damage is inherent
in TIMET's operations. TIMET's operations pose a continuing risk of accidental
releases of, and worker exposure to, hazardous or toxic substances. There is
also a risk that government environmental requirements, or enforcement thereof,
may become more stringent in the future. There can be no assurances that some,
or all, of the risks discussed under this heading will not result in liabilities
that would be material to TIMET's results of operations, financial condition or
cash flows.
TIMET's operations in Europe are similarly subject to foreign laws and
regulations respecting environmental and worker safety matters, which laws have
had, and are not presently expected to have, a material adverse effect on
TIMET's results of operations, financial condition or cash flows.
TIMET believes that its operations are in compliance in all material
respects with applicable requirements of environmental and worker health and
safety laws. TIMET's policy is to continually strive to improve environmental,
health and safety performance. From time to time, TIMET may be subject to
environmental regulatory enforcement under various statutes, resolution of which
typically involves the establishment of compliance programs. Occasionally,
resolution of these matters may result in the payment of penalties. TIMET
incurred capital expenditures for health, safety and environmental compliance
matters of approximately $2.6 million in 2000 and $2.4 million in 2001, and its
capital budget provides for approximately $2.0 million of such expenditures in
2002. However, the imposition of more strict standards or requirements under
environmental, health or safety laws and regulations could result in
expenditures in excess of amounts estimated to be required for such matters.
OTHER
Tremont Corporation. Tremont is primarily a holding company which owns 21%
of NL and 39% of TIMET. In addition, Tremont owns indirect ownership interests
in Basic Management, Inc. ("BMI"), which provides utility services to, and owns
property (the "BMI Complex") adjacent to, TIMET's facility in Nevada, and The
Landwell Company L.P. ("Landwell"), which is actively engaged in efforts to
develop certain land holdings for commercial, industrial and residential
purposes surrounding the BMI Complex.
Foreign operations. The Company has substantial operations and assets
located outside the United States, principally chemicals operations in Germany,
Belgium and Norway, titanium metals operations in the United Kingdom and France,
chemicals and component products operations in Canada and component products
operations in The Netherlands and Taiwan. See Note 2 to the Consolidated
Financial Statements. Approximately 70% of NL's 2001 aggregate TiO2 sales were
to non-U.S. customers, including 12% to customers in areas other than Europe and
Canada. Approximately 40% of CompX's 2001 sales were to non-U.S. customers
located principally in Canada and Europe. About 50% of TIMET's 2001 sales are to
non-U.S. customers, primarily in Europe. Foreign operations are subject to,
among other things, currency exchange rate fluctuations and the Company's
results of operations have in the past been both favorably and unfavorably
affected by fluctuations in currency exchange rates. See Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Item 7A - "Quantitative and Qualitative Disclosures About Market Risk."
CompX's Canadian component products subsidiary has, from time to time,
entered into currency forward contracts to mitigate exchange rate fluctuation
risk for a portion of its receivables denominated in currencies other than the
Canadian dollar (principally the U.S. dollar) or for similar risk associated
with future sales. See Note 1 to the Consolidated Financial Statements.
Otherwise, the Company does not generally engage in currency derivative
transactions.
Political and economic uncertainties in certain of the countries in which
the Company operates may expose the Company to risk of loss. The Company does
not believe that there is currently any likelihood of material loss through
political or economic instability, seizure, nationalization or similar event.
The Company cannot predict, however, whether events of this type in the future
could have a material effect on its operations. The Company's manufacturing and
mining operations are also subject to extensive and diverse environmental
regulation in each of the foreign countries in which they operate, as discussed
in the respective business sections elsewhere herein.
Regulatory and environmental matters. Regulatory and environmental matters
are discussed in the respective business sections contained elsewhere herein and
in Item 3 - "Legal Proceedings." In addition, the information included in Note
19 to the Consolidated Financial Statements under the captions "Legal
proceedings -- lead pigment litigation" and - "Environmental matters and
litigation" is incorporated herein by reference.
Acquisition and restructuring activities. The Company routinely compares
its liquidity requirements and alternative uses of capital against the estimated
future cash flows to be received from its subsidiaries and unconsolidated
affiliates, and the estimated sales value of those units. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify its dividend policy, consider
the sale of interests in subsidiaries, business units, marketable securities or
other assets, or take a combination of such steps or other steps, to increase
liquidity, reduce indebtedness and fund future activities. Such activities have
in the past and may in the future involve related companies. From time to time,
the Company and related entities also evaluate the restructuring of ownership
interests among its subsidiaries and related companies and expects to continue
this activity in the future.
The Company and other entities that may be deemed to be controlled by or
affiliated with Mr. Harold C. Simmons routinely evaluate acquisitions of
interests in, or combinations with, companies, including related companies,
perceived by management to be undervalued in the marketplace. These companies
may or may not be engaged in businesses related to the Company's current
businesses. In a number of instances, the Company has actively managed the
businesses acquired with a focus on maximizing return-on-investment through cost
reductions, capital expenditures, improved operating efficiencies, selective
marketing to address market niches, disposition of marginal operations, use of
leverage and redeployment of capital to more productive assets. In other
instances, the Company has disposed of the acquired interest in a company prior
to gaining control. The Company intends to consider such activities in the
future and may, in connection with such activities, consider issuing additional
equity securities and increasing the indebtedness of Valhi, its subsidiaries and
related companies.
ITEM 2. PROPERTIES
Valhi leases approximately 34,000 square feet of office space for its
principal executive offices in a building located at 5430 LBJ Freeway, Dallas,
Texas, 75240-2697. The principal properties used in the operations of the
Company, including certain risks and uncertainties related thereto, are
described in the applicable business sections of Item 1 - "Business." The
Company believes that its facilities are generally adequate and suitable for
their respective uses.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings. In addition to
information that is included below, certain information called for by this Item
is included in Note 19 to the Consolidated Financial Statements, which
information is incorporated herein by reference.
NL lead pigment litigation. NL was formerly involved in the manufacture of
lead-based paints and lead pigments for use in paint. NL has been named as a
defendant or third party defendant in various legal proceedings alleging that NL
and approximately seven other former manufacturers are responsible for personal
injury, property damage and government expenditures allegedly associated with
the use of these products. NL is vigorously defending against such litigation.
Considering NL's previous involvement in the lead pigment and lead-based paint
businesses, there can be no assurance that additional litigation, similar to
that described below, will not be filed.
In addition, various legislation and administrative regulations have, from
time to time, been enacted or proposed that seek to (i) impose various
obligations on present and former manufacturers of lead pigment and lead-based
paint with respect to asserted health concerns associated with the use of such
products and (ii) effectively overturn court decisions in which NL and other
pigment manufacturers have been successful. Examples of such proposed
legislation include bills which would permit civil liability for damages on the
basis of market share, rather than requiring plantiffs to prove that the
defendant's product resulted in the alleged damage, and bills which would revive
actions currently barred by statutes of limitations. While no legislation or
regulations have been enacted to date which are expected to have a material
adverse effect on NL's consolidated financial position, results of operations or
liquidity, the imposition of market share liability or other legislation could
have such an effect. NL has not accrued any amounts for the pending lead pigment
and lead-based paint litigation. There is no assurance that NL will not incur
future liability in respect of this litigation in view of the inherent
uncertainties involved in court and jury rulings in pending and possible future
cases. However, based on, among other things, the results of such litigation to
date, NL believes that the pending cases are without merit and will continue to
defend the cases vigorously. Liability that may result, if any, cannot
reasonably be estimated.
In 1989 and 1990, the Housing Authority of New Orleans ("HANO") filed
third-party complaints for indemnity and/or contribution against NL, other
alleged manufacturers of lead pigment (together with NL, the "pigment
manufacturers") and the Lead Industries Association (the "LIA") in 14 actions
commenced by residents of HANO units seeking compensatory and punitive damages
for injuries allegedly caused by lead pigment. All but two of the actions (Hall
v. HANO, et al., No. 89-3552, and Allen v. HANO, et al., No. 89-427, Civil
District Court for the Parish of Orleans, State of Louisiana) have been
dismissed. The two remaining cases have been inactive since 1992.
In June 1989, a complaint was filed in the Supreme Court of the State of
New York, County of New York, against the former pigment manufacturers and the
LIA. Plaintiffs sought damages in excess of $50 million for monitoring and
abating alleged lead paint hazards in public and private residential buildings,
diagnosing and treating children allegedly exposed to lead paint in city
buildings, the costs of educating city residents to the hazards of lead paint,
and liability in personal injury actions against the City and the Housing
Authority based on alleged lead poisoning of city residents (The City of New
York, the New York City Housing Authority and the New York City Health and
Hospitals Corp. v. Lead Industries Association, Inc., et al., No. 89-4617). As a
result of pre-trial motions, the New York City Housing Authority is the only
remaining plaintiff in the case and is pursuing damage claims only with respect
to two housing projects. Discovery is proceeding.
In August 1992, NL was served with an amended complaint in Jackson, et al.
v. The Glidden Co., et al., Court of Common Pleas, Cuyahoga County, Cleveland,
Ohio (Case No. 236835). Plaintiffs seek compensatory and punitive damages for
personal injury caused by the ingestion of lead, and an order directing
defendants to abate lead-based paint in buildings. Plaintiffs purport to
represent a class of similarly situated persons throughout the State of Ohio.
While the trial court has denied plaintiffs' motion for class certification,
discovery and pre-trial proceedings are continuing with the individual
plaintiffs.
In December 1998, NL was served with a complaint on behalf of four children
and their guardians in Sabater, et al. v. Lead Industries Association, et al.
(Supreme Court of the State of New York, County of Bronx, Index No. 25533/98).
Plaintiffs purport to represent a class of all children and mothers similarly
situated in New York State. The complaint seeks damages from the LIA and other
former pigment manufacturers for establishment of property abatement and medical
monitoring funds and compensatory damages for alleged injuries to plaintiffs.
Discovery regarding class certification is proceeding.
In September 1999, an amended complaint was filed in Thomas v. Lead
Industries Association, et al. (Circuit Court, Milwaukee, Wisconsin, Case No.
99-CV-6411) adding as defendants NL and seven other companies alleged to have
manufactured lead products in paint to a suit originally filed against
plaintiff's landlords. Plaintiff, a minor, alleges injuries purportedly caused
by lead on the surfaces of premises in homes in which he resided. Plaintiff
seeks compensatory and punitive damages, and NL has denied liability. Pre-trial
motions and discovery are proceeding. Trial is scheduled for June 2003.
In October 1999, NL was served with a complaint in State of Rhode Island v.
Lead Industries Association, et al. (Superior Court of Rhode Island, No.
99-5226). The State seeks compensatory and punitive damages for medical, school
and public and private building abatement expenses that the State alleges were
caused by lead paint, and for funding of a public education campaign and health
screening programs. Plaintiff seeks judgments of joint and several liability
against NL, seven other companies alleged to have manufactured lead products in
paint and the LIA. A trial date has been set for September 2002 at which the
issue of whether lead pigment in paint on Rhode Island buildings is a public
nuisance will be tried, and discovery is proceeding.
In October 1999, NL was served with a complaint in Cofield, et al. v. Lead
Industries Association, et al. (Circuit Court for Baltimore City, Maryland, Case
No. 24-C-99-004491). Plaintiffs, six homeowners, seek to represent a class of
all owners of non-rental residential properties in Maryland. Plaintiffs seek
compensatory and punitive damages in excess of $20,000 per household for the
existence of lead-based paint in their homes, including funds for monitoring,
detecting and abating lead-based paint in those residences. Plaintiffs allege
that the former pigment manufacturers and other companies alleged to have
manufactured paint and/or gasoline additives, the LIA, and the National Paint
and Coatings Association (the "NPCA") are jointly and severally liable. In
August 2001, plaintiffs voluntarily dismissed substantially all of their claims,
and in December 2001 the trial court dismissed the remaining claim. The time for
appeal of that ruling has not expired.
In October 1999, NL was served with a complaint in Smith, et al. v. Lead
Industries Association, et al. (Circuit Court for Baltimore City, Maryland, Case
No. 24-C-99-004490). Plaintiffs, seven minors, each seek compensatory damages of
$5 million and punitive damages of $10 million for alleged injuries due to
lead-based paint. Plaintiffs allege that NL, other companies alleged to have
manufactured lead pigment, paint and/or gasoline additives, the LIA and the NPCA
are jointly and severally liable. NL has denied liability, and all defendants
filed motions to dismiss various of the claims. In February 2002, the trial
court dismissed all claims except those relating to product liability for lead
paint and the Maryland Consumer Protection Act. Pre-trial proceedings and
discovery are continuing.
In February 2000, NL was served with a complaint in City of St. Louis v.
Lead Industries Association, et al. (Missouri Circuit Court 22nd Judicial
Circuit, St. Louis City, Cause No. 002-245, Division 1). The City of St. Louis
seeks compensatory and punitive damages for its expenses discovering and abating
lead-based paint, detecting lead poisoning and providing medical care,
educational programs for City residents and the costs of educating children
suffering injuries due to lead exposure. Plaintiff seeks judgments of joint and
several liability against NL, other companies alleged to have manufactured lead
products for paint and the LIA. The defendants' motion to dismiss this case is
currently pending.
In April 2000, NL was served with a complaint in County of Santa Clara v.
Atlantic Richfield Company, et al. (Superior Court of the State of California,
County of Santa Clara, Case No. CV788657) brought against NL, other former
pigment manufacturers and the LIA. The County of Santa Clara seeks to represent
a class of California governmental entities (other than the state and its
agencies) to recover compensatory damages for funds the plaintiffs have expended
or will in the future expend for medical treatment, educational expenses,
abatement or other costs due to exposure to, or potential exposure to, lead
paint, disgorgement of profit, and punitive damages. Santa Cruz, Solano,
Alameda, San Francisco, and Kern counties, the cities of San Francisco and
Oakland, the Oakland and San Francisco unified school districts and housing
authorities and the Oakland Redevelopment Agency have joined the case as
plaintiffs. Pre-trial proceedings and discovery are continuing.
In June 2000, two complaints were filed in Texas state court, Spring Branch
Independent School District v. Lead Industries Association, et al. (District
Court of Harris County, Texas, No. 2000-31175), and Houston Independent School
District v. Lead Industries Association, et al. (District Court of Harris
County, Texas, No. 2000-33725). The School Districts seek past and future
damages and exemplary damages for costs they have allegedly incurred or will
occur due to the presence of lead-based paint in their buildings from NL, the
LIA and other companies sued as former manufacturers of lead-based paint. NL has
denied all liability. Discovery and pre-trial motions are proceeding in both
cases. Trial is scheduled in the Spring Branch case in September 2002.
In June 2000, a complaint was filed in Illinois state court, Lewis, et al.
v. Lead Industries Association, et al. (Circuit Court of Cook County, Illinois,
County Department, Chancery Division, Case No. 00CH09800). Plaintiffs seek to
represent two classes, one of all minors between the ages of six months and six
years who resided in housing in Illinois built before 1978, and one of all
individuals between the ages of six and twenty years who lived between the ages
of six months and six years in Illinois housing built before 1978 and had blood
lead levels of 10 micrograms/deciliter or more. The complaint seeks damages
jointly and severally from the former pigment manufacturers and the LIA to
establish a medical screening fund for the first class to determine blood lead
levels, a medical monitoring fund for the second class to detect the onset of
latent diseases, and a fund for a public education campaign. Pre-trial motions
by the defendants to dismiss the claims are pending.
In October 2000, NL was served with a complaint filed in California state
court in Justice, et al. v. Sherwin-Williams Company, et al. (Superior Court of
California, County of San Francisco, No. 314686). Plaintiffs are two minors who
seek general, special and punitive damages for injuries alleged to be due to
ingestion of paint containing lead in their residence. NL has denied all
liability. Discovery is proceeding.
In January 2001, NL was served with a complaint in Gaines, et al., v. The
Sherwin-Williams Company, et al. (Circuit Court of Jefferson County,
Mississippi, Civil Action No. 2000-0604). The complaint seeks joint and several
liability for compensatory and punitive damages from NL, Sherwin-Williams, and
four local retailers on behalf of a minor and his mother alleging injuries due
to lead pigment and/or paint. The case has been removed to federal court and
that court has dismissed the local paint retailers. Discovery and pre-trial
motions are proceeding.
In February 2001, NL was served with a complaint in Borden, et al. v. The
Sherwin-Williams Company, et al. (Circuit Court of Jefferson County,
Mississippi, Civil Action No. 2000-587). The complaint seeks joint and several
liability for compensatory and punitive damages from more than 40 manufacturers
and retailers of lead pigment and/or paint, including NL, on behalf of 18 adult
residents of Mississippi who were allegedly exposed to lead during their
employment in construction and repair activities. Pre-trial proceedings,
including those related to removal to federal court, are continuing.
In May 2001, NL was served with a complaint in City of Milwaukee v. NL
Industries, Inc. and Mautz Paint (Circuit Court, Civil Division, Milwaukee
County, Wisconsin, Case No. 01CV003066). Plaintiff seeks compensatory and
equitable relief for lead hazards in Milwaukee homes, restitution for amounts it
has spent to abate lead and punitive damages. NL has denied all liability.
Pre-trial proceedings are continuing.
In May 2001, NL was served with a complaint in Harris County, Texas v. Lead
Industries Association, et al. (District Court of Harris County, Texas, No.
2011-21413). The complaint seeks actual and punitive damages and asserts that
NL, other former manufacturers of lead pigment and the LIA are jointly and
severally liable for past and future damages due to the presence of lead paint
in County-owned buildings. NL has denied all liability. Discovery and pre-trial
motions are proceeding.
In June 2001, NL was served with a complaint in Jefferson County School
District v. Lead Industries Association, et al. (Circuit Court of Jefferson
County, Mississippi, Case No. 2001-69). The complaint seeks joint and several
liability for compensatory and punitive damages for abatement of lead paint in
Jefferson County schools from NL, former manufacturers of lead pigment and paint
and local retailers. NL has denied all liability. The case was removed to
federal court, and pre-trial proceedings are continuing.
In December 2001, NL was served with a complaint in Quitman County School
District v. Lead Industries Association, et al. (Circuit Court of Quitman
County, Mississippi, No. 2001-0106). The complaint asserts joint and several
liability and seeks compensatory and punitive damages from NL, former
manufacturers of lead pigment and paint and local retailers for the abatement of
lead paint in Quitman County schools. NL has denied all liability. Pre-trial
proceedings, including those related to the removal of the case to federal
court, are continuing.
In January and February 2002, NL was served with complaints by 22 various
New Jersey municipalities and counties which have been consolidated as In re:
Lead Paint Litigation (Superior Court, Middlesex County, Case Code 702). Each
complaint seeks abatement of lead paint from all housing and all public
buildings in each jurisdiction and punitive damages jointly and severally from
the former pigment manufacturers and the LIA. NL intends to deny all allegations
of liability.
In January 2002, NL was served with a complaint in Jackson, et al., v.
Phillips Building Supply of Laurel, et al. (Circuit Court of Jones County,
Mississippi, Dkt. Co. 2002-10-CV1). The complaint seeks joint and several
liability from three local retailers and six non-Mississippi companies that sold
paint for compensatory and punitive damages on behalf of four adults for
injuries alleged to have been caused by the use of lead paint. The case has been
removed to federal court. NL has denied all allegations of liability and
pre-trial proceedings are continuing.
In February 2002, NL was served with a complaint in Liberty Independent
School District v. Lead Industries Association, et al. (District Court of
Liberty County, Texas, No. 63,332). The school district seeks compensatory and
punitive damages jointly and severally from NL, the LIA, and other former
manufacturers of lead pigment for paint for property damages in its buildings.
NL has denied all allegations of liability.
NL believes that all of the foregoing lead pigment actions are without
merit and intends to continue to deny all allegations of wrongdoing and
liability and to defend such actions vigorously.
Environmental matters and litigation. NL has been named as a defendant,
PRP, or both, pursuant to CERCLA and similar state laws in approximately 75
governmental and private actions associated with waste disposal sites, mining
locations and facilities currently or previously owned, operated or used by NL,
or its subsidiaries, or their predecessors, certain of which are on the U.S.
Environmental Protection Agency's Superfund National Priorities List or similar
state lists. These proceedings seek cleanup costs, damages for personal injury
or property damage and/or damages for injury to natural resources. Certain of
these proceedings involve claims for substantial amounts. Although NL may be
jointly and severally liable for such costs, in most cases it is only one of a
number of PRPs who are also jointly and severally liable.
The extent of CERCLA liability cannot be determined until the Remedial
Investigation and Feasibility Study ("RIFS") is complete, the U.S. EPA issues a
record of decision and costs are allocated among PRPs. The extent of liability
under analogous state cleanup statutes and for common law equivalents are
subject to similar uncertainties. NL believes it has provided adequate accruals
for reasonably estimable costs for CERCLA matters and other environmental
liabilities. At December 31, 2001, NL had accrued $107 million with respect to
those environmental matters which are reasonably estimable. NL determines the
amount of accrual on a quarterly basis by analyzing and estimating the range of
reasonably possible costs to NL. Such costs include, among other things,
expenditures for remedial investigations, monitoring, managing, studies, certain
legal fees, clean-up, removal and remediation. It is not possible to estimate
the range of costs for certain sites. NL has estimated that the upper end of the
range of reasonably possible costs to NL for sites for which it is possible to
estimate costs is approximately $160 million. NL's estimates of such liabilities
have not been discounted to present value, and other than the three settlements
discussed below with respect to certain of NL's former insurance carriers, NL
has not recognized any insurance recoveries. No assurance can be given that
actual costs will not exceed either accrued amounts or the upper end of the
range for sites for which estimates have been made, and no assurance can be
given that costs will not be incurred with respect to sites as to which no
estimate presently can be made. The imposition of more stringent standards or
requirements under environmental laws or regulations, new developments or
changes with respect to site cleanup costs or allocation of such costs among
PRPs, or a determination that NL is potentially responsible for the release of
hazardous substances at other sites could result in expenditures in excess of
amounts currently estimated by NL to be required for such matters. Furthermore,
there can be no assurance that additional environmental matters will not arise
in the future. More detailed descriptions of certain legal proceedings relating
to environmental matters are set forth below.
In July 1991, the United States filed an action in the U.S. District Court
for the Southern District of Illinois against NL and others (United States of
America v. NL Industries, Inc., et al., Civ. No. 91-CV 00578) with respect to
the Granite City, Illinois lead smelter formerly owned by NL. The complaint
seeks injunctive relief to compel the defendants to comply with an
administrative order issued pursuant to CERCLA, and fines and treble damages for
the alleged failure to comply with the order. NL and the other parties did not
implement the order, believing that the remedy selected by the U.S. EPA was
invalid, arbitrary, capricious and was not selected in accordance with law. The
complaint also seeks recovery of past costs and a declaration that the
defendants are liable for future costs. Although the action was filed against NL
and ten other defendants, there are 330 other PRPs who have been notified by the
U.S. EPA. Some of those notified were also respondents to the administrative
order. In September 1995, the U.S. EPA released its amended decision selecting
cleanup remedies for the Granite City site. In September 1997, the U.S. EPA
informed NL that the past and future cleanup costs were estimated to total
approximately $63.5 million. In 1999, the U.S. EPA and certain other PRPs
entered into a consent decree settling their liability at the site for
approximately 50% of the site costs, and NL and the U.S. EPA reached an
agreement in principle to settle NL's liability at the site for $31.5 million.
NL and the U.S. EPA are negotiating a consent decree embodying the terms of this
agreement in principle.
NL previously reached an agreement with the other PRPs at a lead smelter
site in Pedricktown, New Jersey, formerly owned by NL, to settle NL's liability
for $6 million, of which $4.1 million has already been paid as of December 31,
2001. The settlement does not resolve issues regarding NL's potential liability
in the event site costs exceed $21 million. However, NL does not presently
expect site costs to exceed such amount and has not provided accruals for such
contingency.
In 1998, NL reached an agreement to settle litigation with the other PRPs
at a lead smelter site in Portland, Oregon that was formerly owned by NL. Under
the agreement, NL agreed to pay a portion of future cleanup costs. In 2000, the
construction of the remediation was completed and is now in the operation and
maintenance phase.
In 2000, NL reached an agreement with the other PRPs at the Baxter Springs
subsite in Cherokee County, Kansas, to resolve NL's liability. NL and others
formerly mined lead and zinc in the Baxter Springs subsite. Under the agreement,
NL agreed to pay a portion of the cleanup costs associated with the Baxter
Springs subsite. The U.S. EPA has estimated the total cleanup costs in the
Baxter Springs subsite to be $5.4 million. The remedial design phase of the
cleanup is underway.
In 1996, the U.S. EPA ordered NL to perform a removal action at a facility
in Chicago, Illinois formerly owned by NL. NL has complied with the order and
has completed the on-site work at the facility. NL is conducting an
investigation regarding potential offsite contamination.
Residents in the vicinity of NL's former Philadelphia lead chemicals plant
commenced a class action allegedly comprised of over 7,500 individuals seeking
medical monitoring and damages allegedly caused by emissions from the plant.
Wagner, et al v. Anzon and NL Industries, Inc., No. 87-4420, Court of Common
Pleas, Philadelphia County. The complaint sought compensatory and punitive
damages from NL and the current owner of the plant, and alleged causes of action
for, among other things, negligence, strict liability, and nuisance. A class was
certified to include persons who resided, owned or rented property, or who work
or have worked within up to approximately three-quarters of a mile from the
plant from 1960 through the present. In December 1994, the jury returned a
verdict in favor of NL, and the verdict was affirmed on appeal. Residents also
filed consolidated actions in the United States District Court for the Eastern
District of Pennsylvania, Shinozaki v. Anzon, Inc. and Wagner and Antczak v.
Anzon and NL Industries, Inc., Nos. 87-3441, 87-3502, 87-4137 and 87-5150. The
consolidated action is a putative class action seeking CERCLA response costs,
including cleanup and medical monitoring, declaratory and injunctive relief and
civil penalties for alleged violations of the Resource Conservation and Recovery
Act ("RCRA"), and also asserting pendent common law claims for strict liability,
trespass, nuisance and punitive damages. The court dismissed the common law
claims without prejudice, dismissed two of the three RCRA claims as against NL
with prejudice, and stayed the case pending the outcome of the state court
litigation.
In 2000, NL reached an agreement with the other PRPs at the Batavia
Landfill Superfund Site in Batavia, New York to resolve NL's liability. The
Batavia Landfill is a former industrial waste disposal site. Under the
agreement, NL agreed to pay 40% of the future remedial construction costs, which
the U.S. EPA has estimated to be approximately $11 million in total. Under the
settlement, NL is not responsible for costs associated with the operation and
maintenance of the remedy. In addition, NL received approximately $2 million
from settling PRPs. The remedial design phase of the remedy is underway.
In October 2000, NL was served with a complaint in Pulliam, et al. v. NL
Industries, Inc., et al., (Superior Court in Marion County, Indiana, No.
49F12-0104-CT-001301), filed on behalf of an alleged class of all persons and
entities who own or have owned property or have resided within a one-mile radius
of an industrial facility formerly owned by NL in Indianapolis, Indiana.
Plaintiffs allege that they and their property have been injured by lead dust
and particulates from the facility and seek unspecified actual and punitive
damages and a removal of all alleged lead contamination under various theories,
including negligence, strict liability, battery, nuisance and trespassing. In
December 2000, NL answered the complaint, denying all allegations of wrongdoing
and liability. Discovery is proceeding.
See also Item 1 - "Business - Chemicals - Regulatory and environmental
matters."
In July 2000, Tremont entered into a voluntary settlement agreement with
the Arkansas Department of Environmental Quality pursuant to which Tremont and
other PRPs will undertake certain investigatory and remediation activities at a
former barite mining site located in Hot Springs County, Arkansas. Tremont
currently believes it has accrued adequate amounts to cover its share of the
costs for such remediation activities. At December 31, 2001, Tremont had accrued
approximately $5 million related to these matters.
In 1999, TIMET and certain other companies that currently have or formerly
had operations within the BMI Complex (the "BMI Companies") entered into a
series of agreements with BMI pursuant to which, among other things, BMI assumed
responsibility for the conduct of soils remediation activities on the properties
described, including the responsibility to complete all outstanding requirements
pertaining to such activities under existing consent agreements with the Nevada
Division of Environmental Protection. TIMET contributed $2.8 million to the cost
of this remediation (which payment was charged against TIMET's accrued
liabilities for this matter). TIMET also agreed to convey to BMI, at no
additional cost, certain lands owned by TIMET adjacent to its plant site (the
"TIMET Pond Property") upon payment by BMI of the cost to design, purchase, and
install the technology and equipment necessary to allow TIMET to stop
discharging liquid and solid effluents and co-products onto the TIMET Pond
Property (BMI will pay 100% of the first $15.9 million cost for this project,
and TIMET agreed to contribute 50% of the cost in excess of $15.9 million, up to
a maximum payment by TIMET of $2 million). TIMET, BMI and the other BMI
Companies are continuing investigation with respect to certain additional issues
associated with the properties described above, including any possible
groundwater issues at the BMI Complex and the TIMET Pond Property.
In addition to assessments discussed above, TIMET is continuing assessment
work with respect to its own active plant site in Nevada. A preliminary study of
certain groundwater remediation issues at such Nevada facility and other TIMET
sites within the BMI Complex was completed during 2000. TIMET accrued $3.3
million based on the cost estimates set forth in that study. Such undiscounted
environmental remediation costs are expected to be paid over a period of up to
thirty years.
In February 2002, TIMET fulfilled all of its remaining obligations under
the 2000 settlement agreement of the U. S. EPA's civil action against TIMET
(United States of America v. Titanium Metals Corporation; Civil Action No.
CV-S-98-682-HDM (RLH), U. S. District Court, District of Nevada).
At December 31, 2001, TIMET had accrued an aggregate of approximately $4
million for these environmental matters discussed above.
In addition to amounts accrued by NL, Tremont and TIMET for environmental
matters, at December 31, 2001, the Company also had approximately $6 million
accrued for the estimated cost to complete environmental cleanup matters at
certain of its former facilities. Costs for future environmental remediation
efforts are not discounted to their present value, and no recoveries for
remediation costs from third parties have been recognized. Such accruals will be
adjusted, if necessary, as further information becomes available or as
circumstances change. No assurance can be given that the actual costs will not
exceed accrued amounts. At one of such facilities, the Company has been named as
a PRP pursuant to CERCLA at a Superfund site in Indiana. The Company has also
undertaken a voluntary cleanup program to be approved by state authorities at
another Indiana site. The total estimated cost for cleanup and remediation at
the Indiana Superfund site is $39 million. The Company's share of such estimated
cleanup and remediation cost is currently estimated to be approximately $2
million, of which about one-half has been paid. The Company's estimated cost to
complete the voluntary cleanup program at the other Indiana site, which involves
both surface and groundwater remediation, is relatively nominal. The Company
believes it has adequately provided accruals for reasonably estimable costs for
CERCLA matters and other environmental liabilities for all of such former
facilities. The imposition of more stringent standards or requirements under
environmental laws or regulations, new developments or changes respecting site
cleanup costs or allocation of such costs among PRPs or a determination that the
Company is potentially responsible for the release of hazardous substances at
other sites could result in expenditures in excess of amounts currently
estimated by the Company to be required for such matters. Furthermore, there can
be no assurance that additional environmental matters related to current or
former operations will not arise in the future.
Insurance coverage claims. NL has previously filed actions seeking
declaratory judgment and other relief against various insurance carriers with
respect to costs of defense and indemnity coverage for certain of its
environmental and lead pigment litigation. NL Industries, Inc. v. Commercial
Union Insurance Cos., et al., Nos. 90-2124, -2125 (HLS) (District Court of New
Jersey).
These actions relating to claims for defense costs and indemnity coverage
for environmental matters have been settled with respect to certain defendants.
During 2000 and 2001, NL reached settlements with certain of its former
insurance carriers. The settlements resolved the court proceedings in which NL
had sought reimbursement from the carriers for legal defense expenditures and
indemnity coverage for certain of its environmental remediation expenditures. As
a result of the settlements, NL recognized a $69.5 million pre-tax gain in 2000
related to the 2000 settlements, and an $11.4 million pre-tax gain in 2001
related to the 2001 settlements. Substantially all of the proceeds from these
settlements have been transferred by the carriers to special purpose trusts
formed by NL to pay for certain of its future remediation and other
environmental expenditures. See Note 12 to the Consolidated Financial
Statements. No further material settlements relating to litigation concerning
environmental remediation coverages are expected.
The action relating to claims for lead pigment litigation defense costs
sought to recover defense costs incurred in the City of New York lead pigment
case and two other cases which have since been resolved in NL's favor. Such
action related to lead paint litigation has been settled.
The issue of whether insurance coverage for defense costs or indemnity or
both will be found to exist for lead pigment litigation depends upon a variety
of factors, and there can be no assurance that such insurance coverage will be
available. NL has not considered any potential insurance recoveries for lead
pigment or environmental litigation in determining related accruals.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Valhi's common stock is listed and traded on the New York and Pacific Stock
Exchanges (symbol: VHI). As of February 28, 2002, there were approximately 2,050
holders of record of Valhi common stock. The following table sets forth the high
and low closing per share sales prices for Valhi common stock for the periods
indicated, according to the New York Stock Exchange Composite Tape, and
dividends paid during such periods. On February 28, 2002 the closing price of
Valhi common stock according to the NYSE Composite Tape was $11.80.
Dividends
High Low paid
Year ended December 31, 2000
First Quarter ........................... $ 11.56 $ 10.19 $ .05
Second Quarter .......................... 13.56 10.38 .05
Third Quarter ........................... 13.00 10.75 .05
Fourth Quarter .......................... 12.88 11.44 .06
Year ended December 31, 2001
First Quarter ........................... $ 12.00 $ 10.00 $ .06
Second Quarter .......................... 12.95 10.00 .06
Third Quarter ........................... 13.30 10.16 .06
Fourth Quarter .......................... 13.42 11.11 .06
Valhi's regular quarterly dividend is currently $.06 per share. Declaration
and payment of future dividends and the amount thereof will be dependent upon
the Company's results of operations, financial condition, cash requirements for
its businesses, contractual requirements and restrictions and other factors
deemed relevant by the Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's Consolidated Financial Statements and Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Years ended December 31,
-------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(In millions, except per share data)
STATEMENTS OF OPERATIONS DATA:
Net sales:
Chemicals ......................... $ 984.4 $ 907.3 $ 908.4 $ 922.3 $ 835.1
Component products ................ 108.7 152.1 225.9 253.3 211.4
Waste management (1) .............. -- -- 10.9 16.3 13.0
--------- --------- --------- --------- ---------
$ 1,093.1 $ 1,059.4 $ 1,145.2 $ 1,191.9 $ 1,059.5
========= ========= ========= ========= =========
Operating income:
Chemicals ......................... $ 106.7 $ 154.6 $ 126.2 $ 187.4 $ 143.5
Component products ................ 28.3 31.9 40.2 37.5 13.1
Waste management (1) .............. -- -- (1.8) (7.2) (14.4)
--------- --------- --------- --------- ---------
$ 135.0 $ 186.5 $ 164.6 $ 217.7 $ 142.2
========= ========= ========= ========= =========
Equity in earnings (losses):
Waste Control Specialists (1) ..... $ (12.7) $ (15.5) $ (8.5) $ -- $ --
Tremont Corporation (2) ........... -- 7.4 (48.7) -- --
TIMET (3) ......................... -- -- -- (9.0) (9.2)
Income from continuing operations (4) $ 27.1 $ 225.8 $ 47.4 $ 77.1 $ 93.2
Discontinued operations ............. 33.6 -- 2.0 -- --
Extraordinary item .................. (4.3) (6.2) -- (.5) --
--------- --------- --------- --------- ---------
Net income ...................... $ 56.4 $ 219.6 $ 49.4 $ 76.6 $ 93.2
========= ========= ========= ========= =========
DILUTED EARNINGS PER SHARE DATA:
Income from continuing operations ... $ .24 $ 1.94 $ .41 $ .66 $ .80
Net income .......................... $ .49 $ 1.89 $ .43 $ .66 $ .80
Cash dividends ...................... $ .20 $ .20 $ .20 $ .21 $ .24
Weighted average common shares
Outstanding ........................ 115.9 116.1 116.2 116.3 116.1
BALANCE SHEET DATA (at year end):
Total assets ........................ $ 2,178.1 $ 2,242.2 $ 2,235.2 $ 2,256.8 $ 2,153.8
Long-term debt ...................... 1,008.1 630.6 609.3 595.4 497.2
Stockholders' equity ................ 384.9 578.5 589.4 628.2 622.3
(1) Consolidated effective June 30, 1999.
(2) Commenced recognizing equity in earnings effective July 1, 1998;
consolidated effective December 31, 1999.
(3) Commenced reporting equity in earnings effective January 1, 2000.
(4) Income from continuing operations in 1998 includes the previously-reported
(i) $330 million pre-tax gain ($152 million net of income taxes and
minority interest) related to the sale of NL's specialty chemicals
business unit, (ii) $68 million pre-tax gain ($44 million net of income
taxes) related to the Company's reduction in interest in CompX and (iii)
$32 million charge ($21 million net of income taxes) related to cash
payments made to settle certain litigation. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for a
discussion of unusual items occurring during 1999, 2000 and 2001. There
were no unusual items occurring during 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Continuing operations
The Company reported income from continuing operations of $93.2 million, or
$.80 per diluted share, in 2001 compared to $77.1 million, or $.66 per diluted
share, in 2000. Excluding the effects of unusual items discussed below, the
Company would have reported income from continuing operations of $30.7 million,
or $.27 per diluted share, in 2001 compared to $49.3 million, or $.42 per
diluted share, in 2000. Total operating income decreased 35% in 2001 compared to
2000 due to lower chemicals earnings at NL, lower component products operating
income at CompX International and higher waste management operating losses at
Waste Control Specialists.
The Company's results in 2001 include (i) a pre-tax insurance gain of $16.2
million ($7.4 million, or $.06 per diluted share, net of income taxes and
minority interest) related to insurance recoveries received by NL resulting from
the March 2001 fire at one of NL's facilities, as insurance recoveries received
exceeded the carrying value of the property destroyed and cleanup costs
incurred, (ii) aggregate net securities transactions gains of $47.0 million
($30.7 million, or $.26 per diluted share, net of income taxes and minority
interest) related principally to the disposition of a portion of the shares of
Halliburton Company common stock held by the Company, including dispositions
when certain holders of the Company's LYONs debt obligation exercised their
right to exchange such debt for such Halliburton stock, (iii) pre-tax gains
aggregating $31.9 million ($18.3 million, or $.16 per diluted share, net of
income taxes and minority interest) related to NL's legal settlements with
certain of its former insurance carriers and the settlement of certain
litigation to which Waste Control Specialists was a party and (iv) a $17.6
million non-cash income tax benefit ($13 million, or $.11 per diluted share, net
of minority interest) related to a change in estimate of NL's ability to utilize
certain German income tax attributes. In addition, the Company's equity in
earnings of TIMET in 2001 includes $12.7 million of net equity in losses ($6.9
million, or $.06 per diluted share, net of income tax benefit) related to the
combined net effect of TIMET's (i) $62.7 million pre-tax settlement with Boeing,
(ii) $61.5 million provision for an other than temporary impairment of its
investment in preferred securities of Special Metals Corporation and (iii) $12.3
million increase in its deferred income tax asset valuation allowance. See Notes
5, 7, 12 and 16 to the Consolidated Financial Statements.
The Company's results in 2000 include a $69.5 million pre-tax net gain
($28.2 million, or $.24 per diluted share, net of income taxes and minority
interest) related to NL's settlements with certain of its principal former
insurance carriers. The 1999 results include a $90 million non-cash income tax
benefit ($52 million, or $.45 per diluted share, net of minority interest)
recognized by NL and a non-cash impairment charge of $50 million ($32 million,
or $.28 per diluted share, net of income taxes) for an other than temporary
decline in the market value of TIMET. See Notes 12 and 16 to the Consolidated
Financial Statements.
As discussed in Note 20 to the Consolidated Financial Statements, beginning
in 2002 the Company will no longer recognize periodic amortization of goodwill
in its results of operations. The Company would have reported income before
extraordinary item of approximately $109 million in 2001, or about $16 million
higher than what was actually reported, if the goodwill amortization included in
the Company's reported net income had not been recognized. Of such $16 million
difference, approximately $14.5 million and $2.5 million relates to amortization
of goodwill attributable to the Company's chemicals and components products
segment, respectively, and approximately $1 million relates to minority interest
associated with the goodwill amortization recognized by certain of the Company's
less-than-wholly-owned subsidiaries.
Excluding the effect of all of the unusual items discussed above, and even
after considering the effect of ceasing to periodically amortize goodwill
beginning in 2002, the Company currently believes its net income in 2002 will be
significantly lower compared to 2001 due primarily to significantly lower
expected chemicals operating income.
Critical accounting policies and estimates
The accompanying "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are based upon the Company's consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). The
preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the reported
period. On an on-going basis, the Company evaluates its estimates, including
those related to bad debts, inventory reserves, impairments of investments in
marketable securities and investments accounted for by the equity method, the
recoverability of other long-lived assets (including goodwill and other
intangible assets), pension and other post-retirement benefit obligations and
the underlying actuarial assumptions related thereto, the realization of
deferred income tax assets and accruals for environmental remediation,
litigation, income tax and other contingencies. The Company bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the reported amounts of assets, liabilities, revenues and
expenses. Actual results may differ from previously-estimated amounts under
different assumptions or conditions.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements:
o The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments and
other factors. The Company takes into consideration the current financial
condition of the customers, the age of the outstanding balance and the
current economic environment when assessing the adequacy of the allowance.
If the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
o The Company provides reserves for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated net realizable value using assumptions about future demand for
its products and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory reserves
may be required. NL provides reserves for tools and supplies inventory
based generally on both historical and expected future usage requirements.
o The Company owns investments in certain companies that are accounted for
either as marketable securities or under the equity method. For all of such
investments, the Company records an impairment charge when it believes an
investment has experienced a decline in fair value that is other than
temporary. Future adverse changes in market conditions or poor operating
results of underlying investments could result in losses or an inability to
recover the carrying value of the investments that may not be reflected in
an investment's current carrying value, thereby possibly requiring an
impairment charge in the future.
o The Company recognizes an impairment charge associated with its long-lived
assets, including property and equipment, goodwill and other intangible
assets, whenever it determines that recovery of such long-lived asset is
not probable. Such determination is made in accordance with the applicable
GAAP requirements associated with the long-lived asset, and is based upon,
among other things, estimates of the amount of future net cash flows to be
generated by the long-lived asset and estimates of the current fair value
of the asset. Adverse changes in such estimates of future net cash flows or
estimates of fair value could result in an inability to recover the
carrying value of the long-lived asset, thereby possibly requiring an
impairment charge to be recognized in the future.
o The Company records a valuation allowance to reduce its deferred income tax
assets to the amount that is believed to be realized under the
"more-likely-than-not" recognition criteria. While the Company has
considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation allowance, it is
possible that in the future the Company may change its estimate of the
amount of the deferred income tax assets that would "more-likely-than-not"
be realized in the future, resulting in an adjustment to the deferred
income tax asset valuation allowance that would either increase or
decrease, as applicable, reported net income in the period such change in
estimate was made.
o The Company records an accrual for environmental, legal, income tax and
other contingencies when estimated future expenditures associated with such
contingencies become probable, and the amounts can be reasonably estimated.
However, new information may become available, or circumstances (such as
applicable laws and regulations) may change, thereby resulting in an
increase or decrease in the amount required to be accrued for such matters
(and therefore a decrease or increase in reported net income in the period
of such change).
Chemicals
Selling prices for TiO2, NL's principal product, were generally decreasing
during the first three quarters of 1999, were generally increasing during the
fourth quarter of 1999 and most of 2000, and were generally decreasing during
most of 2001. The most significant TiO2 price erosion that occurred during 2001
was in European and export markets. NL's average TiO2 selling prices have
continued to trend downward during the first quarter of 2002. NL's TiO2
operations are conducted through its wholly-owned subsidiary Kronos.
Chemicals operating income, as presented below, is stated net of
amortization of Valhi's purchase accounting adjustments made in conjunction with
its acquisitions of its interest in NL. Such adjustments result in additional
depreciation, depletion and amortization expense beyond amounts separately
reported by NL. Such additional non-cash expenses reduced chemicals operating
income, as reported by Valhi, by approximately $19.5 million, $18.9 million and
$19.7 million in 1999, 2000 and 2001, respectively, as compared to amounts
separately reported by NL. As discussed in Note 3 to the Consolidated Financial
Statements, the Company commenced consolidating Tremont's results of operations
effective January 1, 2000. Tremont owns 21% of NL and accounts for its interest
in NL by the equity method. Tremont also has purchase accounting adjustments
made in conjunction with the acquisitions of its interest in NL. During 1999,
amortization of such purchase accounting adjustments were included in the
Company's equity in earnings of Tremont. Beginning in 2000 when the Company
commenced consolidating Tremont's result of operations, amortization of such
Tremont purchase accounting adjustments further reduced chemicals operating
income, as reported by Valhi, compared to amounts separately reported by NL by
approximately $6.2 million and $6.0 million in 2000 and 2001, respectively. Had
the Company consolidated Tremont's results of operations effective January 1,
1999, amortization of Tremont's purchase accounting adjustments related to NL
would have further reduced chemicals operating income, as presented below, for
1999 by $6.8 million. A significant portion of such purchase accounting
adjustment amortization relates to goodwill (about $14.5 million in 2001). As
discussed above, beginning in 2002 goodwill will no longer be subject to
periodic amortization. Accordingly, beginning in 2002 the reduction in chemicals
operating income reported by the Company as compared to amounts
separately-reported by NL is not expected to be as much as it was in 2001
because of the effect of ceasing periodic amortization of such goodwill purchase
accounting adjustments.
Years ended December 31, % Change
--------------------- --------------
1999 2000 2001 1999-00 2000-01
---- ---- ---- ------- -------
(In millions)
Net sales ........................... $ 90 $922.3 $835.1 + 2% - 9
Operating income .................... 126.2 187.4 143.5 + 48% - 23
Operating income margin ............. 14% 20% 17%
TiO2 data:
Sales volumes (thousands
of metric tons) .................. 427 436 402 + 2% - 8
Average selling price
index (1983=100) ................. 153 161 156 + 6% - 3
Chemicals sales decreased in 2001 compared to 2000 due primarily to lower
TiO2 sales volumes and lower TiO2 average selling prices. Excluding the effect
of fluctuations in the value of the U.S. dollar relative to other currencies,
NL's average TiO2 selling prices (in billing currencies) during 2001 were 3%
lower compared to 2000, with prices lower in all major regions. NL's TiO2 sales
volumes in the 2001 were 8% lower than the record sales volumes of 2000, with
slightly higher volumes in export markets more than offset by lower volumes in
North America and Europe. Approximately one-half of Kronos' TiO2 sales volumes
in 2001 was attributable to markets in Europe, with 38% attributable to North
America and the balance to export markets.
Chemicals operating income in 2001 decreased compared to 2000 due primarily
to the lower TiO2 sales volumes and average selling prices as well as lower TiO2
production volumes. NL's TiO2 production volumes were 6% lower in 2001 compared
to the record production volumes in 2000, with operating rates in 2001 of 91%
compared to near full capacity in 2000. The lower production volumes were due
primarily to the effects of the previously-reported March 2001 fire at NL's
Leverkusen, Germany sulfate-process facility, as well as NL's decision to
curtail production during the period of soft demand. The Leverkusen
sulfate-process facility became approximately 50% operational in September 2001,
and returned to full production in late October 2001.
Chemicals operating income in 2001 includes $27.3 million of business
interruption insurance proceeds as payment for losses (unallocated period costs
and lost margin) caused by the Leverkusen fire. The effects of the lower TiO2
sales and production volumes were offset in part by the business interruption
insurance proceeds. Of such $27.3 million of business interruption insurance
proceeds, $20.1 million was recorded as a reduction of cost of sales to offset
unallocated period costs that resulted from lost production, and the remaining
$7.2 million, representing recovery of lost margin, was recorded in other
income. The business interruption insurance proceeds distorts the chemicals
operating income margin percentage in 2001 as there are no sales associated with
the $7.2 million of lost margin operating profit recognized. See Note 12 to the
Consolidated Financial Statements.
NL also recognized insurance recoveries of $29.1 million in 2001 for
property damage and related cleanup and other extra expenses related to the
fire, resulting in an insurance gain of $16.2 million, as the insurance
recoveries exceeded the carrying value of the property destroyed and the cleanup
and other extra expenses incurred. Such insurance gain is not reported as a
component of chemicals operating income but is included in general corporate
items. NL does not expect to recognize any additional insurance recoveries
related to the Leverkusen fire.
Kronos' operating income in 2000 increased compared to 1999 due primarily
to higher average TiO2 selling prices and higher TiO2 sales and production
volumes. Excluding the effect of fluctuations in the value of the U.S. dollar
relative to other currencies, Kronos' average TiO2 selling prices (in billing
currencies) during 2000 were 6% higher than 1999, with increased prices in all
major regions and the greatest improvement in European and export markets.
Kronos' TiO2 sales volumes in 2000 were a record and were 2% higher than 1999,
primarily due to higher sales in Europe and North America. Demand for Ti02 in
the first three quarters of 2000 was stronger than comparable year-earlier
periods as a result of, among other things, customers buying in advance of
anticipated price increases. Demand for Ti02 softened in the fourth quarter of
2000. Kronos' TiO2 production volumes in 2000 were also a record and were 7%
higher than 1999, with operating rates near full capacity in 2000 compared to
about 93% capacity utilization in 1999. The lower level of capacity utilization
in 1999 was due to Kronos' decision to manage its inventory levels in early 1999
by curtailing production during the first quarter. In addition, Kronos'
operating income in 1999 includes $5.3 million of foreign currency transaction
gains related to certain of NL's short-term intercompany cross-border financings
that were settled in July 1999.
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions can significantly impact NL's earnings and operating cash
flows. The average TiO2 selling price index (using 1983 = 100) of 156 in 2001
was 3% lower than the 2000 index of 161 (2000 was 6% higher than the 1999 index
of 153). In comparison, the 2001 index was 11% below the 1990 price index of 175
and 23% higher than the 1993 price index of 127. Many factors influence TiO2
pricing levels, including industry capacity, worldwide demand growth and
customer inventory levels and purchasing decisions.
NL expects TiO2 industry demand in 2002 will improve over 2001 levels
because NL expects worldwide economic conditions will improve and inventory
levels of its customers will increase. NL's TiO2 production volumes in 2002 are
expected to approximate NL's 2002 TiO2 sales volumes. In January 2002, NL
announced price increases in all major markets of approximately 5% to 8% above
existing December 2001 prices, scheduled to be implemented late in the first
quarter of 2002 and early in the second quarter of 2002. NL is hopeful that it
will realize such announced prices increases, but the extent to which NL can
realize these and possibly other price increases during 2002 will depend on
improving market conditions and global economic recovery. However, because TiO2
prices were generally declining during all of 2001, NL believes that its average
2002 prices in billing currencies will be significantly below its average 2001
prices, even if the recently-announced price increases are realized. Overall, NL
expects its TiO2 operating income in 2002 will be significantly lower than 2001,
primarily due to lower average TiO2 selling prices. NL's expectations as to the
future prospects of NL and the TiO2 industry are based upon a number of factors
beyond NL's control, including worldwide growth of gross domestic product,
competition in the market place, unexpected or earlier-than-expected capacity
additions and technological advances. If actual developments differ from NL's
expectations, NL's results of operations could be unfavorably affected.
NL's efforts to debottleneck its production facilities to meet long-term
demand continue to prove successful. NL expects its TiO2 production capacity
will increase by about 25,000 metric tons (primarily at its chloride-process
facilities), with moderate capital expenditures, to increase its aggregate
production capacity to about 480,000 metric tons during 2005.
NL has substantial operations and assets located outside the United States
(principally Germany, Belgium, Norway and Canada). A significant amount of NL's
sales generated from its non-U.S. operations are denominated in currencies other
than the U.S. dollar (57% in 2001), primarily the euro, other major European
currencies and the Canadian dollar. In addition, a portion of NL's sales
generated from its non-U.S. operations are denominated in the U.S. dollar.
Certain raw materials, primarily titanium-containing feedstocks, are purchased
in U.S. dollars, while labor and other production costs are denominated
primarily in local currencies. Consequently, the translated U.S. dollar value of
NL's foreign sales and operating results are subject to currency exchange rate
fluctuations which may favorably or adversely impact reported earnings and may
affect the comparability of period-to-period operating results. Including the
effect of fluctuations in the value of the U.S. dollar relative to other
currencies, Kronos' average TiO2 selling prices (in billing currencies) in 2001
decreased 5% compared to 2000 (such prices in 2000 decreased 1% compared to
1999). Overall, fluctuations in the value of the U.S. dollar relative to other
currencies, primarily the euro, decreased TiO2 sales in 2001 by a net $19
million compared to 2000, and decreased sales by a net $68 million in 2000
compared to 1999. 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 lower during 2001 and 2000 as compared to the
respective prior years. Overall, the net impact of currency exchange rate
fluctuations on NL's operating income comparisons, other than the $5.3 million
1999 foreign currency transaction gain discussed above, was not significant in
2001 and 2000 compared to the respective prior year.
Component products
Years ended December 31, % Change
----------------------- ------------
1999 2000 2001 1999-00 2000-01
---- ---- ---- ------- -------
(In millions)
Net sales ....................... $ 225.9 $ 253.3 $ 211.4 + 12% - 17
Operating income ................ 40.2 37.5 13.1 - 7 - 65
Operating income margin ......... 18% 15% 6%
Component products sales and operating income decreased in 2001 compared to
2000 due primarily to continued weak economic conditions in the manufacturing
sector in North America and Europe. During 2001, sales of slide products
decreased 26% compared to 2000, and sales of security products and ergonomic
products each decreased 13%. CompX's efforts to reduce manufacturing, fixed
overhead and related overhead costs partially offset the effect of the decline
in sales, although CompX was unable to sufficiently reduce such costs to fully
compensate for the lower level of sales. Component products operating income in
2001 also includes a restructuring charge related to the consolidation and
rationalization of certain of its European and North American operations
(including headcount reductions) and provisions for obsolete and slow-moving
inventories and other items aggregating $5.7 million. Operating income and
margins were also adversely impacted in 2001 by unfavorable changes in product
mix and general pricing pressures.
Component products sales increased in 2000 compared to 1999 due to the
effect of acquisitions. Sales of security products in 2000 increased 13%
compared to 1999, and sales of slide products increased 18%. During 2000, sales
of CompX's ergonomic products decreased 5% compared to 1999. Excluding the
effect of acquisitions, component products sales in 2000 were essentially flat
compared to 1999, with sales of slide products up 8% and sales of ergonomic
products and security products down 5% and 7%, respectively. The increase in
sales of slide products is due to market share gains and increased demand for
CompX's slide products. Sales of ergonomic products were negatively impacted in
the second half of 2000 by softening demand in the office furniture industry in
North America and loss of market share due to competition from imports. The
lower security products sales were due to weakness in the computer and related
products industry and increased competition from lower-cost imports. Component
products operating income and operating income margins in 2000 were adversely
impacted by a change in product mix, with a lower percentage of sales generated
by certain higher-margin products in 2000 compared to 1999, as well as expenses
associated with the relocation of one of CompX's operations, an expansion of
another CompX facility and higher administrative expenses. Excluding the effect
of acquisitions, component products operating income decreased 11% in 2000
compared to 1999.
CompX has substantial operations and assets located outside the United
States (principally in Canada, The Netherlands and Taiwan). A portion of CompX's
sales generated from its non-U.S. operations are denominated in currencies other
than the U.S. dollar, principally the Canadian dollar, the Dutch guilder, the
euro and the New Taiwan dollar. In addition, a portion of CompX's sales
generated from its non-U.S. operations (principally in Canada) are denominated
in the U.S. dollar. Most raw materials, labor and other production costs for
such non-U.S. operations are denominated primarily in local currencies.
Consequently, the translated U.S. dollar value of CompX's foreign sales and
operating results are subject to currency exchange rate fluctuations which may
favorably or unfavorably impact reported earnings and may affect comparability
of period-to-period operating results. During 2001, currency exchange rate
fluctuations of the Canadian dollar and the euro negatively impacted component
products sales compared to 2000 (principally with respect to slide products).
Operating income comparisons for this period, however, were not materially
impacted by currency fluctuations. Excluding the effect of currency, component
products sales decreased 15% in 2001 compared to 2000. During 2000, weakness in
the euro negatively impacted component products sales and operating income
comparisons with 1999 (principally with respect to slide products). Excluding
the effect of currency and acquisitions, component products sales increased 2%
in 2000 compared to 1999, and operating income decreased 9%.
CompX expects the weak economic conditions experienced in 2001 will
continue to negatively impact its results of operations in 2002. A significant
portion of CompX's business is derived from the office furniture industry, which
has historically tended to lag behind the rest of the economy in periods of
economic recovery. Ceasing to periodically amortize goodwill, however, will
favorably impact component products operating income in 2002 compared to 2001 by
approximately $2.5 million.
Waste management
Years ended December 31,
1999 2000 2001
---- ---- ----
(In millions)
Net sales ......................... $ 19.2 $ 16.3 $ 13.0
Operating loss .................... (9.8) (7.2) (14.4)
As discussed in Note 3 to the Consolidated Financial Statements, the
Company commenced consolidating Waste Control Specialists' results of operations
in the third quarter of 1999. During the first six months of 1999 prior to
consolidation, the Company reported its interest in Waste Control Specialists by
the equity method. The Company's equity in net losses of Waste Control
Specialists during the first six months of 1999 was $8.5 million.
Waste management operating losses increased in 2001 compared to 2000 due
primarily to the effect of continued weak demand for Waste Control Specialists'
waste management services, higher expenses associated with its permitting
efforts and expenses associated with the start-up of certain new waste disposal
process equipment. Waste Control Specialists' operating loss was lower in 2000
compared to 1999 due primarily to the favorable effect of certain cost control
measures implemented during the second half of 1999, which more than offset the
unfavorable effect of a lower level of sales resulting from weak demand for its
waste management services.
Waste Control Specialists currently has permits which allow it to treat,
store and dispose of a broad range of hazardous and toxic wastes, and to treat
and store a broad range of low-level and mixed radioactive wastes. The hazardous
waste industry (other than low-level and mixed radioactive waste) currently has
excess industry capacity caused by a number of factors, including a relative
decline in the number of environmental remediation projects generating hazardous
wastes and efforts on the part of generators to reduce the volume of waste
and/or manage wastes onsite at their facilities. These factors have led to
reduced demand and increased price pressure for non-radioactive hazardous waste
management services. While Waste Control Specialists believes its broad range of
permits for the treatment and storage of low-level and mixed radioactive waste
streams provides certain competitive advantages, a key element of Waste Control
Specialists' long-term strategy to provide "one-stop shopping" for hazardous,
low-level and mixed radioactive wastes includes obtaining additional regulatory
authorizations for the disposal of low-level and mixed radioactive wastes.
The current state law in Texas (where Waste Control Specialists' disposal
facility is located) prohibits the applicable Texas regulatory agency from
issuing a permit for the disposal of low-level radioactive waste to a private
enterprise operating a disposal facility in Texas. During the two previous Texas
legislative sessions, which ended in May 1999 and 2001, Waste Control
Specialists was supporting a proposed change in state law that would allow the
regulatory agency to issue a low-level radioactive waste disposal permit to a
private entity. Both legislative sessions ended without any such change in state
law. There can be no assurance that the state law will in the future be changed
or, assuming the state law is changed, that Waste Control Specialists would be
successful in obtaining any future permit modifications.
Waste Control Specialists is continuing its attempts to increase its sales
volumes from waste streams that conform to Waste Control Specialists' permits
currently in place. Waste Control Specialists is also continuing to identify and
attempt to obtain modifications to its current permits that would allow for
treatment, storage and disposal of additional types of wastes. The ability of
Waste Control Specialists to achieve increased sales volumes of these waste
streams, together with improved operating efficiencies through further cost
reductions and increased capacity utilization, are important factors in Waste
Control Specialists' ability to achieve improved cash flows. The Company
currently believes Waste Control Specialists can become a viable, profitable
operation. However, there can be no assurance that Waste Control Specialists'
efforts will prove successful in improving its cash flows. Valhi has in the
past, and may in the future, consider strategic alternatives with respect to
Waste Control Specialists. Depending on the form of the transaction that any
such strategic alternative might take, it is possible that the Company might
report a loss with respect to such a transaction.
TIMET
Years ended December 31,
1999 2000 2001
---- ---- ----
(In millions)
TIMET historical:
Net sales ................................ $480.0 $426.8 $486.9
Operating income (loss) .................. $(31.4) $(41.7) $ 64.5
General corporate, net ................... 4.8 6.3 (55.9)
Interest expense ......................... (7.1) (7.7) (4.1)
------ ------ ------
(33.7) (43.1) 4.5
Income tax benefit (expense) ............. 12.0 15.1 (31.1)
Minority interest ........................ (9.7) (10.0) (15.2)
Extraordinary item ....................... -- (.9) --
------ ------ ------
Net loss ............................... $(31.4) $(38.9) $(41.8)
====== ====== ======
Equity in earnings (losses) of TIMET* ...... N/A $ (9.0) $ (9.2)
====== ======
* Tremont's equity in earnings of TIMET in 1999 is included in the Company's
equity in earnings of Tremont in 1999.
Tremont accounts for its interest in TIMET by the equity method. Tremont's
equity in earnings of TIMET differs from the amounts that would be expected by
applying Tremont's ownership percentage to TIMET's separately-reported earnings
because of the effect of amortization of purchase accounting adjustments made by
Tremont in conjunction with Tremont's acquisitions of its interests in TIMET.
Amortization of such basis differences generally increases earnings (or reduces
losses) attributable to TIMET as reported by Tremont.
In April 2001, TIMET settled the litigation between TIMET and Boeing
related to their 1997 long-term agreement. Pursuant to the settlement, TIMET
received a cash payment of $82 million. The parties also entered into an amended
long-term agreement that, among other things, allows Boeing to purchase up to
7.5 million pounds of titanium product annually from TIMET from 2002 through
2007, subject to certain maximum quarterly volume levels. In consideration,
Boeing will annually advance TIMET $28.5 million for the upcoming year during
the life of the new agreement. The initial advance for calendar year 2002 was
made in December 2001, with each subsequent advance to be made in early January
of the applicable calendar year beginning in 2003. The amended long-term
agreement is structured as a take-or-pay agreement such that Boeing will forfeit
a proportionate part of the $28.5 million annual advance in the event that its
orders for delivery for such calendar year are less than 7.5 million pounds.
Under a separate agreement TIMET will establish and hold buffer stock for Boeing
at TIMET's facilities. TIMET's operating income in the second quarter of 2001
includes income of approximately $62.7 million related to this settlement, net
of associated legal, profit sharing and other costs.
During 2001, TIMET's mill products sales volumes increased 7% compared to
2000, and sales volumes of its melted products (ingot and slab) increased 27%.
TIMET's average selling prices (in billing currencies) for its mill products
increased 2% in 2001 compared to 2000, and melted product selling prices
increased 8%. Operating income comparisons were also impacted by the net effects
of higher operating rates at certain plants, lower sponge costs, higher scrap
costs, higher energy costs, changes in customer and product mix. In addition to
the Boeing settlement discussed above, TIMET's operating results in 2001 also
include a $10.8 million asset impairment charge related to certain manufacturing
assets and a $3.3 million charge related to TIMET's previously-reported tungsten
matter, further discussed below.
TIMET's results in 2001 also include a $61.5 million provision for an other
than temporary impairment of TIMET's investment in the convertible preferred
securities of Special Metals Corporation. In addition, TIMET's effective income
tax rate in 2001 varies from the 35% U.S. federal statutory income tax rate
because of a $30.1 million increase in TIMET's deferred income tax asset
valuation allowance, as TIMET concluded that such deferred income tax assets do
not currently meet the "more-likely-than-not" recognition criteria.
TIMET's results in 2000 were below those of 1999 due in part to lower mill
products average selling prices. During 2000, TIMET's mill products sales
volumes declined 1% compared to 1999, and mill products average selling prices
were 9% lower. Sales volumes of melted products increased 39% compared with
1999, and average selling prices declined 10%. TIMET's results in 2000 also
include special items aggregating to a net charge of $6.3 million, consisting of
restructuring charges, equipment-related impairment charges and environmental
remediation charges aggregating $9.5 million, offset by a $1.2 million gain from
the sale of its castings joint venture and a $2 million gain related to the
termination of TIMET's sponge supply agreement with UTSC. UTSC had a take-or-pay
supply agreement with TIMET that was to be effective for a few more years, and
UTSC paid TIMET $2 million in return for cancellation of its remaining
commitment to purchase specified quantities of sponge. The restructuring charge
relates to personnel reductions of about 170 employees. In addition, TIMET's
results in 1999 include $11 million of special charges related to, among other
things, personnel reductions of about 100 people, slow-moving inventories and
write-downs associated with TIMET's investments in certain start-up joint
ventures.
In March 2001, TIMET was notified by one of its customers that a product
manufactured from standard grade titanium produced by TIMET contained what has
been confirmed to be a tungsten inclusion. TIMET believes that the source of
this tungsten was contaminated silicon purchased from an outside vendor in 1998.
The silicon was used as an alloying addition to the titanium at the melting
stage. TIMET is currently investigating the scope of this problem, including
identification of the customers who received material manufactured using this
silicon and the applications to which such material has been placed by such
customers. At the present time, TIMET is aware of only six standard grade ingots
that have been demonstrated to contain tungsten inclusions; however, further
investigation may identify other material that has been similarly affected.
Until this investigation is completed, TIMET is unable to determine the ultimate
liability TIMET may incur with respect to this matter. TIMET is continuing to
work with its affected customers to determine the appropriate remedial steps
required to satisfy their claims. The $3.3 million amount accrued through
December 31, 2001 represents TIMET's best estimate of the most likely amount of
loss it will incur. However, it may not represent the maximum possible loss,
which TIMET is not presently able to estimate, and the amount accrued may be
periodically revised in the future as more facts become known. TIMET has filed
suit seeking full recovery from the silicon supplier for any liability TIMET
might incur in this matter, although no assurances can be given that TIMET will
ultimately be able to recover all or any portion of such amounts. TIMET has not
recorded any recoveries related to this matter at December 31, 2001.
The commercial aerospace sector has a significant influence on titanium
companies, particularly mill product producers such as TIMET. Industry shipments
of mill products to the commercial aerospace sector in 2001 accounted for
approximately 90% of aerospace demand and 35% of aggregate titanium mill product
demand. The aerospace industry, and consequently the titanium metals industry,
is highly cyclical.
During the latter part of 2001, an economic slowdown in the U.S. and other
regions of the world began to negatively affect the commercial aerospace
industry as evidenced by, among other things, a decline in airline passenger
traffic, reported operating losses by a number of airlines and a reduction in
forecasted deliveries of large commercial aircraft from both Boeing and Airbus.
The terrorist attack on September 11, 2001 exacerbated these trends and had a
significant adverse impact on the global economy and the commercial aerospace
industry. The major U.S. airlines reported significant losses in the fourth
quarter of 2001. In response, airlines have announced a number of actions to
reduce both costs and capacity including, but not limited to, the early
retirement of airplanes, the deferral of scheduled deliveries of new aircraft,
and allowing purchase options to expire.
These events have resulted in the major commercial airframe and jet engine
manufacturers substantially reducing their forecast of engine and aircraft
deliveries over the next few years and their production levels in 2002. TIMET
expects that total industry mill product shipments will decrease in 2002 by
approximately 16% to about 43,000 metric tons. TIMET Company believes that
demand for mill products for the commercial aerospace sector could decline by up
to 40% in 2002, primarily due to a combination of reduced aircraft production
rates and excess inventory accumulated throughout the aerospace supply chain
since September 11 that will likely lead to order demand for titanium products
falling below actual consumption.
According to The Airline Monitor, a leading aerospace publication, large
commercial aircraft deliveries totaled 834 (including 202 wide bodies) in 2001,
and the most recent forecast of aircraft deliveries by The Airline Monitor calls
for 660 deliveries in 2002, 505 deliveries in 2003 and 515 deliveries in 2004.
After 2004, The Airline Monitor calls for a continued increase each year in
large commercial aircraft deliveries with forecasted deliveries of 920 aircraft
in 2008 exceeding 2001 levels. Compared to 2001, these forecasted delivery rates
represent anticipated declines of about 20% in 2002 and just under 40% in 2003
and 2004. Additionally, TIMET's discussions with jet engine manufacturers
suggest that they are expecting production declines in 2002 relative to 2001 in
the range of 25% to 30%.
Although the current business environment makes it particularly difficult
to predict TIMET's future performance, TIMET expects its sales in 2002 may
decline to approximately $375 million, reflecting the combined effects of
changes in sales volume, selling prices, and customer and product mix. Mill
product sales volumes are expected to decline approximately 20% relative to 2001
to about 10,000 metric tons, and melted product sales volumes are expected to
decline by almost one-third to about 3,000 metric tons. In 2002, TIMET expects
about 60% of its sales volumes will be derived from the commercial aerospace
sector (compared to about two-thirds in 2001), with the balance from military
aerospace, industrial, and emerging markets. The sales volume decline in 2002 is
principally driven by an anticipated reduction in TIMET's commercial aerospace
sales volume of about 30% compared to 2001, partly offset by sales volume growth
to other markets. Market selling prices on new orders for titanium products,
while difficult to forecast, are expected to soften throughout 2002. However,
about one-half of TIMET's commercial aerospace volumes are under long-term
agreements that provide TIMET with price stability on that portion of its
business.
TIMET may sell substantially similar titanium products to different
customers at varying selling prices due to the effect of long-term agreements,
timing of purchase orders and market fluctuations. There are also wide
differences in selling prices across different titanium products that TIMET
offers. Accordingly, the mix of customers and products sold affects its average
selling price realized and has an important impact on sales revenue and gross
margin. Average selling prices per kilogram, as reported by TIMET, reflect the
net effects of changes in selling prices, currency exchange rates, customer and
product mix. Accordingly, average selling prices are not necessarily indicative
of any one factor.
Under the amended Boeing long-term agreement, Boeing will advance TIMET
$28.5 million annually from 2002 through 2007. The agreement is structured as a
take-or-pay agreement such that Boeing, beginning in calendar year 2002, will
forfeit a proportionate part of the $28.5 million annual advance, or effectively
$3.80 per pound, in the event that its orders for delivery for such calendar
year are less than 7.5 million pounds. TIMET presently intends to recognize as
income any forfeitable portion of the advance when it becomes virtually assured
that Boeing's annual orders for delivery will be less than 7.5 million pounds.
This will generally result in any take-or-pay forfeiture being recognized in
TIMET's operating income in the last half of each year. TIMET anticipates that
Boeing will purchase about 3 million pounds of product in 2002. At this
projected order level for 2002, TIMET expects to recognize about $17 million of
income under the Boeing's take-or-pay provisions. Those earnings, recognized as
other income and included in TIMET's operating income, will distort TIMET's
operating income percentages as there will be no corresponding amount reported
in TIMET's sales.
In response to the current business climate, TIMET is taking a number of
actions in the near-term to reduce costs. These actions include (i) reducing
plant operating rates and employment levels as business declines, (ii)
negotiating improved pricing at lower volume commitments for certain raw
materials, (iii) reducing discretionary spending and (iv) negotiating various
concessions from both suppliers and service providers. TIMET has already reduced
operating rates and employment levels at its melting facilities since September
11 and expects similar actions will occur in the future. For the longer term,
TIMET is continuing to evaluate product line and facilities consolidations that
may permit it to meaningfully reduce its cost structure in the future while
maintaining and even increasing its market share. Accordingly, TIMET's results
in 2002 could include one or more restructuring, asset impairment and other
special or similar charges that might be material.
TIMET's agreement with its labor union at its Ohio plant expires at the end
of June 2002. TIMET does not anticipate any work stoppage or other labor
disruption. However, should TIMET's efforts be unsuccessful, any work stoppage
or other labor disruption could materially and adversely affect TIMET's results
of operations, financial condition and liquidity.
TIMET expects its effective income tax rate in 2002 will vary significantly
from the U.S. statutory rate as TIMET does not currently expect that recognition
of an income tax benefit associated with its U.S. losses will be appropriate
under the "more-likely-than-not" recognition criteria.
TIMET presently expects an operating loss in 2002 of approximately $25
million, and a net loss for 2002 of approximately $40 million. Although TIMET
expects its gross margin to decrease over the year, TIMET presently expects its
results in the last half of 2002 to be improved compared to the first half. That
anticipated improvement contemplates that the estimated $17 million expected to
be earned under the Boeing take-or-pay provision will be recognized in the last
half of the year.
Tremont Corporation
During 1999, the Company accounted for its interest in Tremont by the
equity method. The Company's equity in Tremont's earnings differs from the
amount that would be expected by applying the Company's ownership percentage to
Tremont's separately-reported earnings because of the effect of amortization of
purchase accounting adjustments made in conjunction with the Company's
acquisitions of its interest in Tremont. Such non-cash amortization increased
losses attributable to Tremont in 1999, as reported by the Company, by
approximately $3 million, exclusive of the impact of the other than temporary
impairment charge related to TIMET discussed below.
Tremont accounts for its interests in both NL and TIMET by the equity
method. Tremont's equity in earnings of TIMET and NL differs from the amounts
that would be expected by applying Tremont's ownership percentage to TIMET's and
NL's separately-reported earnings because of the effect of amortization of
purchase accounting adjustments made by Tremont in conjunction with Tremont's
acquisitions of its interests in TIMET and NL. Amortization of such basis
differences generally increases earnings (or reduces losses) attributable to
TIMET as reported by Tremont (exclusive of the impact of the impairment charge
with respect to TIMET discussed below), and generally reduces earnings (or
increases losses) attributable to NL as reported by Tremont. NL's and TIMET's
operating results are discussed above.
During 1999, Tremont reported a net loss of $28.2 million, comprised
principally of equity in earnings of NL of $28.1 million, equity in losses of
TIMET of $72.0 million and an income tax benefit of $18.9 million. Tremont's
equity in earnings of NL in 1999 includes Tremont's pro-rata share ($17.7
million) of NL's non-cash income tax benefit discussed below. Tremont's equity
in losses of TIMET in 1999 includes an impairment provision for an other than
temporary decline in the value of TIMET discussed below. The Company's pro-rata
share of such charge, together with amortization of purchase accounting
adjustments related to the Company's investment in Tremont which were
attributable to Tremont's investment in TIMET, resulted in a $50 million pre-tax
charge related to the other than temporary impairment of TIMET being included in
the Company's equity in losses of Tremont in 1999.
Tremont periodically evaluates the net carrying value of its long-term
assets, including its investment in TIMET, to determine if there has been any
decline in value below their 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 December 31, 1999, after considering what it believed to be
all relevant factors, including, among other things, TIMET's consolidated
operating results, financial position, estimated asset values and prospects, the
Company recorded a non-cash charge to earnings to reduce the net carrying value
of its investment in TIMET for an other than temporary impairment. In
determining the amount of the impairment charge, Tremont considered, among other
things, then-recent ranges of TIMET's NYSE market price and estimates of TIMET's
future operating losses which would further reduce Tremont's carrying value of
its investment in TIMET as it records additional equity in losses of TIMET.
At December 31, 2001, Tremont's net carrying value of its investment in
TIMET was about $4.90 per share compared to TIMET's NYSE stock price of $3.99
per share at that date. However, TIMET's stock price had been less than
Tremont's per share carrying value of its investment in TIMET only since the end
of the third quarter of 2001. In this regard, TIMET's stock price was trading
over $10 per share prior to September 11, 2001, and on March 13, 2002 TIMET's
stock price was $5.10 per share. Tremont expects the per share carrying value of
its investment in TIMET will decline during 2002 as it recognizes expected
equity in losses of TIMET. Tremont believes NYSE stock prices, particularly in
the case of companies such as TIMET which have a major shareholder, are not
necessarily indicative of a company's enterprise value or the value that could
be realized if the company were sold. Tremont will continue to monitor and
evaluate the value of its investment in TIMET based on, among other things,
TIMET's results of operations, financial condition, liquidity and business
outlook. In the event Tremont determines any decline in value of its investment
in TIMET below its net carrying value has occurred which is other than
temporary, Tremont would report an appropriate write-down at that time.
General corporate and other items
General corporate interest and dividend income. General corporate interest
and dividend income decreased in 2001 compared to 2000 as a slightly higher
level of distributions from The Amalgamated Sugar Company LLC in 2001 was more
than offset by a lower interest rate on the Company's $80 million loan to Snake
River Sugar Company (which rate was reduced from 12.99% to 6.49% effective April
1, 2000) and a lower average interest rate on funds available for investment.
General corporate interest and dividend income decreased in 2000 compared to
1999 due primarily to a slightly lower level of distributions received from The
Amalgamated Sugar Company LLC, as well the effect of the April 1, 2000 reduction
in the interest rate on the Company's $80 million loan to Snake River Sugar
Company. The Company received $23.6 million of dividend distributions from the
LLC in 2001 compared to $22.7 million in 2000 and $23.5 million in 1999. See
Notes 5 and 12 to the Consolidated Financial Statements. Aggregate general
corporate interest and dividend income is currently expected to be lower during
2002 compared to 2001 due primarily to a lower amount of funds available for
investment and lower average interest rates.
Legal settlement, insurance gains and gain on sale/leaseback. The $31.9
million net legal settlement gains in 2001 relate principally to (i) settlement
of certain litigation to which Waste Control Specialists was a party ($20.1
million) and (ii) NL's settlements with certain former insurance carriers ($11.4
million). The $69.5 million net legal settlement gains in 2000 relate to NL's
additional settlements with certain former insurance carriers. These 2000 and
2001 settlements of NL resolved court proceedings in which NL had sought
reimbursement from the carriers for legal defense costs and indemnity coverage
for certain of its environmental remediation expenditures. No further material
settlements relating to litigation concerning environmental remediation
coverages are expected. The insurance gain in 2001 relates to proceeds NL
received related to property damage insurance coverages for the fire at its
Leverkusen, Germany facility, as the proceeds received exceeded the carrying
value of the property destroyed and cleanup and other extra costs incurred. NL
does not expect to receive any additional insurance proceeds related to the
Leverkusen fire subsequent to December 31, 2001. The gain on sale/leaseback
relates to CompX's manufacturing facility in The Netherlands. See Note 12 to the
Consolidated Financial Statements.
Securities transactions. Securities transactions gains in 2001 include a
$33.1 million realized gain from exchanges of LYONs and related to the
disposition of a portion of the shares of Halliburton Company common stock held
by the Company when certain holders of the Company's LYONs debt obligations
exercised their right to exchange their LYONs for such Halliburton shares.
Securities transactions in 2001 also include (i) a $14.2 million gain related to
the reclassification of certain shares of Halliburton common stock from
available-for-sale to trading securities, (ii) an $11.6 million unrealized loss
related to changes in market value of the Halliburton shares classified as
trading securities, (iii) Valhi's sale of 390,000 Halliburton shares in market
transactions for an aggregate realized gain of $13.7 million and (iv) a $2.3
million charge for an other than temporary impairment of certain marketable
securities held by the Company. Securities transactions in 2000 include (i) a
$5.6 million gain related to common stock received by NL from the
demutualization of an insurance company from which NL had purchased certain
insurance policies and (ii) a $5.7 million charge for an other than temporary
decline in value of certain marketable securities held by the Company.
Securities transactions gains in 1999 relate principally to LYONs exchanges. See
Notes 5 and 12 to the Consolidated Financial Statements. Any additional LYONs
exchanges in 2002 or thereafter would similarly result in additional securities
transaction gains. Also, the Company held approximately 515,000 shares of
Halliburton common stock at December 31, 2001 that were classified as trading
securities. Such 515,000 Halliburton shares were sold during the first quarter
of 2002 for aggregate proceeds of $8.7 million, or $1.9 million greater than the
carrying value of such shares at December 31, 2001. The Company will report a
$1.9 million securities transaction gain in the first quarter of 2002 related to
the disposal of such Halliburton shares.
General corporate expenses. Net general corporate expenses in 2001
approximated net expenses in 2000, as lower legal expenses of NL were offset by
higher compensation-related expenses of Tremont. Net general corporate expenses
increased in 2000 compared to 1999 due primarily to higher environmental and
legal expenses of NL and the effect of consolidating Tremont's results of
operations effective January 1, 2000. NL's $20 million of proceeds from the
disposal of its specialty chemicals business unit related to its agreement not
to compete in the rheological products business will be recognized as a
component of general corporate income (expense) ratably over the five-year
non-compete period ending in the first quarter of 2003 ($4 million recognized in
each of 1999, 2000 and 2001). See Note 12 to the Consolidated Financial
Statements. Net general corporate expenses in 2002 are currently expected to be
somewhat higher compared to 2001.
Interest expense. Interest expense declined in 2001 compared to 2000 due
primarily to lower interest rates on variable-rate borrowings and a lower level
of outstanding indebtedness of NL and Valhi, offset in part by higher levels of
indebtedness at CompX. Interest expense declined slightly in 2000 compared to
1999 due primarily to lower average levels of outstanding indebtedness at NL,
offset in part by the effect of consolidating Tremont's results of operations
effective January 1, 2000 and higher levels of indebtedness at CompX.
In February 2002, NL announced the redemption of $25 million principal
amount of its 11.75% Senior Secured Notes in March 2002 at par value. NL may
redeem additional amounts of its Senior Secured Notes during 2002. Assuming
interest rates do not increase significantly from year-end 2001 levels, interest
expense in 2002 is expected to be somewhat lower compared to 2001 due to lower
anticipated interest rates on variable-rate borrowings in the U.S. and a lower
average level of outstanding debt (including Valhi's LYONs).
At December 31, 2001, approximately $476 million of consolidated
indebtedness, principally publicly-traded debt and Valhi's loans from Snake
River Sugar Company, bears interest at fixed interest rates averaging 10.3%
(2000 - $551 million with a weighted average interest rate of 10.2%; 1999 - $596
million with a weighted average fixed interest rate of 10.4%). The weighted
average interest rate on $133 million of outstanding variable rate borrowings at
December 31, 2001 was 4.5% compared to an average interest rate on outstanding
variable rate borrowings of 7.1% at December 31, 2000 and 5.0% at December 31,
1999. The weighted average interest rate on outstanding variable rate borrowings
decreased from December 31, 2000 to December 31, 2001 due principally to the
reduction in short-term U.S. interest rates. The weighted average interest rate
increased from December 31, 1999 to December 31, 2000 due principally to an
increase in U.S. short-term interest rates and an increase in the amount of
higher-cost U.S. dollar-denominated indebtedness relative to lower-cost non-U.S.
dollar-denominated indebtedness.
NL has a certain amount of indebtedness denominated in currencies other
than the U.S. dollar and, accordingly, NL's interest expense is also subject to
currency fluctuations. See Item 7A, "Quantitative and Qualitative Disclosures
About Market Risk." Periodic cash interest payments are not required on Valhi's
9.25% deferred coupon LYONs. As a result, current cash interest expense payments
are lower than accrual basis interest expense.
Provision for income taxes. The principal reasons for the difference
between the Company's effective income tax rates and the U.S. federal statutory
income tax rates are explained in Note 16 to the Consolidated Financial
Statements. Income tax rates vary by jurisdiction (country and/or state), and
relative changes in the geographic mix of the Company's pre-tax earnings can
result in fluctuations in the effective income tax rate.
Through December 31, 2000, certain subsidiaries, including NL, Tremont and,
beginning in March 1998, CompX, were not members of the consolidated U.S. tax
group of which Valhi is a member (the Contran Tax Group), and the Company
provided incremental income taxes on such earnings. In addition, through
December 31, 2000, Tremont and NL were each in separate U.S. tax groups, and
Tremont provided incremental income taxes on its earnings with respect to NL. As
previously reported, effective January 1, 2001 NL and Tremont each became
members of the Contran Tax Group. Consequently, beginning in 2001 Valhi no
longer provides incremental income taxes on its earnings with respect to NL and
Tremont nor on Tremont's earnings with respect to NL. In addition, beginning in
2001 the Company believes that recognition of an income tax benefit for certain
of Tremont's deductible income tax attributes arising during 2001, while not
appropriate under the "more-likely-than-not" recognition criteria at the Tremont
separate-company level, is appropriate at the Valhi consolidated level as a
result of Tremont becoming a member of the Contran Tax Group. Both of these
factors resulted in a reduction in the Company's consolidated effective income
tax rate in 2001 compared to 2000.
During 2001, NL reduced its deferred income tax asset valuation allowance
by $24.7 million. Of such reduction, $23.2 million related to a change in
estimate of NL's ability to utilize certain German income tax attributes
following the completion of a restructuring of its German operations, the
benefit of which had not previously been recognized under the
"more-likely-than-not" recognition criteria. In addition, NL also utilized
certain tax attributes during 2001 for which the benefit had also not previously
been recognized.
During 2001, Tremont increased its deferred income tax asset valuation
allowance (at the Valhi consolidated level) by a net $3.8 million due primarily
because Tremont concluded certain tax attributes, including its net operating
loss carryforwards generated prior to January 1, 2001 now did not meet the
"more-likely-than-not" recognition criteria. Such net operating loss
carryforwards can only be used to offset future taxable income of Tremont, and
may not be used to offset future taxable income of other members of the Contran
Tax Group.
During 2000, NL reduced its deferred income tax valuation allowance by $2.6
million primarily as a result of utilization of certain tax attributes for which
the benefit had not been previously recognized under the "more-likely-than-not"
recognition criteria. Also during 2000, Tremont increased its deferred income
tax valuation allowance by $3.3 million primarily due to its equity in losses of
TIMET and other deductible income tax attributes arising during 2000 for which
recognition of a deferred tax benefit is not currently considered appropriate by
Tremont under the "more-likely-than-not" recognition criteria.
In October 2000, a reduction in the German "base" income tax rate from 30%
to 25%, effective January 1, 2001, was enacted. Such reduction in the German tax
rate resulted in an additional net income tax expense in the fourth quarter of
2000 of $4.4 million due to a revaluation of NL's German tax attributes,
including the effect of revaluing certain deferred income tax purchase
accounting adjustments with respect to NL's German assets. The reduction in the
German income tax rate results in an additional income tax expense because the
Company has recognized a net deferred income tax asset with respect to Germany.
In 1999, NL recognized a $90 million non-cash income tax benefit related to
(i) a favorable resolution of NL's previously-reported tax contingency in
Germany ($36 million) and (ii) a net reduction in NL's deferred income tax
valuation allowance due to a change in estimate of NL's ability to utilize
certain income tax attributes under the "more-likely-than-not" recognition
criteria ($54 million). The $54 million net reduction in NL's deferred income
tax valuation allowance is comprised of (i) a $78 million decrease in the
valuation allowance to recognize the benefit of certain deductible income tax
attributes which NL now believes meets the recognition criteria as a result of,
among other things, a corporate restructuring of NL's German subsidiaries and
(ii) a $24 million increase in the valuation allowance to reduce the
previously-recognized benefit of certain other deductible income tax attributes
which NL now believes do not meet the recognition criteria due to a change in
German tax law. The German tax law change enacted on April 1, 1999, was
effective January 1, 1999 and resulted in an increase in NL's current income tax
expense.
Also during 1999, NL reduced its deferred income tax valuation allowance by
$16 million primarily as a result of utilization of certain tax attributes for
which the benefit had not been previously recognized under the
"more-likely-than-not" recognition criteria.
As discussed in Note 20 to the Consolidated Financial Statements, effective
January 1, 2002, the Company will no longer recognize periodic amortization of
goodwill. Under GAAP, generally there is no income tax benefit recognized for
financial reporting purposes attributable to goodwill amortization. Accordingly,
ceasing to periodically amortize goodwill beginning in 2002 will result in a
reduction in the Company's overall effective income tax rate in 2002 as compared
to 2001. However, despite the impact on the Company's effective income tax rate
in 2002 due to ceasing to periodically amortize goodwill, and excluding the
effect in 2001 of changes in NL's and Tremont's deferred income tax asset
valuation allowances, the Company currently expects its effective income tax
rate for 2002 will likely be higher as compared to 2001 due to changes in the
relative mix of pre-tax income, with a higher percentage of pre-tax income
associated with high tax-rate jurisdictions in 2002 as compared to 2001.
Minority interest. See Note 13 to the Consolidated Financial Statements.
Minority interest in NL's subsidiaries relates principally to NL's
majority-owned environmental management subsidiary, NL Environmental Management
Services, Inc. ("EMS"). EMS was established in 1998, at which time EMS
contractually assumed certain of NL's environmental liabilities. EMS' earnings
are based, in part, upon its ability to favorably resolve these liabilities on
an aggregate basis. The shareholders of EMS, other than NL, actively manage the
environmental liabilities and share in 39% of EMS' cumulative earnings. NL
continues to consolidate EMS and provides accruals for the reasonably estimable
costs for the settlement of EMS' environmental liabilities, as discussed below.
As discussed above, the Company commenced consolidating Tremont's results
of operations beginning in 2000. Consequently, the Company commenced reporting
minority interest in Tremont's net earnings beginning in 2000. Minority interest
in earnings of Tremont's subsidiaries in 2000 relates to TRECO L.L.C., a
75%-owned subsidiary of Tremont that holds Tremont's interests in BMI and
Landwell. In December 2000, TRECO acquired the 25% interest in TRECO previously
held by the other owner of TRECO, and TRECO became a wholly-owned subsidiary of
Tremont. Accordingly, no minority interest in Tremont's subsidiaries was
reported in 2001.
Related party transactions. The Company is a party to certain transactions
with related parties. See Note 18 to the Consolidated Financial Statements.
Discontinued operations, extraordinary item and accounting principles not
yet adopted. See Notes 3, 1 and 20 to the Consolidated Financial Statements.
European monetary conversion
Beginning January 1, 1999, 11 of the 15 members of the European Union
("EU"), including Germany, Belgium, The Netherlands and France, established
fixed conversion exchange rates between their existing national currencies and
the European currency unit ("euro"). Such members adopted the euro as their
common legal currency on that date. The remaining four EU members (including the
United Kingdom) may convert their national currencies to the euro at a later
date. Certain European countries, such as Norway, are not members of the EU and
their national currencies will remain intact. Each EU national government
retained authority to establish their own tax and fiscal spending policies and
public debt levels, although such public debt will be issued in, or
re-denominated into, the euro. However, monetary policies, including money
supply and official euro interest rates, are now established by a new European
Central Bank. Following the introduction of the euro, the participating
countries' national currencies remained legal tender as denominations of the
euro through January 1, 2002, although the exchange rates between the euro and
such currencies remained fixed. Beginning January 1, 2002, national currency
units were exchanged for euros and the euro became the primary legal tender
currency.
NL. NL conducts substantial operations in Europe, principally in Germany,
Belgium, The Netherlands, France and Norway. In addition, at December 31, 2001,
NL has a certain amount of outstanding indebtedness denominated in the euro. The
national currency of the country in which such operations are located are such
operation's functional currency. As of January 1, 2001, the functional
currencies of the German, Belgian, Dutch and French operations had been
converted from their respective national currencies to the euro. The euro
conversion may impact NL's operations including, among other things, changes in
product pricing decisions necessitated by cross-border price transparencies.
Such changes in product pricing decisions could impact both selling prices and
purchasing costs, and consequently favorably or unfavorably impact NL's reported
consolidated results of operations, financial condition or liquidity. At
December 31, 2001, NL had substantial net assets denominated in the euro.
CompX. As of January 1, 2001, the functional currency of CompX's Thomas
Regout operations in The Netherlands had been converted to the euro from its
national currency (Dutch guilders). CompX does not believe the euro conversion
had a material effect on its consolidated results of operations, financial
condition or liquidity.
TIMET. TIMET also has substantial operations and assets located in Europe,
principally in the United Kingdom. The United Kingdom has not adopted the euro.
Approximately 60% of TIMET's European sales are denominated in currencies other
than the U.S. dollar, principally the British pound and other European
currencies tied to the euro. Certain purchases of raw materials for TIMET's
European operations, principally titanium sponge and alloys, are denominated in
U.S. dollars while labor and other production costs are primarily denominated in
local currencies. The U.S. dollar value of TIMET's foreign sales and operating
costs are subject to currency exchange rate fluctuations that can impact
reported earnings.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated cash flows
Operating activities. Trends in cash flows from operating annual activities
(excluding the impact of significant asset dispositions and relative changes in
assets and liabilities) are generally similar to trends in the Company's
earnings. Changes in assets and liabilities generally result from the timing of
production, sales, purchases and income tax payments.
Certain items included in the determination of net income are non-cash, and
therefore such items have no impact on cash flows from operating activities.
Non-cash items included in the determination of net income include depreciation,
depletion and amortization expense, non-cash interest expense, asset impairment
charges and unrealized securities transactions gains and losses. Non-cash
interest expense relates principally to Valhi and NL and consists of
amortization of original issue discount on certain indebtedness and amortization
of deferred financing costs. In addition, substantially all of the proceeds
resulting from NL's legal settlements in 2000 and 2001 are shown as restricted
cash, and therefore such settlements had no impact on cash flows from operating
activities.
Certain other items included in the determination of net income may have an
impact on cash flows from operating activities, but the impact of such items on
cash flows from operating activities will differ from their impact on net
income. For example, equity in earnings of affiliates will generally differ from
the amount of distributions received from such affiliates, and equity in losses
of affiliates does not necessarily result in a current cash outlay paid to such
affiliates. The amount of periodic defined benefit pension plan expense and
periodic OPEB expense depends upon a number of factors, including certain
actuarial assumptions, and changes in such actuarial assumptions will result in
a change in the reported expense. In addition, the amount of such periodic
expense generally differs from the outflows of cash required to be currently
paid for such benefits.
Certain other items included in the determination of net income have no
impact on cash flows from operating activities, but such items do impact cash
flows from investing activities (although their impact on such cash flows
differs from their impact on net income). For example, realized gains and losses
from the disposal of marketable securities and long-lived assets are included in
the determination of net income, although the proceeds from any such disposal
are shown as part of cash flows from investing activities. Similarly, NL's
insurance gain in 2001 related to the property destroyed by fire at its
Leverkusen facility is included in the determination of net income, but the
proceeds received from the insurance company for property damage reimbursements
are also shown as investing activities.
Investing activities. Capital expenditures are disclosed by business
segment in Note 2 to the Consolidated Financial Statements.
At December 31, 2001, the estimated cost to complete capital projects in
process approximated $13.5 million, of which $11 million relates to NL's Ti02
facilities (including $4 million related to reconstruction of the Leverkusen
facility) and the remainder relates to CompX's facilities. Aggregate capital
expenditures for 2002 are expected to approximate $48 million ($32 million for
NL, $11 million for CompX and $5 million for Waste Control Specialists). Capital
expenditures in 2002 are expected to be financed primarily from operations or
existing cash resources and credit facilities.
During 2001, NL and CompX each purchased shares of their respective common
stocks in market transactions for an aggregate of $15.5 million and $2.6
million, respectively, and Valhi purchased shares of Tremont common stock in
market transactions for an aggregate of $198,000. In addition, (i) EMS loaned a
net $20 million to one of the Contran family trusts discussed in Note 1 to the
Consolidated Financial Statements, (ii) NL received $23.4 million of insurance
recoveries for property damage and clean-up costs associated with the Leverkusen
fire, (iii) Valhi sold 390,000 shares of Halliburton common stock in market
transactions for aggregate proceeds of $16.8 million and (iv) CompX received $10
million of proceeds from the sale/leaseback of its manufacturing facility in The
Netherlands.
During 2000, (i) CompX acquired a lock producer for $9 million using
borrowings under its unsecured revolving bank credit facility, (ii) NL purchased
$30.9 million of shares of its common stock pursuant to its previously-reported
share repurchase programs, (iii) CompX purchased $8.7 million of its shares
pursuant to its previously-reported share repurchase program, (iv) NL and Valhi
purchased an aggregate of $45.4 million of shares of Tremont common stock and
(v) Tremont purchased the 25% interest in TRECO LLC it previously did not own
for $2.5 million.
During 1999, (i) CompX acquired two slide producers for approximately $65.0
million using funds on hand and $20 million of borrowing under its unsecured
revolving bank credit facility, (ii) Valhi contributed an additional $10 million
to Waste Control Specialists' equity, (iii) Valhi purchased $1.9 million of
additional shares of Tremont common stock and $.8 million of additional shares
of CompX common stock, (iv) Valhi sold certain marketable securities for an
aggregate of $6.6 million, (v) Valhi received $2 million of additional
consideration related to the 1997 disposal of its former fast food operations
and (vi) NL purchased $7.2 million of shares of its common stock.
Financing activities. During 2001, (i) Valhi borrowed a net $4.0 million
under its revolving bank credit facility and borrowed a net $16.6 million under
short-term demand loans from Contran, (ii) CompX borrowed a net $10 million
under its revolving bank credit facility and (iii) NL repaid euro 24 million
($21.4 million when repaid) of its short-term non-U.S. notes payable. In
addition, (i) a wholly-owned subsidiary of Valhi purchased Waste Control
Specialists' bank term loan from the lender at par value, (ii) $142.6 million
principal amount at maturity ($79.9 million accreted value) of Valhi's LYONs
debt obligations were retired either through exchanges or redemptions and (iii)
EMS entered into a $13.4 million reducing revolving intercompany credit facility
with Tremont, the proceeds of which were used to repay Tremont's loan from
Contran.
Net repayments of indebtedness in 2000 include (ii) NL's repayments of $50
million principal amount of its Senior Secured Notes using cash on hand and
borrowings under short-term euro or Norwegian Krona denominated credit
facilities ($43 million when borrowed), (ii) CompX's borrowing a net $19 million
under its unsecured revolving bank credit facility, (iii) NL's repayment of Euro
30.9 million ($28.9 million when paid) of certain of its other Euro-denominated
short-term indebtedness and (iv) Valhi's borrowing a net $10 million under its
bank credit facility and borrowing a net $5.7 million of short-term borrowings
from Contran.
Net repayments of indebtedness in 1999 include (i) NL's repayment in full
of the outstanding balance under its DM credit facility ($100 million net when
repaid) using funds on hand and an increase in outstanding borrowings under
other NL non-U.S. credit facilities ($26 million when borrowed), (ii) CompX's
$20 million of borrowing under its revolving bank credit facility, (iii) Valhi's
$21 million of borrowing under its revolving bank credit facility and (iv)
Valhi's repayment of a net $7.2 million of short-term borrowings from Contran.
At December 31, 2001, unused credit available under existing credit
facilities approximated $77.9 million, which was comprised of $51 million
available to CompX under its revolving credit facility, $8 million available to
NL under non-U.S. credit facilities and $18.9 million available to Valhi under
its revolving bank credit facility. Provisions contained in certain of the
Company's credit agreements could result in the acceleration of the applicable
indebtedness prior to its stated maturity for reasons other than defaults from
failing to comply with typical financial covenants. For example, certain credit
agreements allow the lender to accelerate the maturity of the indebtedness upon
a change of control (as defined) of the borrower. The terms of Valhi's revolving
bank credit facility could require Valhi to either reduce outstanding borrowings
or pledge additional collateral in the event the fair value of the existing
pledged collateral falls below specified levels. In addition, certain credit
agreements could result in the acceleration of all or a portion of the
indebtedness following a sale of assets outside the ordinary course of business.
See Note 11 to the Consolidated Financial Statements. Other than operating
leases discussed in Note 19 to the Consolidated Financial Statements, neither
Valhi nor any of its subsidiaries or affiliates are parties to any off-balance
sheet financing arrangements.
Chemicals - NL Industries
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions can significantly impact NL's earnings and operating cash
flows.
At December 31, 2001, NL had cash, cash equivalents and marketable debt
securities of $199 million, including restricted balances of $83 million, and NL
had $8 million available for borrowing under its non-U.S. credit facilities. At
December 31, 2001, NL had complied with all financial covenants governing its
debt agreements. Based upon NL's expectations for the TiO2 industry and
anticipated demands on NL's cash resources as discussed herein, NL expects to
have sufficient liquidity to meet its near-term obligations including
operations, capital expenditures, debt service and dividends. To the extent that
actual developments differ from NL's expectations, NL's liquidity could be
adversely affected.
NL's capital expenditures during the past three years aggregated $120.4
million, including $23.0 million ($5.0 million in 2001) for NL's ongoing
environmental protection and compliance programs and $22.3 million in 2001
related to reconstruction of the Leverkusen facility destroyed by fire. NL's
estimated 2002 and 2003 capital expenditures are $32.0 million each, and include
$5.0 million (2003 - $4.0 million) in the area of environmental protection and
compliance and $4.0 million in 2002 related to completion of the reconstruction
of the Leverkusen facility. The capital expenditures of the TiO2 manufacturing
joint venture are not included in NL's capital expenditures.
NL's board of directors has authorized NL to purchase up to 4.5 million
shares of its common stock in open market or privately-negotiated transactions
over an unspecified period of time. Through December 31, 2001, NL had purchased
3.3 million of its shares pursuant to such authorizations for an aggregate of
$53.6 million, including 1.1 million shares purchased during 2001 for an
aggregate of $15.5 million.
In February 2002, NL announced the redemption of $25 million principal
amount of its Senior Secured Notes at par value. NL may redeem more of its
Senior Secured Notes in 2002, although there can be no assurance that any such
additional redemption will be called.
Certain of NL's U.S. and non-U.S. tax returns are being examined and tax
authorities have or may propose tax deficiencies, including non-income related
items and interest. NL has received preliminary tax assessments for the years
1991 to 1997 from the Belgian tax authorities proposing tax deficiencies,
including related interest, of approximately 10.4 million euro ($9.2 million at
December 31, 2001). 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. No assurance can be
given that these tax matters will be resolved in NL's favor in view of the
inherent uncertainties involved in court proceedings. NL believes that it has
provided adequate accruals for additional taxes and related interest expense
which may ultimately result from all such examinations and believes that the
ultimate disposition of such examinations should not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity.
At December 31, 2001, NL had recorded net deferred tax liabilities of $133
million. NL operates in numerous tax jurisdictions, in certain of which it has
temporary differences that net to deferred tax assets (before valuation
allowance). NL has provided a deferred tax valuation allowance of $154 million
at December 31, 2001, principally related to Germany, partially offsetting
deferred tax assets which NL believes do not currently meet the
"more-likely-than-not" recognition criteria.
NL has been named as a defendant, potentially responsible party, or both,
in a number of legal proceedings associated with environmental matters,
including waste disposal sites, mining locations and facilities currently or
previously owned, operated or used by NL, certain of which are on the U.S. EPA's
Superfund National Priorities List or similar state lists. On a quarterly basis,
NL evaluates the potential range of its liability at sites where it has been
named as a PRP or defendant, including sites for which EMS has contractually
assumed NL's obligation. NL believes it has provided adequate accruals ($107
million at December 31, 2001) for reasonably estimable costs of such matters,
but NL's ultimate liability may be affected by a number of factors, including
changes in remedial alternatives and costs and the allocation of such costs
among PRPs. It is not possible to estimate the range of costs for certain sites.
The upper end of the range of reasonably possible costs to NL for sites for
which it is possible to estimate costs is approximately $160 million. NL's
estimates of such liabilities have not been discounted to present value, and
other than certain previously-reported settlements with respect to certain of
NL's former insurance carriers, NL has not recognized any insurance recoveries.
No assurance can be given that actual costs will not exceed accrued amounts or
the upper end of the range for sites for which estimates have been made, and no
assurance can be given that costs will not be incurred with respect to sites as
to which no estimate presently can be made. NL is also a defendant in a number
of legal proceedings seeking damages for personal injury and property damage
allegedly arising from the sale of lead pigments and lead-based paints,
including cases in which plaintiffs purport to represent a class and cases
brought on behalf of government entities. NL has not accrued any amounts for the
pending lead pigment and lead-based paint litigation. There is no assurance that
NL will not incur future liability in respect of this pending litigation in view
of the inherent uncertainties involved in court and jury rulings in pending and
possible future cases. However, based on, among other things, the results of
such litigation to date, NL believes that the pending lead pigment and
lead-based paint litigation is without merit. Liability that may result, if any,
cannot reasonably be estimated. In addition, various legislation and
administrative regulations have, from time to time, been enacted or proposed
that seek to impose various obligations on present and former manufacturers of
lead pigment and lead-based paint with respect to asserted health concerns
associated with the use of such products and to effectively overturn court
decisions in which NL and other pigment manufacturers have been successful.
Examples of such proposed legislation include bills which would permit civil
liability for damages on the basis of market share, rather than requiring
plaintiffs to prove that the defendant's product caused the alleged damage, and
bills which would revive actions currently barred by statutes of limitations. NL
currently believes the disposition of all claims and disputes, individually or
in the aggregate, should not have a material adverse effect on its consolidated
financial position, results of operations or liquidity. There can be no
assurance that additional matters of these types will not arise in the future.
NL periodically evaluates its liquidity requirements, alternative uses of
capital, capital needs and availability of resources in view of, among other
things, its debt service and capital expenditure requirements and estimated
future operating cash flows. As a result of this process, NL has in the past and
may in the future seek to reduce, refinance, repurchase or restructure
indebtedness, raise additional capital, issue additional securities, repurchase
shares of its common stock, modify its dividend policy, restructure ownership
interests, sell interests in subsidiaries or other assets, or take a combination
of such steps or other steps to manage its liquidity and capital resources. In
the normal course of its business, NL may review opportunities for the
acquisition, divestiture, joint venture or other business combinations in the
chemicals industry or other industries, as well as the acquisition of interests
in, and loans to, related entities. In the event of any such transaction, NL may
consider using its available cash, issuing its equity securities or refinancing
or increasing its indebtedness to the extent permitted by the agreements
governing NL's existing debt. In this regard, the indentures governing NL's
publicly-traded debt contain provisions which limit the ability of NL and its
subsidiaries to incur additional indebtedness or hold noncontrolling interests
in business units.
As discussed in "Results of Operations - Chemicals," NL has substantial
operations located outside the United States for which the functional currency
is not the U.S. dollar. As a result, the reported amount of NL's assets and
liabilities related to its non-U.S. operations, and therefore NL's and the
Company's consolidated net assets, will fluctuate based upon changes in currency
exchange rates.
Component products - CompX International
In 1999, CompX acquired two slide producers for approximately $65 million
cash consideration, using available cash on hand and $20 million of borrowing
under its revolving bank credit facility. In 2000, CompX acquired a lock
producer for an aggregate of $9 million cash consideration using primarily
borrowings under its bank credit facility.
CompX's capital expenditures during the past three years aggregated $56.1
million. Such capital expenditures included manufacturing equipment that
emphasizes improved production efficiency and increased production capacity.
CompX's board of directors has authorized CompX to purchase up to 1.5
million shares of its common stock in open market or privately-negotiated
transactions over an unspecified period of time. Through December 31, 2001,
CompX had purchased 1.1 million shares pursuant to such authorization for an
aggregate of $11.3 million, including 260,000 shares purchased in 2001 for $2.6
million.
CompX believes that its cash on hand, together with cash generated from
operations and borrowing availability under its credit facility, will be
sufficient to meet CompX's liquidity needs for working capital, capital
expenditures, debt service, dividends and future acquisitions for the
foreseeable future.
CompX periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements, capital resources and estimated
future operating cash flows. As a result of this process, CompX has in the past
and may in the future seek to raise additional capital, refinance or restructure
indebtedness, issue additional securities, modify its dividend policy,
repurchase shares of its common stock or take a combination of such steps or
other steps to manage its liquidity and capital resources. In the normal course
of business, CompX may review opportunities for acquisitions, divestitures,
joint ventures or other business combinations in the component products
industry. In the event of any such transaction, CompX may consider using
available cash, issuing additional equity securities or increasing the
indebtedness of CompX or its subsidiaries.
Waste management - Waste Control Specialists
Waste Control Specialists capital expenditures during the past three years
aggregated $7.3 million. Such capital expenditures were funded primarily from
Valhi's capital contributions ($10 million in 1999 and $20 million in 2000) as
well as certain debt financing provided to Waste Control Specialists by Valhi.
At December 31, 2001, Waste Control Specialists' indebtedness consists
principally of (i) a $4.8 million term loan due in installments through November
2004 and (ii) $11.3 million of other borrowings under a $15 million revolving
credit facility that matures in 2004. All of such indebtedness is owed to a
wholly-owned subsidiary of Valhi, and is therefore eliminated in the Company's
consolidated financial statements. Waste Control Specialists will likely borrow
additional amounts during 2002 under its $15 million revolving credit facility.
TIMET
At December 31, 2001, TIMET had net cash of approximately $12.1 million
($12.4 million of debt and $24.5 million of cash and equivalents). At December
31, 2001, TIMET had over $150 million available for borrowing under such
facilities. TIMET believes such net cash, cash flow from operations and its
borrowing availability will satisfy its working capital, capital expenditures
and other requirements in 2002.
TIMET's capital expenditures during the past three years aggregated $52.1
million. TIMET's capital expenditures during 2002 are currently expected to be
about $12 million.
At December 31, 2001, TIMET had $201.2 million outstanding of its 6.625%
convertible preferred securities. Such convertible preferred securities do not
require principal amortization, and TIMET has the right to defer dividend
payments for one or more quarters of up to 20 consecutive quarters. TIMET is
prohibited from, among other things, paying dividends on its common stock while
dividends are being deferred on the convertible preferred securities. TIMET
suspended the payment of dividends on its common stock during the fourth quarter
of 1999 in view of, among other things, the continuing weakness in demand for
titanium metals products. In April 2000, TIMET exercised its rights under the
convertible preferred securities and commenced deferring future dividend
payments on these securities. During June 2001, following TIMET's legal
settlement with Boeing, TIMET resumed payment of dividends on its convertible
preferred securities, and TIMET also paid the aggregate amount of dividends that
have been previously deferred on such convertible preferred securities ($13.9
million). Prior to September 2001, TIMET was prohibited from paying dividends on
its common stock due to restrictions contained in its U.S. credit agreement. In
September 2001, such U.S. credit agreement was amended to permit TIMET to pay
dividends on its common stock in amounts up to an aggregate of $10 million per
year, provided certain specified conditions were met.
TIMET used the proceeds from its settlement with Boeing to (i) pay legal
and other costs associated with the Boeing settlement, (ii) pay the deferred
dividends on its convertible preferred securities and (iii) repay a substantial
portion of TIMET's outstanding revolving bank debt.
In October 1998, TIMET purchased for cash $80 million of Special Metals
Corporation 6.625% convertible preferred stock (the "SMC Preferred Stock").
Dividends for the period October 1998 through December 1999 were deferred by
Special Metals due to limitations imposed by their bank credit agreements. In
April 2000, Special Metals resumed current dividend payments of $1.3 million
each quarter, however dividends and interest in arrears were not paid. On
October 11, 2001, TIMET was notified by Special Metals of their intention to
again defer the payment of dividends effective with the dividend due on October
28, 2001. TIMET believes that such dividends are likely to be deferred
indefinitely. At December 31, 2001, the aggregate dividends and interest accrued
by TIMET were approximately $9 million. There can be no assurances that TIMET
will again receive regular quarterly dividend payments and/or reimbursement for
dividend and interest payments in arrears.
The SMC Preferred Stock is not marketable, and quoted market prices are
unavailable. TIMET understands that a significant portion of Special Metal's
sales are to the commercial aerospace industry, and, therefore, its business may
be adversely impacted by the terrorist attacks of September 11, 2001. TIMET
believes Special Metals has a significant amount of debt relative to its near
term potential earnings and cash flow and that a refinancing and/or
restructuring of its capital, or some portion thereof, is necessary. Special
Metals has indicated that it may violate certain bank covenants early in 2002
and that it is considering strategic and financial options, including efforts to
restructure and/or modify the terms of certain debt agreements. Such efforts may
include negotiations with TIMET to modify the terms of its preferred securities
in Special Metals and/or exchange, in whole or in part, such preferred
securities for common stock, other securities or other assets.
At December 31, 2001, TIMET had $4 million accrued related to environmental
issues at certain of TIMET's facilities for groundwater remediation activities.
The undiscounted environmental remediation charges are expected to be paid over
a period of up to thirty years.
TIMET periodically evaluates its liquidity requirements, capital needs and
availability of resources in view of, among other things, its alternative uses
of capital, its debt service requirements, the cost of debt and equity capital,
and estimated future operating cash flows. As a result of this process, TIMET
has in the past and may in the future seek to raise additional capital, modify
its common and preferred dividend policies, restructure ownership interests,
incur, refinance or restructure indebtedness, repurchase shares of capital
stock, sell assets, or take a combination of such steps or other steps to
increase or manage its liquidity and capital resources. In the normal course of
business, TIMET investigates, evaluates, discusses and engages in acquisition,
joint venture, strategic relationship and other business combination
opportunities in the titanium, specialty metal and other industries. In the
event of any future acquisition or joint venture opportunities, TIMET may
consider using then-available liquidity, issuing equity securities or incurring
additional indebtedness.
Tremont Corporation
Tremont is primarily a holding company which, at December 31, 2001, owned
approximately 39% of TIMET and 21% of NL. At December 31, 2001, the market value
of the 12.3 million shares of TIMET and the 10.2 million shares of NL held by
Tremont was approximately $49 million and $156 million, respectively. See Note 7
to the Consolidated Financial Statements.
In February 2001, Tremont entered into a $13.4 million reducing revolving
credit facility with EMS (NL's majority-owned environmental management
subsidiary), and Tremont repaid its previously-reported loan from Contran. Such
intercompany loan between EMS and Tremont ($12.65 million outstanding at
December 31, 2001), collateralized by 10.2 million shares of NL common stock
owned by Tremont, is eliminated in Valhi's consolidated financial statements.
Tremont has received a tax assessment from the U.S. federal tax authorities
proposing tax deficiencies of $8.3 million on its 1998 tax return. Tremont has
appealed the proposed deficiencies and believes they are substantially without
merit. No assurances can be given that these tax matters will be resolved in
Tremont's favor in view of the inherent uncertainties involved in tax
proceedings. Tremont believes it has provided adequate accruals for additional
taxes which may ultimately result from all such examinations, and believes that
the ultimate disposition of such examinations should not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity.
Tremont periodically evaluates its liquidity requirements, capital needs
and availability of resources in view of, among other things, its alternative
uses of capital, its debt service requirements, the cost of debt and equity
capital and estimated future operating cash flows. As a result of this process,
Tremont has in the past and may in the future seek to obtain financing from
related parties or third parties, raise additional capital, modify its dividend
policy, restructure ownership interests of subsidiaries and affiliates, incur,
refinance or restructure indebtedness, purchase shares of its common stock,
consider the sale of interests in subsidiaries, affiliates, marketable
securities or other assets, or take a combination of such steps or other steps
to increase or manage liquidity and capital resources. In the normal course of
business, Tremont may investigate, evaluate, discuss and engage in acquisition,
joint venture and other business combination opportunities. In the event of any
future acquisition or joint venture opportunities, Tremont may consider using
then-available cash, issuing equity securities or incurring indebtedness.
Other
In 1999, the Company received $2 million of additional consideration
related to the 1997 disposal of the Company's former fast food operations. No
such additional consideration is expected to be received in the future related
to the disposed fast food operations.
General corporate - Valhi
Valhi's operations are conducted primarily through its subsidiaries (NL,
CompX, Tremont and Waste Control Specialists). Accordingly, Valhi's long-term
ability to meet its parent company level corporate obligations is dependent in
large measure on the receipt of dividends or other distributions from its
subsidiaries. NL increased its quarterly dividend from $.035 per share to $.15
per share in the first quarter of 2000, and NL further increased its quarterly
dividend to $.20 per share in the fourth quarter of 2000. At the current $.20
per share quarterly rate, and based on the 30.1 million NL shares held by Valhi
at December 31, 2001, Valhi would receive aggregate annual dividends from NL of
approximately $24.1 million. Tremont Group, Inc. owns 80% of Tremont
Corporation. Tremont Group is owned 80% by Valhi and 20% by NL. Tremont's
quarterly dividend is currently $.07 per share. At that rate, and based upon the
5.1 million Tremont shares owned by Tremont Group at December 31, 2001, Tremont
Group would receive aggregate annual dividends from Tremont of approximately
$1.4 million. Tremont Group intends to pass-through the dividends it receives
from Tremont to its shareholders (Valhi and NL). Based on Valhi's 80% ownership
of Tremont Group, Valhi would receive $1.2 million in annual dividends from
Tremont Group as a pass-through of Tremont Group's dividends from Tremont. CompX
commenced quarterly dividends of $.125 per share in the fourth quarter of 1999.
At this current rate and based on the 10.4 million CompX shares held by Valhi
and its wholly-owned subsidiary Valcor at December 31, 2001, Valhi/Valcor would
receive annual dividends from CompX of $5.2 million. Various credit agreements
to which certain subsidiaries or affiliates are parties contain customary
limitations on the payment of dividends, typically a percentage of net income or
cash flow; however, such restrictions in the past have not significantly
impacted Valhi's ability to service its parent company level obligations. Valhi
has not guaranteed any indebtedness of its subsidiaries or affiliates. To the
extent that one or more of Valhi's subsidiaries were to become unable to
maintain its current level of dividends, either due to restrictions contained in
the applicable subsidiary's credit agreements or otherwise, Valhi parent
company's liquidity could become adversely impacted. In such an event, Valhi
might consider reducing or eliminating its dividend or selling interests in
subsidiaries or other assets.
At December 31, 2001, Valhi had $3.5 million of parent level cash and cash
equivalents, had $35 million of outstanding borrowings under its revolving bank
credit agreement and had $24.6 million of short-term demand loans payable to
Contran. In addition, Valhi had $18.9 million of borrowing availability under
its bank credit facility and 515,000 shares of Halliburton common stock with an
aggregate market value of $6.7 million which have been released from the LYONs
escrow and could therefore be sold. During the first quarter of 2002, Valhi sold
such Halliburton shares in market transactions for an aggregate of $8.7 million,
and used a majority of the proceeds to reduce its outstanding borrowings from
Contran. In January and February 2002, the size of Valhi's bank credit facility
was increased by an aggregate of $17.5 million to $72.5 million.
Valhi's LYONs do not require current cash debt service. See Note 11 to the
Consolidated Financial Statements. Exchanges of LYONs for Halliburton stock
result in the Company reporting income related to the disposition of the
Halliburton stock for both financial reporting and income tax purposes, although
no cash proceeds are generated by such exchanges. Valhi's potential cash income
tax liability that would have been triggered at December 31, 2001, assuming
exchanges of all of the outstanding LYONs for Halliburton stock at such date,
was approximately $9 million.
At December 31, 2001, the LYONs had an accreted value equivalent to
approximately $41 per Halliburton share, and the market price of the Halliburton
common stock was $13.10 per share. The LYONs, which mature in October 2007, are
redeemable at the option of the LYON holder in October 2002 for an amount equal
to $636.27 per $1,000 principal amount at maturity, or an aggregate of $27.4
million. Such October 2002 redemption price is equivalent to about $44 per
Halliburton share. If the market value of Halliburton common stock equals or
exceeds $44 per share in October 2002, the Company does not expect a significant
amount of LYONs would be tendered to the Company for redemption at that date. To
the extent the Company was required to redeem the LYONs in October 2002 for cash
and the market price of Halliburton was less than $44 per share, the Company
would likely sell the Halliburton shares underlying the LYONs tendered in order
to raise a portion of the cash redemption price due to the LYON holder, and the
Company would be required to use other resources to makeup the shortfall due to
the LYONs holder.
During 2001, holders representing $92.2 million principal amount at
maturity exchanged their LYONs debt obligation for shares of Halliburton common
stock. Under the terms of the indenture governing the LYONs, the Company has the
option to deliver, in whole or in part, cash equal to the market value of the
Halliburton shares that are otherwise required to be delivered to the LYONs
holder in an exchange, and a portion of such exchanges during 2001 were so
settled. Also during 2001, $50.4 million principal amount at maturity of LYONs
were redeemed by the Company for cash at various redemption prices equal to the
accreted value of the LYONs on the respective redemption dates. Valhi may
consider additional partial redemptions or a full redemption of the remaining
notes based on future market conditions and other considerations. There can be
no assurance, however, that Valhi will pursue an additional partial redemption
or a full redemption of the notes.
The terms of The Amalgamated Sugar Company LLC provide for annual "base
level" of cash dividend distributions (sometimes referred to 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 is 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 2002,
Valhi currently expects that distributions received from the LLC in 2002 will
approximate its debt service requirements under its $250 million loans from
Snake River. See Notes 5 and 12 to the Consolidated Financial Statements.
Certain covenants contained in Snake River's third-party senior debt allow
Snake River to pay periodic installments of debt service payments (principal and
interest) under Valhi's $80 million loan to Snake River prior to its maturity in
2010, and such loan is subordinated to Snake River's third-party senior debt.
Such covenants allowed Snake River to pay interest debt service payments to
Valhi on the $80 million loan of $7.2 million in 1999, $950,000 in 2000 and nil
in 2001. At December 31, 2001, the accrued and unpaid interest on the $80
million loan to Snake River aggregated $22.7 million. Such accrued and unpaid
interest is classified as a noncurrent asset at December 31, 2001. The Company
currently believes it will ultimately realize both the $80 million principal
amount and the accrued and unpaid interest, whether through cash generated from
the future operations of Snake River and the LLC or otherwise (including any
liquidation of Snake River/LLC). Following the repayment of Snake River's
third-party senior debt in April 2009, Valhi believes it will receive
significant debt service payments on its loan to Snake River as the cash flows
that Snake River previously would have been using to fund debt service on its
third-party senior debt ($15.5 million in 2001) 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.
Redemption of the Company's interest in the LLC would result in the Company
reporting income related to the disposition of its LLC interest for both
financial reporting and income tax purposes. The cash proceeds that would be
generated from such a disposition would likely be less than the specified
redemption price due to Snake River's ability to simultaneously call its $250
million loans to Valhi. As a result, the net cash proceeds generated by
redemption of the Company's interest in the LLC could be less than the income
taxes that would become payable as a result of the disposition.
The Company routinely compares its liquidity requirements and alternative
uses of capital against the estimated future cash flows to be received from its
subsidiaries, and the estimated sales value of those units. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify its dividend policies, consider
the sale of interests in subsidiaries, affiliates, business units, marketable
securities or other assets, or take a combination of such steps or other steps,
to increase liquidity, reduce indebtedness and fund future activities. Such
activities have in the past and may in the future involve related companies.
The Company and related entities routinely evaluate acquisitions of
interests in, or combinations with, companies, including related companies,
perceived by management to be undervalued in the marketplace. These companies
may or may not be engaged in businesses related to the Company's current
businesses. The Company intends to consider such acquisition activities in the
future and, in connection with this activity, may consider issuing additional
equity securities and increasing the indebtedness of the Company, its
subsidiaries and related companies. From time to time, the Company and related
entities also evaluate the restructuring of ownership interests among their
respective subsidiaries and related companies. In this regard, the indentures
governing the publicly-traded debt of NL contain provisions which limit the
ability of NL and its subsidiaries to incur additional indebtedness or hold
noncontrolling interests in business units.
Summary of debt and other contractual commitments
As more fully described in the notes to the Consolidated Financial
Statements, the Company is a party to various debt, lease and other agreements
which contractually and unconditionally commit the Company to pay certain
amounts in the future. See Notes 11 and 19 to the Consolidated Financial
Statements. The following table summarizes such contractual commitments for the
Company and its consolidated subsidiaries that are unconditional both in terms
of timing and amount by the type and date of payment.
Unconditional payment due date
2007 and
Contractual commitment 2002 2003/2004 2005/2006 after Total
---------------------- ---- --------- --------- ----- -----
(In millions)
Indebtedness ...................... $111.2 $246.9 $ .3 $250.0 $608.4
Operating leases .................. 5.9 7.5 3.4 20.2 37.0
Fixed asset acquisitions .......... 13.5 1.8 -- -- 15.3
------ ------ ------ ------ ------
$130.6 $256.2 $ 3.7 $270.2 $660.7
====== ====== ====== ====== ======
In addition, the Company is a party to certain other agreements that
contractually and unconditionally commit the Company to pay certain amounts in
the future. While the Company believes it is probable that amounts will be spent
in the future under such contracts, the amount and/or the timing of such future
payments will vary depending on certain provisions of the applicable contract.
Agreements to which the Company is a party that fall into this category, more
fully described in Note 19 to the Consolidated Financial Statements, are: o
CompX's patent license agreements under which it pays royalties based on the
volume of certain products manufactured in Canada and sold in the United States;
o NL's long-term supply contracts for the purchase of chloride-process TiO2
feedstock; and o TIMET's agreement for the purchase of titanium sponge.
In addition, the Company is a party to certain other agreements that
conditionally commit the Company to pay certain amounts in the future. Due to
the provisions of such agreements, it is possible that the Company might not
ever be required to pay any amounts under these agreements. Agreements to which
the Company is a party that fall into this category, more fully described in
Notes 5, 8 and 19 to the Consolidated Financial Statements, are:
o The Company's requirement to escrow funds in amounts up to the next three
years of debt service of Snake River's third-party term debt to
collateralize such debt in order to exercise its conditional right to
temporarily take control of The Amalgamated Sugar Company LLC;
o The Company's requirement to pledge $5 million of cash or marketable
securities as collateral for Snake River's third-party debt in order to
permit Snake River to continue to make debt service payments on its $80
million loan from Valhi; and
o Waste Control Specialists' requirement to pay certain amounts based upon
specified percentages of qualifying revenues.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. The Company is exposed to market risk from changes in foreign
currency exchange rates, interest rates and equity security prices. In the past,
the Company has periodically entered into interest rate swaps or other types of
contracts in order to manage a portion of its interest rate market risk. The
Company has also periodically entered into currency forward contracts to either
manage a nominal portion of foreign exchange rate market risk associated with
receivables denominated in a currency other than the holder's functional
currency or similar risk associated with future sales, or to hedge specific
foreign currency commitments. Otherwise, the Company does not generally enter
into forward or option contracts to manage such market risks, nor does the
Company enter into any such contract or other type of derivative instrument for
trading or speculative purposes. Other than the contracts discussed below, the
Company was not a party to any forward or derivative option contract related to
foreign exchange rates, interest rates or equity security prices at December 31,
2000 and 2001. See Notes 1 and 15 to the Consolidated Financial Statements for a
discussion of the assumptions used to estimate the fair value of the financial
instruments to which the Company is a party at December 31, 2000 and 2001.
Interest rates. The Company is exposed to market risk from changes in
interest rates, primarily related to indebtedness and certain interest-bearing
notes receivable.
At December 31, 2001, the Company's aggregate indebtedness was split
between 78% of fixed-rate instruments and 22% of variable-rate borrowings (2000
- 79% of fixed-rate instruments and 21% of variable rate borrowings). The large
percentage of fixed-rate debt instruments minimizes earnings volatility which
would result from changes in interest rates. The following table presents
principal amounts and weighted average interest rates for the Company's
aggregate outstanding indebtedness at December 31, 2001. The Company's LYONs
debt obligations, which mature in October 2007, are reflected in the following
table as due in October 2002, the next date at which they are redeemable at the
option of the holder. At December 31, 2001, all outstanding fixed-rate
indebtedness was denominated in U.S. dollars, and the outstanding variable rate
borrowings were denominated in U.S. dollars or the euro. Information shown below
for such foreign currency denominated indebtedness is presented in its U.S.
dollar equivalent at December 31, 2001 using exchange rates of .88 U.S. dollars
per euro and .11 U.S. dollars per kroner.
Amount
Carrying Fair Interest Maturity
Indebtedness* value value rate date
------------ --------- --------- -------- ------
(In millions)
Fixed-rate indebtedness:
Valhi LYONs ....................... $ 25.5 $ 25.0 9.2% 2002
Valhi note payable ................ 2.9 2.9 6.2% 2002
Valcor Senior Notes ............... 2.4 2.4 9.6% 2003
NL Senior Notes ................... 194.0 194.9 11.7% 2003
Valhi loans from Snake River ...... 250.0 250.0 9.4% 2027
Other ............................. .8 .8 7.6% Various
------- ------- -------
475.6 476.0 10.3%
------- ------- -------
Variable-rate indebtedness:
NL notes payable:
euro-denominated ................ 24.0 24.0 3.8% 2002
kroner-denominated .............. 22.2 22.2 7.3% 2002
Valhi bank revolver ............... 35.0 35.0 3.8% 2002
CompX bank revolver ............... 49.0 49.0 4.2% 2003
Other ............................. 2.5 2.5 3.8% various
------- ------- -------
132.7 132.7 4.5%
------- ------- -------
$ 608.3 $ 608.7 9.1%
======= ======= =======
* Denominated in U.S. dollars, except as otherwise indicated.
At December 31, 2000, fixed rate indebtedness aggregated $550.8 million
(fair value - $564.7 million) with a weighted-average interest rate of 10.2%;
variable rate indebtedness at such date aggregated $148.7 million, which
approximates fair value, with a weighted-average interest rate of 7.1%. All of
such fixed rate indebtedness was denominated in U.S. dollars. Such variable rate
indebtedness was denominated in U.S. dollars (52% of the total), the euro (32%),
the Norwegian kroner (15%) or the new Taiwan dollar (1%)
The Company has an $80 million loan to Snake River Sugar Company at
December 31, 2000 and 2001. Such loan bears interest at a fixed interest rate of
6.49% at such dates, the estimated fair value of such loan aggregated $86.4
million and $96.4 million at December 31, 2000 and 2001, respectively. The
potential decrease in the fair value of such loan resulting from a hypothetical
100 basis point increase in market interest rates would be approximately $5.4
million at December 31, 2001 (2000 - $3.7 million).
Foreign currency exchange rates. The Company is exposed to market risk
arising from changes in foreign currency exchange rates as a result of
manufacturing and selling its products worldwide. Earnings are primarily
affected by fluctuations in the value of the U.S. dollar relative to the euro,
the Canadian dollar, the Norwegian kroner and the United Kingdom pound sterling.
As described above, at December 31, 2001, NL had the equivalent of $24.0
million of outstanding euro-denominated indebtedness and $22.2 million of
Norwegian kroner-denominated indebtedness (2000- the equivalent of $47.5 million
of euro-denominated indebtedness and $22.5 million of Norwegian
kroner-denominated indebtedness). The potential increase in the U.S. dollar
equivalent of the principal amount outstanding resulting from a hypothetical 10%
adverse change in exchange rates at such date would be approximately $4.6
million at December 31, 2001 (2000 - $7.0 million).
Certain of CompX's sales generated by its Canadian operations are
denominated in U.S. dollars. To manage a portion of the foreign exchange rate
market risk associated with such receivables or similar exchange rate risk
associated with future sales, at December 31, 2000 CompX had entered into a
series of short-term forward exchange contracts maturing through March 2001 to
exchange an aggregate of $9.1 million for an equivalent amount of Canadian
dollars at an exchange rate of approximately Cdn $1.48 per U.S. dollar. The
estimated fair value of such forward exchange contracts at December 31, 2000 is
not material. No such contracts were held at December 31, 2001.
Marketable equity and debt security prices. The Company is exposed to
market risk due to changes in prices of the marketable securities which are
owned. The fair value of such debt and equity securities at December 31, 2000
and 2001 (including shares of Halliburton common stock held by the Company) was
$268.0 million and $205.0 million, respectively. The potential change in the
aggregate fair value of these investments, assuming a 10% change in prices,
would be $26.8 million at December 31, 2000 and $20.5 million at December 31,
2001.
Embedded derivatives. The Company's LYONs debt obligations contain an
embedded derivative that allows the LYONs holders to exchange their debt
instrument for shares of Halliburton common stock held by the Company. See Notes
5 and 11 to the Consolidated Financial Statements. As a result, the LYONs debt
obligations are is exposed to both interest rate and equity security market risk
because changes in either market interest rates or the price of Halliburton
common stock will affect the fair value of the debt obligations.
The LYONs are exchangeable at any time at the option of the holder for
14.4308 shares of Halliburton common stock held by the Company. The LYONs are
redeemable at the option of the holder in October 2002 for cash in an amount
equal to the accreted value at that date ($636.27 per $1,000 principal amount at
maturity, or the equivalent of about $44 per Halliburton share). The LYONs
mature in October 2007 for $1,000 per LYON (or the equivalent of about $69 per
Halliburton share). If the market value of Halliburton common stock equals or
exceeds $44 per share in October 2002, the Company does not expect a significant
amount of LYONs would be tendered to the Company for redemption at that date. To
the extent the Company was required to redeem the LYONs in October 2002 for cash
and the market price of Halliburton was less than $44 per share, the Company
would likely sell the Halliburton shares underlying the LYONs tendered in order
to raise a portion of the cash redemption price due to the LYON holders, and the
Company would be required to use other resources to makeup the shortfall due to
the LYONs holders. Similarly, if the market value of Halliburton common stock
equals or exceeds $69 per share in October 2007 (the maturity date of the
LYONs), the Company would expect that it would extinguish the LYONs debt
obligations through an exchange of such debt obligations for the shares of
Halliburton common stock held by the Company. To the extent the market price of
Halliburton common stock was less than $69 in October 2007 and the Company was
required to extinguish the debt through a cash payment of $1,000 per LYON, the
Company would likely sell the Halliburton shares underlying the maturing LYONs
in order to raise a portion of the cash maturity price due to the LYON holders,
and the Company would be required to use other resources to makeup the shortfall
due to the LYONs holders.
Other. The Company believes there are certain shortcomings in the
sensitivity analyses presented above, which analyses are required under the
Securities and Exchange Commission's regulations. For example, the hypothetical
effect of changes in interest rates discussed above ignores the potential effect
on other variables which affect the Company's results of operations and cash
flows, such as demand for the Company's products, sales volumes and selling
prices and operating expenses. Contrary to the above assumptions, changes in
interest rates rarely result in simultaneous parallel shifts along the yield
curve. Also, certain of the Company's marketable securities are exchangeable for
certain of the Company's debt instruments, and a decrease in the fair value of
such securities would likely be mitigated by a decrease in the fair value of the
related indebtedness. Accordingly, the amounts presented above are not
necessarily an accurate reflection of the potential losses the Company would
incur assuming the hypothetical changes in market prices were actually to occur.
The above discussion and estimated sensitivity analysis amounts include
forward-looking statements of market risk which assume hypothetical changes in
market prices. Actual future market conditions will likely differ materially
from such assumptions. Accordingly, such forward-looking statements should not
be considered to be projections by the Company of future events, gains or
losses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item is contained in a separate section
of this Annual Report. See "Index of Financial Statements and Schedules" (page
F-1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
Valhi's definitive Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after the end of the
fiscal year covered by this report (the "Valhi Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Valhi Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Valhi Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Valhi Proxy Statement. See Note 18 to the Consolidated Financial Statements.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Schedules
The Registrant
The consolidated financial statements and schedules listed
on the accompanying Index of Financial Statements and
Schedules (see page F-1) are filed as part of this Annual
Report.
(b) Reports on Form 8-K
Reports on Form 8-K filed for the quarter ended December 31,
2001.
None.
(c) Exhibits
Included as exhibits are the items listed in the Exhibit
Index. Valhi will furnish a copy of any of the exhibits
listed below upon payment of $4.00 per exhibit to cover the
costs to Valhi of furnishing the exhibits. Instruments
defining the rights of holders of long-term debt issues
which do not exceed 10% of consolidated total assets as of
December 31, 2001 will be furnished to the Commission upon
request.
Item No. Exhibit Item
3.1 Restated Articles of Incorporation of the Registrant -
incorporated by reference to Appendix A to the definitive
Prospectus/Joint Proxy Statement of The Amalgamated Sugar
Company and LLC Corporation (File No. 1-5467) dated February
10, 1987.
3.2 By-Laws of the Registrant as amended - incorporated by
reference to Exhibit 3.1 of the Registrant's Quarterly
Report on Form 10-Q (File No. 1-5467) for the quarter ended
March 31, 1992.
4.1 Indenture dated October 20, 1993 governing NL's 11 3/4%
Senior Secured Notes due 2003, including form of note, -
incorporated by reference to Exhibit 4.1 of NL's Quarterly
Report on Form 10-Q (File No. 1-640) for the quarter ended
September 30, 1993.
9.1 Shareholders' Agreement dated February 15, 1996 among TIMET,
Tremont, IMI plc, IMI Kynoch Ltd. and IMI Americas, Inc. -
incorporated by reference to Exhibit 2.2 to Tremont's
Current Report on Form 8-K (File No. 1-10126) dated March 1,
1996.
9.2 Amendment to the Shareholders' Agreement dated March 29,
1996 among TIMET, Tremont, IMI plc, IMI Kynosh Ltd. and IMI
Americas, Inc. - incorporated by reference to Exhibit 10.30
to Tremont's Annual Report on Form 10-K (File No. 1-10126)
for the year ended December 31, 1995.
10.1 Intercorporate Services Agreement between the Registrant and
Contran Corporation effective as of January 1, 2001.
Item No. Exhibit Item
10.2 Intercorporate Services Agreement between Contran
Corporation and NL effective as of January 1, 2001 -
incorporated by reference to Exhibit 10.1 to NL's Quarterly
Report on Form 10-Q (File No. 1-640) for the quarter ended
March 31, 2001.
10.3 Intercorporate Services Agreement between Contran
Corporation and Tremont effective as of January 1, 2001 -
incorporated by reference to Exhibit 10.1 to Tremont's
Quarterly Report on Form 10-Q (File No. 1-10126) for the
quarter ended March 31, 2001.
10.4 Intercompany Services Agreement between Contran Corporation
and CompX effective January 1, 2001 - incorporated by
reference to Exhibit 10.1 to CompX's Quarterly Report on
Form 10-Q (File No. 1-13905) for the quarter ended June 30,
2001.
10.5 Revolving Loan Note dated May 4, 2001 with Harold C. Simmons
Family Trust No. 2 and EMS Financial, Inc. - incorporated by
reference to Exhibit 10.1 to NL's Quarterly Report on Form
10-Q (File No. 1-640) for the quarter ended September 30,
2001.
10.6 Security Agreement dated May 4, 2001 by and between Harold
C. Simmons Family Trust No. 2 and EMS Financial, Inc. -
incorporated by reference to Exhibit 10.2 to NL's Quarterly
Report on Form 10-Q (File No. 1-640) for the quarter ended
September 30, 2001.
10.7* Valhi, Inc. 1987 Stock Option - Stock Appreciation Rights
Plan, as amended - incorporated by reference to Exhibit 10.4
to the Registrant's Annual Report on Form 10-K (File No.
1-5467) for the year ended December 31, 1994.
10.8* Valhi, Inc. 1997 Long-Term Incentive Plan - incorporated by
reference to Exhibit 10.12 to the Registrant's Annual Report
on Form 10-K (File No. 1-5467) for the year ended December
31, 1996.
10.9* CompX International Inc. 1997 Long-Term Incentive Plan -
incorporated by reference to Exhibit 10.2 to CompX's
Registration Statement on Form S-1 (File No. 333-42643).
10.10* Form of Deferred Compensation Agreement between the
Registrant and certain executive officers - incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q (File No. 1-5467) for the quarter ended
March 31, 1999.
10.11 Formation Agreement of The Amalgamated Sugar Company LLC
dated January 3, 1997 (to be effective December 31, 1996)
between Snake River Sugar Company and The Amalgamated Sugar
Company - incorporated by reference to Exhibit 10.19 to the
Registrant's Annual Report on Form 10-K (File No. 1-5467)
for the year ended December 31, 1996.
10.12 Master Agreement Regarding Amendments to The Amalgamated
Sugar Company Documents dated October 19, 2000 -
incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q (File No. 1-5467)
for the quarter ended September 30, 2000.
10.13 Company Agreement of The Amalgamated Sugar Company LLC dated
January 3, 1997 (to be effective December 31, 1996) -
incorporated by reference to Exhibit 10.20 to the
Registrant's Annual Report on Form 10-K (File No. 1-5467)
for the year ended December 31, 1996.
Item No. Exhibit Item
10.14 First Amendment to the Company Agreement of The Amalgamated
Sugar Company LLC dated May 14, 1997 - incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q (File No. 1-5467) for the quarter ended
June 30, 1997.
10.15 Second Amendment to the Company Agreement of The Amalgamated
Sugar Company LLC dated November 30, 1998 - incorporated by
reference to Exhibit 10.24 to the Registrant's Annual Report
on Form 10-K (File No. 1-5467) for the year ended December
31, 1998.
10.16 Third Amendment to the Company Agreement of The Amalgamated
Sugar Company LLC dated October 19, 2000 - incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q (File No. 1-5467) for the quarter ended
September 30, 2000.
10.17 Subordinated Promissory Note in the principal amount of
$37.5 million between Valhi, Inc. and Snake River Sugar
Company, and the related Pledge Agreement, both dated
January 3, 1997 - incorporated by reference to Exhibit 10.21
to the Registrant's Annual Report on Form 10-K (File No.
1-5467) for the year ended December 31, 1996.
10.18 Limited Recourse Promissory Note in the principal amount of
$212.5 million between Valhi, Inc. and Snake River Sugar
Company, and the related Limited Recourse Pledge Agreement,
both dated January 3, 1997 - incorporated by reference to
Exhibit 10.22 to the Registrant's Annual Report on Form 10-K
(File No. 1-5467) for the year ended December 31, 1996.
10.19 Subordinated Loan Agreement between Snake River Sugar
Company and Valhi, Inc., as amended and restated effective
May 14, 1997 - incorporated by reference to Exhibit 10.9 to
the Registrant's Quarterly Report on Form 10-Q (File No.
1-5467) for the quarter ended June 30, 1997.
10.20 Second Amendment to the Subordinated Loan Agreement between
Snake River Sugar Company and Valhi, Inc. dated November 30,
1998 - incorporated by reference to Exhibit 10.28 to the
Registrant's Annual Report on Form 10-K (File No. 1-5467)
for the year ended December 31, 1998.
10.21 Third Amendment to the Subordinated Loan Agreement between
Snake River Sugar Company and Valhi, Inc. dated October 19,
2000 - incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q (File No. 1-5467)
for the quarter ended September 30, 2000.
10.22 Contingent Subordinate Pledge Agreement between Snake River
Sugar Company and Valhi, Inc., as acknowledged by First
Security Bank National Association as Collateral Agent,
dated October 19, 2000 - incorporated by reference to
Exhibit 10.4 to the Registrant's Quarterly Report on Form
10-Q (File No. 1-5467) for the quarter ended September 30,
2000.
10.23 Contingent Subordinate Security Agreement between Snake
River Sugar Company and Valhi, Inc., as acknowledged by
First Security Bank National Association as Collateral
Agent, dated October 19, 2000 - incorporated by reference to
Exhibit 10.5 to the Registrant's Quarterly Report on Form
10-Q (File No. 1-5467) for the quarter ended September 30,
2000.
Item No. Exhibit Item
10.24 Contingent Subordinate Collateral Agency and Paying Agency
Agreement among Valhi, Inc., Snake River Sugar Company and
First Security Bank National Association dated October 19,
2000 - incorporated by reference to Exhibit 10.6 to the
Registrant's Quarterly Report on Form 10-Q (File No. 1-5467)
for the quarter ended September 30, 2000.
10.25 Deposit Trust Agreement related to the Amalgamated
Collateral Trust among ASC Holdings, Inc. and Wilmington
Trust Company dated May 14, 1997 - incorporated by reference
to Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q (File No. 1-5467) for the quarter ended June 30, 1997.
10.26 Pledge Agreement between the Amalgamated Collateral Trust
and Snake River Sugar Company dated May 14, 1997 -
incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q (File No. 1-5467)
for the quarter ended June 30, 1997.
10.27 Guarantee by the Amalgamated Collateral Trust in favor of
Snake River Sugar Company dated May 14, 1997 - incorporated
by reference to Exhibit 10.4 to the Registrant's Quarterly
Report on Form 10-Q (File No. 1-5467) for the quarter ended
June 30, 1997.
10.28 Amended and Restated Pledge Agreement between ASC Holdings,
Inc. and Snake River Sugar Company dated May 14, 1997 -
incorporated by reference to Exhibit 10.5 to the
Registrant's Quarterly Report on Form 10-Q (File No. 1-5467)
for the quarter ended June 30, 1997.
10.29 Collateral Deposit Agreement among Snake River Sugar
Company, Valhi, Inc. and First Security Bank, National
Association dated May 14, 199 - incorporated by reference to
Exhibit 10.6 to the Registrant's Quarterly Report on Form
10-Q (File No. 1-5467) for the quarter ended June 30, 1997.
10.30 Voting Rights and Forbearance Agreement among the
Amalgamated Collateral Trust, ASC Holdings, Inc. and First
Security Bank, National Association dated May 14, 1997 -
incorporated by reference to Exhibit 10.7 to the
Registrant's Quarterly Report on Form 10-Q (File No. 1-5467)
for the quarter ended June 30, 1997.
10.31 First Amendment to the Voting Rights and Forbearance
Agreement among the Amalgamated Collateral Trust, ASC
Holdings, Inc. and First Security Bank National Association
dated October 19, 2000 - incorporated by reference to
Exhibit 10.9 to the Registrant's Quarterly Report on Form
10-Q (File No. 1-5467) for the quarter ended September 30,
2000.
10.32 Voting Rights and Collateral Deposit Agreement among Snake
River Sugar Company, Valhi, Inc., and First Security Bank,
National Association dated May 14, 1997 - incorporated by
reference to Exhibit 10.8 to the Registrant's Quarterly
Report on Form 10-Q (File No. 1-5467) for the quarter ended
June 30, 1997.
10.33 Subordination Agreement between Valhi, Inc. and Snake River
Sugar Company dated May 14, 1997 - incorporated by reference
to Exhibit 10.10 to the Registrant's Quarterly Report on
Form 10-Q (File No. 1-5467) for the quarter ended June 30,
1997.
Item No. Exhibit Item
10.34 First Amendment to the Subordination Agreement between
Valhi, Inc. and Snake River Sugar Company dated October 19,
2000 - incorporated by reference to Exhibit 10.7 to the
Registrant's Quarterly Report on Form 10-Q (File No. 1-5467)
for the quarter ended September 30, 2000.
10.35 Form of Option Agreement among Snake River Sugar Company,
Valhi, Inc. and the holders of Snake River Sugar Company's
10.9% Senior Notes Due 2009 dated May 14, 1997 -
incorporated by reference to Exhibit 10.11 to the
Registrant's Quarterly Report on Form 10-Q (File No. 1-5467)
for the quarter ended June 30, 1997.
10.36 First Amendment to Option Agreements among Snake River Sugar
Company, Valhi Inc., and the holders of Snake River's 10.9%
Senior Notes Due 2009 dated October 19, 2000 - incorporated
by reference to Exhibit 10.8 to the Registrant's Quarterly
Report on Form 10-Q (File No. 1-5467) for the quarter ended
September 30, 2000.
10.37 Formation Agreement dated as of October 18, 1993 among
Tioxide Americas Inc., Kronos Louisiana, Inc. and Louisiana
Pigment Company, L.P. - incorporated by reference to Exhibit
10.2 of NL's Quarterly Report on Form 10-Q (File No. 1-640)
for the quarter ended September 30, 1993.
10.38 Joint Venture Agreement dated as of October 18, 1993 between
Tioxide Americas Inc. and Kronos Louisiana, Inc. -
incorporated by reference to Exhibit 10.3 of NL's Quarterly
Report on Form 10-Q (File No. 1-640) for the quarter ended
September 30, 1993.
10.39 Kronos Offtake Agreement dated as of October 18, 1993 by and
between Kronos Louisiana, Inc. and Louisiana Pigment
Company, L.P. - incorporated by reference to Exhibit 10.4 of
NL's Quarterly Report on Form 10-Q (File No. 1-640) for the
quarter ended September 30, 1993.
10.40 Amendment No. 1 to Kronos Offtake Agreement dated as of
December 20, 1995 between Kronos Louisiana, Inc. and
Louisiana Pigment Company, L.P. - incorporated by reference
to Exhibit 10.22 of NL's Annual Report on Form 10-K (File
No. 1-640) for the year ended December 31 1995.
10.41 Master Technology and Exchange Agreement dated as of October
18, 1993 among Kronos, Inc., Kronos Louisiana, Inc., Kronos
International, Inc., Tioxide Group Limited and Tioxide Group
Services Limited - incorporated by reference to Exhibit 10.8
of NL's Quarterly Report on Form 10-Q (File No. 1-640) for
the quarter ended September 30, 1993.
10.42 Allocation Agreement dated as of October 18, 1993 between
Tioxide Americas Inc., ICI American Holdings, Inc., Kronos,
Inc. and Kronos Louisiana, Inc. - incorporated by reference
to Exhibit 10.10 to NL's Quarterly Report on Form 10-Q (File
No. 1-640) for the quarter ended September 30, 1993.
10.43 Lease Contract dated June 21, 1952, between Farbenfabrieken
Bayer Aktiengesellschaft and Titangesellschaft mit
beschrankter Haftung (German language version and English
translation thereof) - incorporated by reference to Exhibit
10.14 of NL's Annual Report on Form 10-K (File No. 1-640)
for the year ended December 31, 1985.
Item No. Exhibit Item
10.44 Contract on Supplies and Services among Bayer AG, Kronos
Titan GmbH and Kronos International, Inc. dated June 30,
1995 (English translation from German language document) -
incorporated by reference to Exhibit 10.1 of NL's Quarterly
Report on Form 10-Q (File No. 1-640) for the quarter ended
September 30, 1995.
10.45 Lease Agreement, dated January 1, 1996, between Holford
Estates Ltd. and IMI Titanium Ltd. related to the building
known as Titanium Number 2 Plant at Witton, England -
incorporated by reference to Exhibit 10.23 to Tremont's
Annual Report on Form 10-K (File No. 1-10126) for the year
ended December 31, 1995.
10.46 Richards Bay Slag Sales Agreement dated May 1, 1995 between
Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.17 to
NL's Annual Report on Form 10-K (File No. 1-640) for the
year ended December 31, 1995.
10.47 Amendment to Richards Bay Slag Sales Agreement dated May 1,
1999, between Richards Bay Iron and Titanium (Proprietary)
Limited and Kronos, Inc. - incorporated by reference to
Exhibit 10.4 to NL's Annual Report on Form 10-K (File No.
1-640) for the year ended December 31, 1999.
10.48 Amendment to Richards Bay Slag Sales Agreement dated June 1,
2001 between Richards Bay Iron and Titanium (Proprietary)
Limited and Kronos, Inc. - incorporated by reference to
Exhibit No. 10.5 to NL's Annual Report on Form 10-K for the
year ended December 31, 2001 (File No. 1-640).
10.49 Investment Agreement dated July 9, 1998, between TIMET,
TIMET Finance Management Company and Special Metals
Corporation - incorporated by reference to Exhibit 10.1 to
TIMET's Current Report on Form 8-K (File No. 0-28538) dated
July 9, 1998.
10.50 Amendment to Investment Agreement, dated October 28, 1998,
among TIMET, TIMET Finance Management Company and Special
Metals Corporation - incorporated by reference to Exhibit
10.4 to TIMET's Quarterly Report on Form 10-Q (File No.
0-28538) for the quarter ended September 30, 1998.
10.51 Registration Rights Agreement, dated October 28, 1998,
between TIMET Finance Management Company and Special Metals
Corporation - incorporated by reference to Exhibit 10.5 to
TIMET's Quarterly Report on Form 10-Q (File No. 0-28538) for
the quarter ended September 30, 1998.
10.52 Certificate of Designations for the Special Metals
Corporation Series A Preferred Stock - incorporated by
reference to Exhibit 4.5 to Special Metals Corporation's
Current Report on Form 8-K (File No. 000-22029) dated
October 28, 1998.
10.53 Registration Rights Agreement dated October 30, 1991, by and
between NL and Tremont - incorporated by reference to
Exhibit 4.3 of NL's Annual Report on Form 10-K (File No.
1-640) for the year ended December 31, 1991.
Item No. Exhibit Item
10.54 Insurance Sharing Agreement, effective January 1, 1990, by
and between NL, TRE Insurance, Ltd., and Baroid Corporation
- incorporated by reference to Exhibit 10.20 to NL's Annual
Report on Form 10-K (File No. 1-640) for the year ended
December 31, 1991.
10.55 Indemnification Agreement between Baroid, Tremont and NL
Insurance, Ltd. dated September 26, 1990 - incorporated by
reference to Exhibit 10.35 to Baroid's Registration
Statement on Form 10 (No. 1-10624) filed with the Commission
on August 31, 1990.
10.56 Purchase Agreement dated January 4, 2002 by and among
Kronos, Inc. as the Purchaser, and Big Bend Holdings LLC and
Contran Insurance Holdings, Inc., as Sellers regarding the
sale and purchase of EWI RE, Inc. and EWI RE, Ltd. -
incorporated by reference to Exhibit No. 10.40 to NL's
Annual Report on Form 10-K (File No. 1-640) for the year
ended December 31, 2001.
10.57 Settlement Agreement and Release of Claims dated April 19,
2001 between Titanium Metals Corporation and the Boeing
Company - incorporated by reference to Exhibit 10.1 to
TIMET's Quarterly Report on Form 10-Q (File No. 0-28538) for
the quarter ended March 31, 2001.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP
* Management contract, compensatory plan or agreement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VALHI, INC.
(Registrant)
By: /s/ Steven L. Watson
----------------------------------
Steven L. Watson, March 25, 2002
(President)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Harold C. Simmons /s/ Steven L. Watson
--------------------------------------- ------------------------------------
Harold C. Simmons, March 25, 2002 Steven L. Watson, March 25, 2002
(Chairman of the Board and (President and Director)
Chief Executive Officer)
/s/ Thomas E. Barry /s/ Glenn R. Simmons
--------------------------------------- -----------------------------------
Thomas E. Barry, March 25, 2002 Glenn R. Simmons, March 25, 2002
(Director) (Vice Chairman of the Board)
/s/ Norman S. Edelcup /s/ Bobby D. O'Brien
-------------------------------------- -----------------------------------
Norman S. Edelcup, March 25, 2002 Bobby D. O'Brien, March 25, 2002
(Director) (Vice President and Treasurer,
Principal Financial Officer)
/s/ Edward J. Hardin /s/ Gregory M. Swalwell
-------------------------------------- ----------------------------------
Edward J. Hardin, March 25, 2002 Gregory M. Swalwell, March 25, 2002
(Director) (Vice President and Controller,
Principal Accounting Officer)
/s/ J. Walter Tucker, Jr.
--------------------------------------
J. Walter Tucker, Jr. March 25, 2002
(Director)
Annual Report on Form 10-K
Items 8, 14(a) and 14(d)
Index of Financial Statements and Schedules
Financial Statements Page
Report of Independent Accountants F-2
Consolidated Balance Sheets - December 31, 2000 and 2001 F-3
Consolidated Statements of Income -
Years ended December 31, 1999, 2000 and 2001 F-5
Consolidated Statements of Comprehensive Income -
Years ended December 31, 1999, 2000 and 2001 F-7
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1999, 2000 and 2001 F-8
Consolidated Statements of Cash Flows -
Years ended December 31, 1999, 2000 and 2001 F-9
Notes to Consolidated Financial Statements F-12
Financial Statement Schedules
Report of Independent Accountants S-1
Schedule I - Condensed financial information of Registrant S-2
Schedule II - Valuation and qualifying accounts S-11
Schedules III and IV are omitted because they are not applicable.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Valhi, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of Valhi, Inc. and Subsidiaries as of December 31, 2000 and 2001, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
PricewaterhouseCoopers LLP
Dallas, Texas
March 15, 2002
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 2001
(In thousands, except per share data)
ASSETS
2000 2001
---- ----
Current assets:
Cash and cash equivalents .................... $ 135,017 $ 154,413
Restricted cash equivalents .................. 69,242 63,257
Marketable securities ........................ -- 18,465
Accounts and other receivables ............... 182,991 162,310
Refundable income taxes ...................... 14,470 3,564
Receivable from affiliates ................... 885 844
Inventories .................................. 242,994 262,733
Prepaid expenses ............................. 7,272 11,252
Deferred income taxes ........................ 14,236 12,999
---------- ----------
Total current assets ..................... 667,107 689,837
---------- ----------
Other assets:
Marketable securities ........................ 268,006 186,549
Investment in affiliates ..................... 235,791 211,115
Receivable from affiliate .................... -- 20,000
Loans and other receivables .................. 100,540 105,940
Mining properties ............................ 13,971 12,410
Prepaid pension costs ........................ 22,789 18,411
Unrecognized net pension obligations ......... -- 5,901
Goodwill ..................................... 359,420 349,058
Deferred income taxes ........................ 2,046 3,818
Other assets ................................. 49,604 32,549
---------- ----------
Total other assets ....................... 1,052,167 945,751
---------- ----------
Property and equipment:
Land ......................................... 29,644 28,721
Buildings .................................... 167,653 163,995
Equipment .................................... 543,915 569,001
Construction in progress ..................... 14,865 9,992
---------- ----------
756,077 771,709
Less accumulated depreciation ................ 218,530 253,450
---------- ----------
Net property and equipment ............... 537,547 518,259
---------- ----------
$2,256,821 $2,153,847
========== ==========
See accompanying notes to consolidated financial statements
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2000 and 2001
(In thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
2000 2001
---- ----
Current liabilities:
Notes payable .................................. $ 70,039 $ 46,201
Current maturities of long-term debt ........... 34,284 64,972
Accounts payable ............................... 81,572 114,474
Accrued liabilities ............................ 162,431 166,488
Payable to affiliates .......................... 32,042 38,148
Income taxes ................................... 15,693 9,578
Deferred income taxes .......................... 1,922 1,821
----------- -----------
Total current liabilities .................. 397,983 441,682
----------- -----------
Noncurrent liabilities:
Long-term debt ................................. 595,354 497,215
Accrued OPEB costs ............................. 50,624 50,146
Accrued pension costs .......................... 26,697 33,823
Accrued environmental costs .................... 66,224 54,392
Deferred income taxes .......................... 294,371 268,468
Other .......................................... 41,055 32,642
----------- -----------
Total noncurrent liabilities ............... 1,074,325 936,686
----------- -----------
Minority interest ................................ 156,278 153,151
----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares
authorized; none issued ....................... -- --
Common stock, $.01 par value; 150,000 shares
authorized; 125,730 and 125,811 shares issued . 1,257 1,258
Additional paid-in capital ..................... 44,345 44,982
Retained earnings .............................. 591,030 656,408
Accumulated other comprehensive income:
Marketable securities ........................ 132,580 86,654
Currency translation ......................... (60,811) (79,404)
Pension liabilities .......................... (4,517) (11,921)
Treasury stock, at cost - 10,570 shares ........ (75,649) (75,649)
----------- -----------
Total stockholders' equity ................. 628,235 622,328
----------- -----------
$ 2,256,821 $ 2,153,847
=========== ===========
Commitments and contingencies (Notes 5, 8, 11, 16, 18 and 19)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999, 2000 and 2001
(In thousands, except per share data)
1999 2000 2001
---- ---- ----
Revenues and other income:
Net sales ........................... $ 1,145,222 $ 1,191,885 $ 1,059,470
Other, net .......................... 68,456 127,101 154,000
----------- ----------- -----------
1,213,678 1,318,986 1,213,470
----------- ----------- -----------
Cost and expenses:
Cost of sales ....................... 840,326 824,391 774,979
Selling, general and administrative . 189,036 201,732 195,166
Interest ............................ 72,039 70,354 62,285
----------- ----------- -----------
1,101,401 1,096,477 1,032,430
----------- ----------- -----------
112,277 222,509 181,040
Equity in earnings of:
Titanium Metals Corporation ("TIMET") -- (8,990) (9,161)
Tremont Corporation* ................ (48,652) -- --
Waste Control Specialists* .......... (8,496) -- --
Other ............................... -- 1,672 580
----------- ----------- -----------
Income before taxes ............... 55,129 215,191 172,459
Provision for income taxes (benefit) .. (71,285) 94,442 53,179
Minority interest in after-tax earnings 78,992 43,658 26,082
----------- ----------- -----------
Income from continuing operations . 47,422 77,091 93,198
Discontinued operations ............... 2,000 -- --
Extraordinary item .................... -- (477) --
----------- ----------- -----------
Net income ........................ $ 49,422 $ 76,614 $ 93,198
=========== =========== ===========
*Prior to consolidation.
See accompanying notes to consolidated financial statements.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
Years ended December 31, 1999, 2000 and 2001
(In thousands, except per share data)
1999 2000 2001
---- ---- ----
Basic earnings per share:
Continuing operations ............................ $ .41 $ .67 $ .81
Discontinued operations .......................... .02 -- --
Extraordinary item ............................... -- -- --
----------- ----------- -----------
Net income ....................................... $ .43 $ .67 $ .81
=========== =========== ===========
Diluted earnings per share:
Continuing operations ............................ $ .41 $ .66 $ .80
Discontinued operations .......................... .02 -- --
Extraordinary item ............................... -- -- --
----------- ----------- -----------
Net income ....................................... $ .43 $ .66 $ .80
=========== =========== ===========
Cash dividends per share ........................... $ .20 $ .21 $ .24
=========== =========== ===========
Shares used in the calculation of per share amounts:
Basic earnings per share ......................... 115,030 115,132 115,193
Dilutive impact of stock options ................. 1,164 1,138 920
----------- ----------- -----------
Diluted earnings per share ....................... 116,194 116,270 116,113
=========== =========== ===========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 1999, 2000 and 2001
(In thousands)
1999 2000 2001
---- ---- ----
Net income ..................................... $ 49,422 $ 76,614 $ 93,198
-------- -------- --------
Other comprehensive income (loss),
net of tax:
Marketable securities adjustment:
Unrealized net gains (losses) arising during
the period ................................ 5,503 1,863 (7,673)
Reclassification for realized net losses
(gains) included in net income ............ (492) 2,880 (38,253)
-------- -------- --------
5,011 4,743 (45,926)
Currency translation adjustment .............. (18,121) (19,978) (18,593)
Pension liabilities adjustment ............... (2,930) 1,258 (7,404)
-------- -------- --------
Total other comprehensive income (loss), net (16,040) (13,977) (71,923)
-------- -------- --------
Comprehensive income ..................... $ 33,382 $ 62,637 $ 21,275
======== ======== ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 2000 and 2001
(In thousands)
Additional Accumulated other comprehensive income Total
Common paid-in Retained Marketable Currency Pension Treasury stockholders'
stock capital earnings securities translation liabilitie stock equity
------ ------- -------- --------- -------- -------- ------- ------
Balance at December 31, 1998 ......... $1,255 $42,789 $ 512,468 $ 122,826 $(22,712) $ (2,845) $(75,259) $ 578,522
Net income ........................... -- -- 49,422 -- -- -- -- 49,422
Cash dividends ....................... -- -- (23,146) -- -- -- -- (23,146)
Other comprehensive income (loss), net -- -- -- 5,011 (18,121) (2,930) -- (16,040)
Other, net ........................... 1 655 -- -- -- -- -- 656
------ ------- --------- --------- -------- -------- -------- ---------
Balance at December 31, 1999 ......... 1,256 43,444 538,744 127,837 (40,833) (5,775) (75,259) 589,414
Net income ........................... -- -- 76,614 -- -- -- -- 76,614
Cash dividends ....................... -- -- (24,328) -- -- -- -- (24,328)
Other comprehensive income (loss), net -- -- -- 4,743 (19,978) 1,258 -- (13,977)
Common stock reacquired .............. -- -- -- -- -- -- (19) (19)
Other, net ........................... 1 901 -- -- -- -- (371) 531
------ ------- --------- --------- -------- -------- -------- ---------
Balance at December 31, 2000 ......... 1,257 44,345 591,030 132,580 (60,811) (4,517) (75,649) 628,235
Net income ........................... -- -- 93,198 -- -- -- -- 93,198
Cash dividends ....................... -- -- (27,820) -- -- -- -- (27,820)
Other comprehensive income (loss), net -- -- -- (45,926) (18,593) (7,404) -- (71,923)
Other, net ........................... 1 637 -- -- -- -- -- 638
------ ------- --------- --------- -------- -------- -------- ---------
Balance at December 31, 2001 ......... $1,258 $44,982 $ 656,408 $ 86,654 $(79,404) $(11,921) $(75,649) $ 622,328
====== ======= ========= ========= ======== ======== ======== =========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 2000 and 2001
(In thousands)
1999 2000 2001
---- ---- ----
Cash flows from operating activities:
Net income .................................. $ 49,422 $ 76,614 $ 93,198
Depreciation, depletion and amortization .... 64,654 71,091 74,493
Legal settlements, net ...................... -- (69,465) (10,307)
Securities transaction gains, net ........... (757) (40) (47,009)
Insurance gain .............................. -- -- (16,190)
Non-cash:
Interest expense .......................... 9,788 9,446 5,601
Defined benefit pension expense ........... (4,543) (11,874) (3,651)
Other postretirement benefit expense ...... (5,091) (2,641) (385)
Deferred income taxes ....................... (92,840) 42,912 7,718
Minority interest ........................... 78,992 43,658 26,082
Equity in:
TIMET ..................................... -- 8,990 9,161
Tremont Corporation* ...................... 48,652 -- --
Waste Control Specialists* ................ 8,496 -- --
Other ..................................... -- (1,672) (580)
Discontinued operations ................... (2,000) -- --
Extraordinary item ........................ -- 477 --
Distributions from:
Manufacturing joint venture ............... 13,650 7,550 11,313
Tremont Corporation* ...................... 655 -- --
Other ..................................... -- 81 1,300
Other, net .................................. 1,809 2,581 (477)
--------- --------- ---------
170,887 177,708 150,267
Change in assets and liabilities:
Accounts and other receivables ............ (34,616) (10,709) 8,464
Inventories ............................... 18,671 (30,816) (28,623)
Accounts payable and accrued
liabilities .............................. 1,080 12,955 30,065
Income taxes .............................. 5,150 3,940 3,439
Accounts with affiliates .................. (7,055) 13,544 4,025
Other, net ................................ (15,812) (4,183) (8,988)
--------- --------- ---------
Net cash provided by operating activities 138,305 162,439 158,649
--------- --------- ---------
*Prior to consolidation
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1999, 2000 and 2001
(In thousands)
1999 2000 2001
---- ---- ----
Cash flows from investing activities:
Capital expenditures ................... $ (55,869) $ (57,772) $ (70,821)
Purchases of:
Business units ....................... (64,975) (9,346) --
NL common stock ...................... (7,210) (30,886) (15,502)
Tremont common stock ................. (1,945) (45,351) (198)
CompX common stock ................... (816) (8,665) (2,650)
Interest in other subsidiaries ....... -- (2,500) --
Investment in Waste Control Specialists* (10,000) -- --
Proceeds from disposal of:
Marketable securities ................ 6,588 158 16,802
Property and equipment ............... 2,449 577 11,032
Change in restricted cash
equivalents, net ...................... (5,176) 1,517 8,022
Loans to affiliates:
Loans ................................ (6,000) (21,969) (20,000)
Collections .......................... 6,000 21,969 --
Property damaged by fire:
Insurance proceeds ................... -- -- 23,361
Other, net ........................... -- -- (3,205)
Discontinued operations, net ........... 2,000 -- --
Other, net ............................. (595) 1,351 (635)
--------- --------- ---------
Net cash used by investing activities (135,549) (150,917) (53,794)
--------- --------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings ........................... 123,203 123,857 51,356
Principal payments ................... (157,310) (126,252) (102,014)
Loans from affiliates:
Loans ................................ 45,000 18,160 81,905
Repayments ........................... (52,218) (12,782) (78,731)
Valhi dividends paid ................... (23,146) (24,328) (27,820)
Valhi common stock reacquired .......... -- (19) --
Distributions to minority interest ..... (3,744) (10,084) (10,496)
Other, net ............................. 860 4,411 1,347
--------- --------- ---------
Net cash used by financing activities (67,355) (27,037) (84,453)
--------- --------- ---------
Net decrease ............................. $ (64,599) $ (15,515) $ 20,402
========= ========= =========
*Prior to consolidation.
See accompanying notes to consolidated financial statements.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1999, 2000 and 2001
(In thousands)
1999 2000 2001
---- ---- ----
Cash and cash equivalents - net change from:
Operating, investing and financing
activities ........................... $ (64,599) $ (15,515) $ 20,402
Currency translation .................. (3,398) (2,175) (1,006)
Business units acquired ............... 4,785 -- --
Consolidation of Waste Control
Specialists and Tremont Corporation .. 3,736 -- --
--------- --------- ---------
(59,476) (17,690) 19,396
Balance at beginning of year .......... 212,183 152,707 135,017
--------- --------- ---------
Balance at end of year ................ $ 152,707 $ 135,017 $ 154,413
========= ========= =========
Supplemental disclosures - cash paid for:
Interest, net of amounts capitalized .. $ 62,208 $ 61,930 $ 57,775
Income taxes .......................... 16,296 33,798 36,556
Business units acquired -
net assets consolidated:
Cash and cash equivalents ........... $ 4,785 $ -- $ --
Goodwill and other intangible assets 22,700 5,091 --
Other non-cash assets ............... 54,966 7,144 --
Liabilities ......................... (17,476) (2,889) --
--------- --------- ---------
Cash paid ........................... $ 64,975 $ 9,346 $ --
========= ========= =========
Waste Control Specialists and Tremont
Corporation - net assets consolidated:
Cash and cash equivalents ........... $ 3,736 $ -- $ --
Noncurrent restricted cash .......... 4,710 -- --
Investment in
TIMET ............................. 85,772 -- --
NL Industries* .................... 159,799 -- --
Other joint ventures .............. 13,658 -- --
Property and equipment .............. 23,716 -- --
Other non-cash assets ............... 17,933 -- --
Liabilities ......................... (83,784) -- --
Minority interest ................... (85,610) -- --
--------- --------- ---------
Net investment at respective dates
of consolidation ................... $ 139,930 $ -- $ --
========= ========= =========
*Eliminated in consolidation.
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies:
Organization and basis of presentation. Valhi, Inc. (NYSE: VHI) is a
subsidiary of Contran Corporation. Contran holds, directly or through
subsidiaries, approximately 94% of Valhi's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is sole trustee. Mr. Simmons, the Chairman of the
Board and Chief Executive Officer of Valhi and Contran, may be deemed to control
such companies. Certain prior year amounts have been reclassified to conform to
the current year presentation.
Management's estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America ("GAAP") requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amount of revenues and expenses during the reporting period. Actual
results may differ from previously-estimated amounts under different assumptions
or conditions.
Principles of consolidation. The consolidated financial statements include
the accounts of Valhi and its majority-owned subsidiaries (collectively, the
"Company"), except as described below. All material intercompany accounts and
balances have been eliminated. Prior to June 30 1999, the Company did not
consolidate its majority-owned subsidiary Waste Control Specialists because the
Company was not deemed to control Waste Control Specialists. See Note 3.
Translation of foreign currencies. Assets and liabilities of subsidiaries
whose functional currency is other than the U.S. dollar are translated at
year-end rates of exchange and revenues and expenses are translated at average
exchange rates prevailing during the year. Resulting translation adjustments are
accumulated in stockholders' equity as part of accumulated other comprehensive
income, net of related deferred income taxes and minority interest. Currency
transaction gains and losses are recognized in income currently.
Net sales. Sales are recorded when products are shipped and title and other
risks and rewards of ownership have passed to the customer, or when services are
performed. Shipping terms of products shipped in both the Company's chemicals
and components products segments are generally FOB shipping point, although in
some instances shipping terms are FOB destination point. Amounts charged to
customers for shipping and handling are included in net sales. The Company
adopted Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No.
101, as amended, in 2000. SAB No. 101 provides guidance on the recognition,
presentation and disclosure of revenue. The impact of adopting SAB No. 101 was
not material.
Inventories and cost of sales. Inventories are stated at the lower of cost
or market. Inventory costs are generally based on average cost or the first-in,
first-out method.
Shipping and handling costs. Shipping and handling costs of the Company's
chemicals segment are included in selling, general and administrative expenses
and were approximately $54 million in 1999, $50 million in 2000 and $49 million
in 2001. Shipping and handling costs of the Company's component products and
waste management segments are not material.
Cash and cash equivalents and restricted cash. Cash equivalents include
bank time deposits and government and commercial notes and bills with original
maturities of three months or less.
Restricted cash equivalents and debt securities. Restricted cash
equivalents and debt securities, invested primarily in U.S. government
securities and money market funds that invest in U.S. government securities,
includes amounts restricted pursuant to outstanding letters of credit, and at
December 31, 2001 also includes $74 million held by special purpose trusts (2000
- $70 million) formed by NL Industries, the assets of which can only be used to
pay for certain of NL's future environmental remediation and other environmental
expenditures. Such restricted amounts are generally classified as either a
current or noncurrent asset depending on the classification of the liability to
which the restricted amount relates. Additionally, the restricted debt
securities are generally classified as either a current or noncurrent asset
depending upon the maturity date of each debt security. See Notes 5, 8 and 12.
Marketable securities and securities transactions. Marketable debt and
equity securities are carried at fair value based upon quoted market prices or
as otherwise disclosed. Unrealized gains and losses on trading securities are
recognized in income currently. Unrealized gains and losses on
available-for-sale securities are accumulated in stockholders' equity as part of
accumulated other comprehensive income, net of related deferred income taxes and
minority interest. Realized gains and losses are based upon the specific
identification of the securities sold.
Accounts receivable. The Company provides an allowance for doubtful
accounts for known and estimated potential losses arising from sales to
customers based on a periodic review of these accounts.
Investment in joint ventures. Investments in more than 20%-owned but less
than majority-owned companies, and the Company's investment in Waste Control
Specialists prior to June 30 1999, are accounted for by the equity method. See
Note 7. Differences between the cost of each investment and the Company's pro
rata share of the entity's separately-reported net assets, if any, are allocated
among the assets and liabilities of the entity based upon estimated relative
fair values. Such differences approximate a $61 million credit at December 31,
2001, related principally to the Company's investment in TIMET and are charged
or credited to income as the entities depreciate, amortize or dispose of the
related net assets.
Goodwill and other intangible assets. Goodwill, representing the excess of
cost over fair value of individual net assets acquired in business combinations
accounted for by the purchase method, is stated net of accumulated amortization
of $77.8 million at December 31, 2001 (2000 - $60.9 million). Through December
31, 2001, goodwill was amortized by the straight-line method over not more than
40 years. Upon adoption of Statement of Financial Accounting Standards ("SFAS")
No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002,
goodwill will no longer be subject to periodic amortization. See Notes 9 and 20.
Intangible assets, consisting principally at December 31, 2000 and 2001 of
the estimated fair value of certain patents acquired in connection with the
acquisition of certain business units by CompX, are stated net of accumulated
amortization of $1.0 million at December 31, 2001 (2000 - $.8 million). Such
intangible assets have been, and will continue to be upon adoption of SFAS No.
142 effective January 1, 2002, amortized by the straight-line method over the
lives of the patents (approximately 11.25 years remaining at December 31, 2001)
with no assumed residual value at the end of the life of the patents.
Amortization expense of intangible assets was $2.1 million in 1999, $474,000 in
2000 and $229,000 in 2001, and is expected to be approximately $250,000 in each
of 2002 through 2006.
Through December 31, 2001, when events or changes in circumstances
indicated that goodwill or other intangible assets may be impaired, an
evaluation was performed to determine if an impairment existed. Such events or
circumstances included, among other things, (i) a prolonged period of time
during which the Company's net carrying value of its investment in subsidiaries
whose common stocks are publicly-traded was greater than quoted market prices
for such stocks and (ii) significant current and prior periods or current and
projected periods with operating losses related to the applicable business unit.
All relevant factors were considered in determining whether an impairment
existed. If an impairment was determined to exist, goodwill and, if appropriate,
the underlying long-lived assets associated with the goodwill, were written down
to reflect the estimated future discounted cash flows expected to be generated
by the underlying business. Effective January 1, 2002, the Company will assess
impairment of goodwill and other intangible assets in accordance with SFAS No.
142. See Note 20.
Property and equipment, mining properties, depreciation and depletion.
Property and equipment are stated at cost. Mining properties are stated at cost
less accumulated depletion. Depreciation for financial reporting purposes is
computed principally by the straight-line method over the estimated useful lives
of ten to 40 years for buildings and three to 20 years for equipment. Depletion
for financial reporting purposes is computed by the unit-of-production and
straight-line methods. Accelerated depreciation and depletion methods are used
for income tax purposes, as permitted. Upon sale or retirement of an asset, the
related cost and accumulated depreciation are removed from the accounts and any
gain or loss is recognized in income currently.
Expenditures for maintenance, repairs and minor renewals are expensed;
expenditures for major improvements are capitalized. The Company will perform
certain planned major maintenance activities during the year, primarily with
respect to the chemicals segment. Repair and maintenance costs estimated to be
incurred in connection with such planned major maintenance activities are
accrued in advance and are included in cost of goods sold.
Interest costs related to major long-term capital projects and renewals are
capitalized as a component of construction costs. Interest costs capitalized
related to the Company's consolidated business segments were not significant in
1999, 2000 or 2001.
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances include, among other things, (i) significant
current and prior periods or current and projected periods with operating
losses, (ii) a significant decrease in the market value of an asset or (iii) a
significant change in the extent or manner in which an asset is used. All
relevant factors are considered. The test for impairment is performed by
comparing the estimated future undiscounted cash flows (exclusive of interest
expense) associated with the asset to the asset's net carrying value to
determine if a write-down to market value or discounted cash flow value is
required. Through December 31, 2001, if the asset being tested for impairment
was acquired in a business combination accounted for by the purchase method, any
goodwill which arose out of that business combination was also considered in the
impairment test if the goodwill related specifically to the acquired asset and
not to other aspects of the acquired business, such as the customer base or
product lines. Effective January 1, 2002, the Company will assess impairment of
goodwill in accordance with SFAS No. 142, and the Company will assess impairment
of other long-lived assets (such as property and equipment and mining
properties) in accordance with SFAS No. 144. See Note 20.
Long-term debt. Long-term debt is stated net of unamortized original issue
discount ("OID"). OID is amortized over the period during which interest is not
paid and deferred financing costs are amortized over the term of the applicable
issue, both by the interest method.
Derivatives and hedging activities. The Company adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended,
effective January 1, 2001. Under SFAS No. 133, all derivatives are recognized as
either assets or liabilities and measured at fair value. The accounting for
changes in fair value of derivatives depends upon the intended use of the
derivative, and such changes are recognized either in net income or other
comprehensive income. As permitted by the transition requirements of SFAS No.
133, as amended, the Company has exempted from the scope of SFAS No. 133 all
host contracts containing embedded derivatives which were issued or acquired
prior to January 1, 1999. Other than certain currency forward contracts
discussed below, the Company was not a party to any significant derivative or
hedging instrument covered by SFAS No. 133 at January 1, 2001. The accounting
for such currency forward contracts under SFAS No. 133 is not materially
different from the accounting for such contracts under prior GAAP, and therefore
the impact to the Company of adopting SFAS No. 133 was not material.
Certain of the Company's sales generated by its non-U.S. operations are
denominated in U.S. dollars. The Company periodically uses currency forward
contracts to manage a very nominal portion of foreign exchange rate risk
associated with receivables denominated in a currency other than the holder's
functional currency or similar exchange rate risk associated with future sales.
The Company has not entered into these contracts for trading or speculative
purposes in the past, nor does the Company currently anticipate entering into
such contracts for trading or speculative purposes in the future. At each
balance sheet date, any such outstanding currency forward contract is
marked-to-market with any resulting gain or loss recognized in income currently
as part of net currency transactions. To manage such exchange rate risk, at
December 31, 2000 the Company held contracts maturing through March 2001 to
exchange an aggregate of U.S. $9.1 million for an equivalent amount of Canadian
dollars at an exchange rate of Cdn. $1.48 per U.S. dollar. At December 31, 2000,
the actual exchange rate was Cdn. $1.50 per U.S. dollar. No such contracts were
held at December 31, 2001.
The Company periodically uses interest rate swaps and other types of
contracts to manage interest rate risk with respect to financial assets or
liabilities. The Company has not entered into these contracts for trading or
speculative purposes in the past, nor does the Company currently anticipate
entering into such contracts for trading or speculative purposes in the future.
The Company was not a party to any such contract during 1999, 2000 or 2001.
Income taxes. Valhi and its qualifying subsidiaries are members of
Contran's consolidated United States federal income tax group (the "Contran Tax
Group"). The policy for intercompany allocation of federal income taxes provides
that subsidiaries included in the Contran Tax Group compute the provision for
income taxes on a separate company basis. Subsidiaries make payments to or
receive payments from Contran in the amounts they would have paid to or received
from the Internal Revenue Service had they not been members of the Contran Tax
Group. The separate company provisions and payments are computed using the tax
elections made by Contran.
Through December 31, 2000, NL and Tremont Corporation were separate U.S.
taxpayers and were not members of the Contran Tax Group. Effective January 1,
2001, NL and Tremont became members of the Contran Tax Group. See Note 3. CompX
is a separate U.S. taxpayer and is not a member of the Contran Tax Group. Waste
Control Specialists LLC and The Amalgamated Sugar Company LLC are treated as
partnerships for income tax purposes.
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the income tax and
financial reporting carrying amounts of assets and liabilities, including
investments in the Company's subsidiaries and affiliates who are not members of
the Contran Tax Group. The Company periodically evaluates its deferred tax
assets in the various taxing jurisdictions in which it operates and adjusts any
related valuation allowance based on the estimate of the amount of such deferred
tax assets which the Company believes does not meet the "more-likely-than-not"
recognition criteria.
Earnings per share. Basic earnings per share of common stock is based upon
the weighted average number of common shares actually outstanding during each
period. Diluted earnings per share of common stock includes the impact of
outstanding dilutive stock options. The weighted average number of outstanding
stock options excluded from the calculation of diluted earnings per share
because their impact would have been antidilutive aggregated approximately
313,000 in 1999, 246,000 in 2000 and 297,000 in 2001.
Deferred income. Deferred income, related principally to a non-compete
agreement discussed in Note 12, is amortized over the periods earned, generally
by the straight-line method.
Stock options. The Company accounts for stock-based employee compensation
in accordance with Accounting Principles Board Opinion 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. Compensation cost recognized by the Company in accordance with APBO No. 25
was not significant during 1999 and was approximately $2 million in each of 2000
and 2001.
Environmental costs. The Company records liabilities related to
environmental remediation obligations when estimated future expenditures are
probable and reasonably estimable. Such accruals are adjusted as further
information becomes available or circumstances change. Estimated future
expenditures are generally not discounted to their present value. Recoveries of
remediation costs from other parties, if any, are recognized as assets when
their receipt is deemed probable. At December 31, 2000 and 2001, no receivables
for recoveries have been recognized.
Closure and post closure costs. The Company provides for estimated closure
and post-closure monitoring costs for its waste disposal site over the operating
life of the facility as airspace is consumed ($802,000 and $1.2 million accrued
at December 31, 2000 and 2001, respectively). Such costs are estimated based on
the technical requirements of applicable state or federal regulations, whichever
are stricter, and include such items as final cap and cover on the site, methane
gas and leachate management and groundwater monitoring. Cost estimates are based
on management's judgment and experience and information available from
regulatory agencies as to costs of remediation. These estimates are sometimes a
range of possible outcomes, in which case the Company provides for the amount
within the range which constitutes its best estimate. If no amount within the
range appears to be a better estimate than any other amount, the Company
provides for at least the minimum amount within the range. See Note 20.
Estimates of the ultimate cost of remediation require a number of
assumptions, are inherently difficult and the ultimate outcome may differ from
current estimates. As additional information becomes available, estimates are
adjusted as necessary. Where the Company believes that both the amount of a
particular environmental liability and the timing of the payments are reliably
determinable, the cost in current dollars is inflated at 3% per annum until
expected time of payment.
The Company's waste disposal site has an estimated remaining life of over
100 years based upon current site plans and annual volumes of waste. During this
remaining site life, the Company estimates it will provide for an additional $23
million of closure and post-closure costs, including inflation. Anticipated
payments of environmental liabilities accrued at December 31, 2001 are not
expected to begin until 2004 at the earliest.
Extraordinary item. The extraordinary loss in 2000, stated net of allocable
income tax benefit and minority interest, relates to the write-off of
unamortized deferred financing costs and premiums paid in connection with the
early retirement of certain NL Industries indebtedness. See Notes 11, 13, and
16.
Other. Advertising costs related to the Company's consolidated business
segments, expensed as incurred, were $2.0 million in each of 1999, 2000 and
2001. Research and development costs related to the Company's consolidated
business segments, expensed as incurred, were $8 million in 1999 and $7 million
in each of 2000 and 2001.
Note 2 - Business and geographic segments:
% owned by Valhi at
Business segment Entity December 31, 2001
Chemicals NL Industries, Inc. 61%
Component products CompX International Inc. 69%
Waste management Waste Control Specialists 90%
Titanium metals Tremont Group, Inc. 80%
Tremont Group (80% owned by Valhi and 20% owned by NL) is a holding company
which owns 80% of Tremont Corporation ("Tremont") at December 31, 2001. Tremont
is also a holding company and owns an additional 21% of NL and 39% of TIMET at
December 31, 2001. See Note 3.
The Company is organized based upon its operating subsidiaries. The
Company's operating segments are defined as components of our consolidated
operations about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in determining how to
allocate resources and in assessing performance. The Company's chief operating
decision maker is Mr. Harold C. Simmons. Each operating segment is separately
managed, and each operating segment represents a strategic business unit
offering different products.
The Company's reportable operating segments are comprised of the chemicals
business conducted by NL, the component products business conducted by CompX
and, beginning in July 1999, the waste management business conducted by Waste
Control Specialists.
NL manufactures and sells titanium dioxide pigments ("TiO2") through its
subsidiary Kronos, Inc. TiO2 is used to impart whiteness, brightness and opacity
to a wide variety of products, including paints, plastics, paper, fibers and
ceramics. Kronos has production facilities located throughout North America and
Europe. Kronos also owns a one-half interest in a TiO2 production facility
located in Louisiana. See Note 7.
CompX produces and sells component products (ergonomic computer support
systems, precision ball bearing slides and security products) for office
furniture, computer related applications and a variety of other applications.
CompX has production facilities in North America, Europe and Asia.
Waste Control Specialists operates a facility in West Texas for the
processing, treatment and storage of hazardous, toxic and low-level and mixed
radioactive wastes, and for the disposal of hazardous and toxic and certain
types of low-level and mixed radioactive wastes. Waste Control Specialists is
seeking additional regulatory authorizations to expand its treatment and
disposal capabilities for low-level and mixed radioactive wastes.
TIMET is a vertically integrated producer of titanium sponge, melted
products (ingot and slab) and a variety of titanium mill products for aerospace,
industrial and other applications with production facilities located in the U.S.
and Europe.
The Company evaluates segment performance based on segment operating
income, which is defined as income before income taxes and interest expense,
exclusive of certain non-recurring items (such as gains or losses on disposition
of business units and other long-lived assets outside the ordinary course of
business and certain legal settlements) and certain general corporate income and
expense items (including securities transactions gains and losses and interest
and dividend income) which are not attributable to the operations of the
reportable operating segments. The accounting policies of the reportable
operating segments are the same as those described in Note 1. Segment operating
profit includes the effect of amortization of any goodwill and other intangible
assets attributable to the segment.
Interest income included in the calculation of segment operating income is
not material in 1999, 2000 or 2001. Capital expenditures include additions to
property and equipment and mining properties but exclude amounts paid for
business units acquired in business combinations accounted for by the purchase
method. See Note 3. Depreciation, depletion and amortization related to each
reportable operating segment includes amortization of any goodwill and other
intangible assets attributable to the segment. Amortization of deferred
financing costs is included in interest expense. There are no intersegment sales
or any other significant intersegment transactions.
Segment assets are comprised of all assets attributable to each reportable
operating segment, including goodwill and other intangible assets. The Company's
investment in the TiO2 manufacturing joint venture (see Note 7) is included in
the chemicals business segment assets. Corporate assets are not attributable to
any operating segment and consist principally of cash and cash equivalents,
restricted cash equivalents, marketable securities and loans to third parties.
At December 31, 2001, approximately 38% of corporate assets were held by NL
(2000 - 31%), with substantially all of the remainder held by Valhi.
For geographic information, net sales are attributed to the place of
manufacture (point-of-origin) and the location of the customer
(point-of-destination); property and equipment and mining properties are
attributed to their physical location. At December 31, 2001, the net assets of
non-U.S. subsidiaries included in consolidated net assets approximated $664
million (2000 - $650 million).
Years ended December 31,
1999 2000 2001
---- ---- ----
(In millions)
Net sales:
Chemicals ................................ $ 908.4 $ 922.3 $ 835.1
Component products ....................... 225.9 253.3 211.4
Waste management (after consolidation) ... 10.9 16.3 13.0
-------- -------- --------
Total net sales ........................ $1,145.2 $1,191.9 $1,059.5
======== ======== ========
Operating income:
Chemicals ................................ $ 126.2 $ 187.4 $ 143.5
Component products ....................... 40.2 37.5 13.1
Waste management (after consolidation) ... (1.8) (7.2) (14.4)
-------- -------- --------
Total operating income ................. 164.6 217.7 142.2
General corporate items:
Legal settlement gains, net .............. -- 69.5 31.9
Securities transactions .................. .8 -- 47.0
Interest and dividend income ............. 43.0 40.3 38.0
Insurance gain ........................... -- -- 16.2
Gain on sale/leaseback ................... -- -- 2.2
General expenses, net .................... (24.1) (34.6) (34.1)
Interest expense ........................... (72.0) (70.4) (62.3)
-------- -------- --------
112.3 222.5 181.1
Equity in:
TIMET .................................... -- (9.0) (9.2)
Tremont Corporation ...................... (48.7) -- --
Waste Control Specialists ................ (8.5) -- --
Other .................................... -- 1.7 .6
-------- -------- --------
Income from continuing operations
before income taxes ................... $ 55.1 $ 215.2 $ 172.5
======== ======== ========
Net sales - point of origin:
United States ............................ $ 399.5 $ 436.0 $ 379.9
Germany .................................. 459.4 444.1 398.5
Belgium .................................. 138.7 137.8 126.8
Norway ................................... 88.3 98.3 102.8
Netherlands .............................. 36.8 35.8 32.2
Other Europe ............................. 92.8 92.7 82.3
Canada ................................... 259.7 253.7 230.7
Taiwan ................................... .7 12.1 9.6
Eliminations ............................. (330.7) (318.6) (303.3)
-------- -------- --------
$1,145.2 $1,191.9 $1,059.5
======== ======== ========
Net sales - point of destination:
United States ............................ $ 412.7 $ 459.3 $ 401.8
Europe ................................... 520.1 515.2 462.4
Canada ................................... 104.4 97.0 82.5
Asia ..................................... 45.0 53.6 51.3
Other .................................... 63.0 66.8 61.5
-------- -------- --------
$1,145.2 $1,191.9 $1,059.5
======== ======== ========
Years ended December 31,
1999 2000 2001
---- ---- ----
(In millions)
Depreciation, depletion and amortization:
Chemicals ................................... $52.5 $54.1 $54.6
Component products .......................... 9.6 12.6 14.9
Waste management (after consolidation) ...... 1.5 3.3 3.8
Corporate ................................... 1.1 1.1 1.2
----- ----- -----
$64.7 $71.1 $74.5
===== ===== =====
Capital expenditures:
Chemicals ................................... $32.7 $31.1 $53.7
Component products .......................... 19.7 23.1 13.2
Waste management (after consolidation) ...... .3 3.3 3.1
Corporate ................................... 3.2 .3 .8
----- ----- -----
$55.9 $57.8 $70.8
===== ===== =====
December 31,
1999 2000 2001
---- ---- ----
(In millions)
Total assets:
Operating segments:
Chemicals ........................ $1,413.8 $1,313.1 $1,296.5
Component products ............... 205.4 227.2 227.3
Waste management ................. 33.9 32.3 31.1
Investment in:
Titanium Metals Corporation ...... 85.8 72.7 60.3
Other joint ventures ............. 13.7 13.1 12.4
Corporate and eliminations ......... 482.6 598.4 526.2
-------- -------- --------
$2,235.2 $2,256.8 $2,153.8
======== ======== ========
Net property and equipment
and mining properties:
United States ...................... $ 67.3 $ 82.5 $ 84.0
Germany ............................ 278.5 246.5 243.1
Canada ............................. 94.3 88.2 83.0
Norway ............................. 64.1 57.7 55.2
Belgium ............................ 57.5 53.7 52.6
Netherlands ........................ 17.6 17.2 7.3
Other Europe ....................... 1.3 -- --
Taiwan ............................. 4.9 5.7 5.5
-------- -------- --------
$ 585.5 $ 551.5 $ 530.7
======== ======== ========
Note 3 - Business combinations and disposals:
NL Industries, Inc. At the beginning of 1999, Valhi held 58% of NL's
outstanding common stock, and Tremont held an additional 20% of NL. During 1999,
2000 and 2001, NL purchased shares of its own common stock in market and private
transactions for an aggregate of $53.6 million, thereby increasing Valhi's and
Tremont's ownership of NL to 61% and 21% at December 31, 2001, respectively. See
Note 18. The Company accounted for such increases in its interest in NL by the
purchase method (step acquisition).
CompX International Inc. At the beginning of 1999, the Company held 64% of
CompX's common stock. During 1999, 2000 and 2001, Valhi purchased shares of
CompX common stock, and CompX purchased shares of its own common stock, in
market transactions for an aggregate of $12.1 million, thereby increasing the
Company's ownership interest of CompX to 69% at December 31, 2001. The Company
accounted for such increases in its interest in CompX by the purchase method
(step acquisition).
In 1999, CompX acquired two slide producers for an aggregate of $65 million
cash consideration. In 2000, CompX acquired a lock producer for an aggregate of
$9 million cash consideration. Such acquisitions were accounted for by the
purchase method.
Waste Control Specialists LLC. In 1995, Valhi acquired a 50% interest in
newly-formed Waste Control Specialists LLC. Valhi contributed $25 million to
Waste Control Specialists at various dates through early 1997 for its 50%
interest. Valhi contributed an additional $10 million to Waste Control
Specialists' equity in each of 1997, 1998 and 1999, and contributed an
additional $20 million to Waste Control Specialists' equity in 2000, thereby
increasing its membership interest from 50% to 90% at December 31, 2001. A
substantial portion of such equity contributions were used by Waste Control
Specialists to reduce the then-outstanding balance of its revolving intercompany
borrowings from the Company.
In 1995, the other owner of Waste Control Specialists, KNB Holdings, Ltd.,
contributed certain assets, primarily land and certain operating permits for the
facility site, and Waste Control Specialists also assumed certain indebtedness
of the other owner. KNB Holdings is controlled by an individual who had been
granted the duties of chief executive officer of Waste Control Specialists under
an employment agreement previously-effective through at least 2001. Such
individual had the ability to establish management policies and procedures, and
had the authority to make routine operating decisions, for Waste Control
Specialists. Prior to June 1999, the rights granted to the owner of the
remaining membership interest under the employment agreement discussed above
overcame the Company's presumption of control at its majority ownership interest
level, and the Company accounted for its interest in Waste Control Specialists
by the equity method. As of June 1999, that individual resigned as chief
executive officer and a new chief executive officer unrelated to the other owner
was appointed. Accordingly, the Company was then deemed to control Waste Control
Specialists. The Company commenced consolidating Waste Control Specialists'
balance sheet at June 30, 1999, and commenced consolidating its results of
operations and cash flows in the third quarter of 1999. See Note 7.
Valhi is entitled to a 20% cumulative preferential return on its initial
$25 million investment, after which earnings are generally split in accordance
with ownership interests. The liabilities of the other owner assumed by Waste
Control Specialists in 1995 exceeded the carrying value of the assets
contributed. Accordingly, all of Waste Control Specialists' cumulative net
losses to date have accrued to the Company for financial reporting purposes, and
all of Waste Control Specialists future net income or net losses will also
accrue to the Company until Waste Control Specialists reports positive equity
attributable to the other owner. See Note 13.
Tremont Corporation and Tremont Group, Inc. At the beginning of 1999, the
Company held 48% of Tremont Corporation's common stock, and the Company
accounted for its interest in Tremont by the equity method. During 1999, Valhi
purchased in market and private transactions additional shares of Tremont for an
aggregate of $1.9 million which, by late December 1999, increased the Company's
ownership of Tremont to 50.2% at December 31, 1999. Accordingly, the Company
commenced consolidating Tremont's balance sheet at December 31, 1999, and the
Company commenced consolidating Tremont's results of operations and cash flows
effective January 1, 2000. See Note 7.
During 2000, Valhi and NL each purchased shares of Tremont in market and
private transactions for an aggregate of $45.4 million, increasing Valhi's and
NL's ownership of Tremont to 64% and 16% at December 31, 2000, respectively. See
Note 18. Effective with the close of business on December 31, 2000, Valhi and NL
each contributed their Tremont shares to newly-formed Tremont Group in return
for an 80% and 20% ownership interest in Tremont Group, respectively, and
Tremont Group became the owner of the 80% of Tremont that Valhi and NL had
previously owned in the aggregate. Tremont Group recorded the shares of Tremont
received from Valhi and NL at predecessor carryover cost basis. During 2001,
Valhi purchased a nominal number of additional Tremont Corporation common shares
for $198,000. The Company accounted for such increases in its interest in
Tremont during 1999, 2000 and 2001 by the purchase method (step acquisition).
In December 2000, TRECO LLC, a 75%-owned subsidiary of Tremont, acquired
the 25% interest in TRECO previously held by the other owner for $2.5 million
cash consideration, and TRECO became a wholly-owned subsidiary of Tremont.
Other. NL (NYSE: NL), CompX (NYSE: CIX), Tremont (NYSE: TRE) and TIMET
(NYSE: TIE) each file periodic reports pursuant to the Securities Exchange Act
of 1934, as amended. Discontinued operations represent additional consideration
received by the Company in 1999 related to the 1997 disposal of its fast food
operations.
Effective July 1, 2001, the Company adopted SFAS No. 141, Business
Combinations, for all business combinations initiated on or after July 1, 2001,
and all purchase business combinations (including step acquisitions). Under SFAS
No. 141, all business combinations are accounted for by the purchase method, and
the pooling-of-interests method became prohibited. The Company did not qualify
to use the pooling-of-interests method of accounting for business combinations
prior to July 1, 2001.
Note 4 - Accounts and other receivables:
December 31,
2000 2001
---- ----
(In thousands)
Accounts receivable .......................... $ 186,887 $ 166,126
Notes receivable ............................. 1,740 2,484
Accrued interest ............................. 272 26
Allowance for doubtful accounts .............. (5,908) (6,326)
--------- ---------
$ 182,991 $ 162,310
Note 5 - Marketable securities:
December 31,
2000 2001
---- ----
(In thousands)
Current assets:
Halliburton Company common stock (trading) ............. $ -- $ 6,744
Halliburton Company common stock (available-for-sale) .. -- 8,138
Restricted debt securities ............................. -- 3,583
-------- --------
$ -- $ 18,465
======== ========
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC ...................... $170,000 $170,000
Restricted debt securities ............................. -- 16,121
Halliburton Company common stock ....................... 97,108 --
Other common stocks .................................... 898 428
-------- --------
$268,006 $186,549
Amalgamated. Prior to 1999, the Company transferred control of the refined
sugar operations previously conducted by the Company's wholly-owned subsidiary,
The Amalgamated Sugar Company, to Snake River Sugar Company, an Oregon
agricultural cooperative formed by certain sugarbeet growers in Amalgamated's
areas of operations. Pursuant to the transaction, Amalgamated contributed
substantially all of its net assets to the Amalgamated Sugar Company LLC, a
limited liability company controlled by Snake River, on a tax-deferred basis in
exchange for a non-voting ownership interest in the LLC. The cost basis of the
net assets transferred by Amalgamated to the LLC was approximately $34 million.
As part of such transaction, Snake River made certain loans to Valhi aggregating
$250 million. Such loans from Snake River are collateralized by the Company's
interest in the LLC. Snake River's sources of funds for its loans to Valhi, as
well as for the $14 million it contributed to the LLC for its voting interest in
the LLC, included cash capital contributions by the grower members of Snake
River and $180 million in debt financing provided by Valhi, of which $100
million was repaid prior to 1999 when Snake River obtained an equal amount of
third-party term loan financing. After such repayments, $80 million principal
amount of Valhi's loans to Snake River remain outstanding. See Notes 8 and 11.
The Company and Snake River share in distributions from the LLC up to an
aggregate of $26.7 million per year (the "base" level), with a preferential 95%
share going to the Company. To the extent the LLC's distributions are below this
base level in any given year, the Company is entitled to an additional 95%
preferential share of any future annual LLC distributions in excess of the base
level until such shortfall is recovered. Under certain conditions, the Company
is entitled to receive additional cash distributions from the LLC, including
amounts discussed in Note 8. The Company may, at its option, require the LLC to
redeem the Company's interest in the LLC beginning in 2010, and the LLC has the
right to redeem the Company's interest in the LLC beginning in 2027. The
redemption price is generally $250 million plus the amount of certain
undistributed income allocable to the Company. In the event the Company requires
the LLC to redeem the Company's interest in the LLC, Snake River has the right
to accelerate the maturity of and call Valhi's $250 million loans from Snake
River.
The LLC Company Agreement contains certain restrictive covenants intended
to protect the Company's interest in the LLC, including limitations on capital
expenditures and additional indebtedness of the LLC. The Company also has the
ability to temporarily take control of the LLC in the event the Company's
cumulative distributions from the LLC fall below specified levels. As a
condition to exercising temporary control, the Company would be required to
escrow funds in amounts up to the next three years of debt service of Snake
River's third-party term loan (an aggregate of $25 million) unless the Company
and Snake River's third-party lender otherwise mutually agree. Through December
31, 2001, the Company's cumulative distributions from the LLC had not fallen
below the specified levels.
Beginning in 2000, Snake River agreed that the annual amount of (i) the
distributions paid by the LLC to the Company plus (ii) the debt service payments
paid by Snake River to the Company on the $80 million loan will at least equal
the annual amount of interest payments owed by Valhi to Snake River on the
Company's $250 million in loans from Snake River. In the event that such cash
flows to the Company are less than the required minimum amount, certain
agreements among the Company, Snake River and the LLC made in 2000, including a
reduction in the amount of cumulative distributions which must be paid by the
LLC to the Company in order to prevent the Company from having the ability to
temporarily take control of the LLC, would retroactively become null and void.
Through December 31, 2001, Snake River and the LLC maintained the minimum
required levels of cash flows to the Company.
The Company reports the cash distributions received from the LLC as
dividend income. See Note 12. The amount of such future distributions is
dependent upon, among other things, the future performance of the LLC's
operations. Because the Company receives preferential distributions from the LLC
and has the right to require the LLC to redeem its interest in the LLC for a
fixed and determinable amount beginning at a fixed and determinable date, the
Company accounts for its investment in the LLC as an available-for-sale
marketable security carried at estimated fair value. In estimating fair value of
the Company's interest in the LLC, the Company considers, among other things,
the outstanding balance of the Company's loans to Snake River and the
outstanding balance of the Company's loans from Snake River.
Halliburton. At December 31, 2001, Valhi held 1.1 million shares of
Halliburton common stock (aggregate cost of $9 million) with a quoted market
price of $13.10 per share, or an aggregate market value of $15 million. Of such
Halliburton shares, approximately 515,000 Halliburton shares are classified as
trading securities and 621,000 are classified as available-for-sale securities.
Valhi's LYONs debt obligations are exchangeable at any time, at the option of
the LYON holder, for the shares of Halliburton common stock classified as
available-for-sale, and the carrying value of such Halliburton shares is limited
to the accreted LYONs obligations. The Halliburton shares classified as
available-for-sale are held in escrow for the benefit of the holders of the
LYONs. Valhi receives the regular quarterly dividend on all of the Halliburton
shares held, including shares held in escrow. The available-for-sale Halliburton
shares are classified as a current asset at December 31, 2001 because the
related LYON obligations, which are redeemable at the option of the holders in
October 2002, are classified as a current liability at such date. During 1999,
2000 and 2001, certain LYON holders exchanged their LYONs for 7,000, 5,000 and
1.2 million Halliburton shares, respectively. The shares classified as trading
securities were reclassified from available-for-sale during 2001 when they
became eligible to, and were, released to Valhi from the LYONs escrow. Also
during 2001, an additional 390,000 Halliburton shares were released to Valhi
from the LYONs escrow and were sold in market transactions for aggregate
proceeds of $16.8 million. See Notes 11 and 12. Halliburton provides services
and products to customers in the oil and gas industry, and provides engineering
and construction services for commercial, industrial and governmental customers.
Halliburton (NYSE: HAL) files periodic reports with the SEC.
Other. The aggregate cost of the debt securities, restricted pursuant to
the terms of one of NL's environmental special purpose trusts discussed in Note
1, is approximately $19.7 million at December 31, 2001. The aggregate cost of
other noncurrent available-for-sale securities is nominal at December 31, 2001
(December 31, 2000 - $2.3 million). See Note 12.
Note 6 - Inventories:
December 31,
2000 2001
---- ----
(In thousands)
Raw materials:
Chemicals .................................. $ 66,061 $ 79,162
Component products ......................... 11,866 9,677
-------- --------
77,927 88,839
-------- --------
In process products:
Chemicals .................................. 7,117 9,675
Component products ......................... 11,454 12,619
-------- --------
18,571 22,294
-------- --------
Finished products:
Chemicals .................................. 107,895 117,976
Component products ......................... 12,811 8,494
-------- --------
120,706 126,470
-------- --------
Supplies (primarily chemicals) ............... 25,790 25,130
-------- --------
$242,994 $262,733
Note 7 - Investment in affiliates:
December 31,
2000 2001
---- ----
(In thousands)
Ti02 manufacturing joint venture ............... $150,002 $138,428
Titanium Metals Corporation .................... 72,655 60,272
Other joint ventures ........................... 13,134 12,415
-------- --------
$235,791 $211,115
TiO2 manufacturing joint venture. A Kronos TiO2 subsidiary (Kronos
Louisiana, Inc., or "KLA") and another Ti02 producer are equal owners of a
manufacturing joint venture (Louisiana Pigment Company, L.P., or "LPC") that
owns and operates a TiO2 plant in Louisiana. KLA and the other Ti02 producer are
each required to purchase one-half of the TiO2 produced by LPC. The
manufacturing joint venture operates on a break-even basis, and consequently the
Company reports no equity in earnings of LPC. Each owner's acquisition transfer
price for its share of the TiO2 produced is equal to its share of the joint
venture's production costs and interest expense, if any.
LPC's net sales aggregated $171.6 million, $185.9 million and $187.4
million in 1999, 2000 and 2001, respectively, of which $85.3 million, $92.5
million and $93.4 million, respectively, represented sales to Kronos and the
remainder represented sales to LPC's other owner. Substantially all of LPC's
operating costs during the past three years represented costs of sales.
At December 31, 2001, LPC reported total assets and partners' equity of
$296.4 million and $279.6 million, respectively (2000 - $321.0 million and
$302.2 million, respectively). Over 80% of LPC's assets at December 31, 2000 and
2001 are comprised of property and equipment; the remainder of LPC's assets are
comprised principally of inventories, receivables from its partners and cash and
cash equivalents. LPC's liabilities at December 31, 2000 and 2001 are comprised
primarily of trade payables and accruals. LPC has no indebtedness at December
31, 2000 and 2001.
Titanium Metals Corporation. At December 31, 2001, the Company held 12.3
million shares of TIMET with a quoted market price of $3.99 per share, or an
aggregate market value of $49 million (2000 - 12.3 million shares with a quoted
market price of $6.75 per share, or an aggregate market value of $83 million).
At December 31, 2001, TIMET reported total assets of $699.4 million and
stockholders' equity of $298.1 million (2000 - $759.1 million and $357.5
million, respectively). TIMET's total assets at December 31, 2001 include
current assets of $308.7 million, property and equipment of $275.3 million and
goodwill and other intangible assets of $54.1 million (2000 - $248.2 million,
$302.1 million and $62.6 million, respectively). TIMET's total liabilities at
December 31, 2001 include current liabilities of $122.4 million, long-term debt
of $19.3 million, accrued OPEB costs of $16.0 million and convertible preferred
securities of $201.3 million (2000 - $115.8 million, $19.0 million, $18.2
million and $201.2 million, respectively). During 2001, TIMET reported net sales
of $486.9 million, operating income of $64.5 million and a net loss of $41.8
million (2000 - net sales of $426.8 million, an operating loss of $41.7 million
and a net loss of $38.9 million).
Tremont Corporation. Effective December 31, 1999, the Company commenced
consolidating Tremont's balance sheet, and the Company commenced consolidating
Tremont's results of operations and cash flows effective January 1, 2000. See
Note 3. During 1999, Tremont reported a net loss of $28.2 million, comprised
principally of equity in earnings of NL of $28.1 million, equity in losses of
TIMET of $72.0 million and an income tax benefit of $18.9 million. The Company's
equity in losses of Tremont in 1999 included a $50.0 million impairment
provision for an other than temporary decline in the value of TIMET.
Waste Control Specialists LLC. The Company commenced consolidating Waste
Control Specialists' results of operations and cash flows in the third quarter
of 1999. For periods prior to consolidation during the first six months of 1999,
Waste Control Specialists reported a net loss of $8.5 million, all of which
accrued to Valhi for financial reporting purposes, and net sales of $8.3
million. See Note 3.
Other. At December 31, 2000 and 2001, other joint ventures, held by TRECO
LLC, are comprised of (i) a 32% interest in Basic Management, Inc., which, among
other things, provides utility services in the industrial park where one of
TIMET's plants is located, and (ii) a 12% interest in The Landwell Company L.P.,
which is actively engaged in efforts to develop certain real estate. Basic
Management owns an additional 50% interest in Landwell.
At December 31, 2001, the combined balance sheets of Basic Management and
Landwell reflected total assets and partners' equity of $89.2 million and $49.7
million, respectively (2000 - $96.6 million and $55.4 million, respectively).
The combined total assets at December 31, 2001 include current assets of $32.1
million, property and equipment of $18.1 million, deferred charges of $13.7
million, land and development costs of $13.1 million, long-term notes and other
receivables of $9.4 million and investment in undeveloped land and water rights
of $2.3 million (2000 - $41.5 million, $18.3 million, $14.2 million, $11.9
million, $7.5 million and $2.5 million, respectively). Combined total
liabilities at December 31, 2001 include current liabilities of $16.5 million,
long-term debt of $18.5 million and deferred income taxes of $4.0 million (2000
- $16.7 million, $19.2 million and $4.6 million, respectively).
During 2001, Basic Management and Landwell reported combined revenues of
$19.3 million, income before income taxes of $575,000 and net income of $761,000
(2000 - $28.8 million, $8.5 million and $7.6 million, respectively; 1999 - $11.0
million, $364,000 and $551,00, respectively). Landwell is treated for federal
income tax purposes as a partnership, and accordingly the combined results of
operations of Basic Management and Landwell includes a provision for income
taxes on Landwell's earnings only to the extent that such earnings accrue to
Basic Management.
Note 8 - Other noncurrent assets:
December 31,
2000 2001
---- ----
(In thousands)
Loans and other receivables:
Snake River Sugar Company:
Principal .................................... $ 80,000 $ 80,000
Interest ..................................... 17,526 22,718
Other .......................................... 4,754 5,706
-------- --------
102,280 108,424
Less current portion ........................... 1,740 2,484
-------- --------
Noncurrent portion ............................. $100,540 $105,940
======== ========
Other assets:
Restricted cash equivalents .................... $ 22,897 $ 4,713
Intangible assets .............................. 2,646 2,440
Waste disposal site operating permits .......... 3,299 2,527
Refundable insurance deposits .................. 1,011 1,609
Deferred financing costs ....................... 2,527 1,120
Other .......................................... 17,224 20,140
-------- --------
$ 49,604 $ 32,549
======== ========
Valhi's loan to Snake River, as amended, is subordinate to Snake River's
third-party senior term loan and bears interest at a fixed rate of 6.49% (12.99%
during 1999 and the first three months of 2000), with all amounts due no later
than 2010. Covenants contained in Snake River's third-party senior term loan
allow Snake River, under certain conditions, to pay periodic installments for
debt service on the $80 million loan prior to its maturity in 2010. Such
covenants allowed Snake River to pay interest debt services payments to Valhi of
$7.2 million in 1999 and $950,000 in 2000. The Company does not currently expect
to receive any significant debt service payments from Snake River during 2002,
and accordingly all accrued and unpaid interest has been classified as a
noncurrent asset as of December 31, 2001. Under certain conditions, Valhi will
be required to pledge $5 million in cash equivalents or marketable securities to
collateralize Snake River's third-party senior term loan as a condition to
permit continued repayment of the $80 million loan. No such cash equivalents or
marketable securities have yet been required to be pledged at December 31, 2001.
The reduction of interest income resulting from the reduction in the
interest rate on the $80 million loan from 12.99% to 6.49% effective April 1,
2000 will be recouped and paid to the Company via additional future LLC
distributions from The Amalgamated Sugar Company LLC upon achievement of
specified levels of future LLC profitability. If Snake River and the LLC do not
maintain minimum specified levels of cash flow to the Company, the interest rate
on the loan to Snake River would revert back to 12.99% retroactive to April 1,
2000. Through December 31, 2001, Snake River and the LLC maintained the minimum
required levels of cash flows to the Company. See Note 5. Snake River has
granted to Valhi a lien on substantially all of Snake River's assets to
collateralize the $80 million loan, such lien becoming effective generally upon
the repayment of Snake River's third-party senior term loan with a scheduled
maturity date of April 2009.
Note 9 - Goodwill:
Changes in the carrying amount of goodwill during the past three years is
presented in the table below. Goodwill related to the chemicals operating
segment was generated from the Company's various step acquisitions of its
interest in NL Industries. Goodwill related to the component products operating
segment was generated principally from CompX's acquisitions of certain business
units during 1998, 1999 and 2000, with a very small amount generated from the
Company's various step acquisitions of CompX.
Operating segment
Component
Chemicals products Total
(In millions)
Balance at December 31, 1998 ................ $234.0 $ 25.3 $259.3
Goodwill acquired during the year ........... 1.9 24.1 26.0
Periodic amortization ....................... (9.7) (2.1) (11.8)
Consolidation of Tremont Corporation ........ 85.2 -- 85.2
Changes in foreign exchange rates ........... -- (2.2) (2.2)
------ ------ ------
Balance at December 31, 1999 ................ 311.4 45.1 356.5
Goodwill acquired during the year ........... 16.0 4.1 20.1
Periodic amortization ....................... (13.4) (2.5) (15.9)
Changes in foreign exchange rates ........... -- (1.3) (1.3)
------ ------ ------
Balance at December 31, 2000 ................ 314.0 45.4 359.4
Goodwill acquired during the year ........... 7.7 -- 7.7
Periodic amortization ....................... (14.5) (2.4) (16.9)
Changes in foreign exchange rates ........... -- (1.1) (1.1)
------ ------ ------
Balance at December 31, 2001 ................ $307.2 $ 41.9 $349.1
====== ====== ======
Upon adoption of SFAS No. 142 effective January 1, 2002 (see Note 20), the
goodwill related to the chemicals operating segment will be assigned to the
reporting unit (as that term is defined in SFAS No. 142) consisting of NL in
total, and the goodwill related to the components product operating segment will
be assigned to two reporting units within that operating segment, one consisting
of CompX's security products operations and the other consisting of CompX's
ergonomic and slide products operations.
Note 10 - Accrued liabilities:
December 31,
2000 2001
---- ----
Current:
Employee benefits .......................... $ 44,397 $ 39,974
Environmental costs ........................ 56,323 64,165
Deferred income ............................ 7,241 9,479
Interest ................................... 6,172 5,162
Other ...................................... 48,298 47,708
-------- --------
$162,431 $166,488
======== ========
Noncurrent:
Insurance claims and expenses .............. $ 22,424 $ 19,182
Employee benefits .......................... 11,893 8,616
Deferred income ............................ 5,453 1,333
Other ...................................... 1,285 3,511
-------- --------
$ 41,055 $ 32,642
======== ========
Note 11 - Notes payable and long-term debt:
December 31,
2000 2001
---- ----
(In thousands)
Notes payable - Kronos bank credit agreements ........ $ 70,039 $ 46,201
======== ========
Long-term debt:
Valhi:
Snake River Sugar Company ........................ $250,000 $250,000
Liquid Yield Option Notes (LYONs) ................ 100,333 25,472
Bank credit facility ............................. 31,000 35,000
Other ............................................ 2,880 2,880
-------- --------
384,213 313,352
-------- --------
Subsidiaries:
NL Senior Secured Notes .......................... 194,000 194,000
CompX bank credit facility ....................... 39,000 49,000
Waste Control Specialists bank term loan ......... 5,311 --
Valcor Senior Notes .............................. 2,431 2,431
Other ............................................ 4,683 3,404
-------- --------
245,425 248,835
-------- --------
629,638 562,187
Less current maturities ............................ 34,284 64,972
-------- --------
$595,354 $497,215
Valhi. Valhi's $250 million in loans from Snake River Sugar Company bear
interest at a weighted average fixed interest rate of 9.4%, are collateralized
by the Company's interest in The Amalgamated Sugar Company LLC and are due in
January 2027. Currently, these loans are nonrecourse to Valhi. Up to $37.5
million principal amount of such loans will become recourse to Valhi when the
balance of Valhi's loan to Snake River (including accrued interest) becomes less
than $37.5 million. Under certain conditions, Snake River has the ability to
accelerate the maturity of these loans. See Notes 5 and 8.
The zero coupon Senior Secured LYONs, $43.1 million principal amount at
maturity in October 2007 outstanding at December 31, 2001, were issued with
significant OID to represent a yield to maturity of 9.25%. No periodic interest
payments are required. Each $1,000 in principal amount at maturity of the LYONs
is exchangeable, at any time at the option of the holders of the LYONs, for
14.4308 shares of Halliburton common stock held by Valhi. Such shares of
Halliburton common stock, classified as available-for-sale, are collateral for
the LYONs debt obligations and are held in escrow for the benefit of holders of
the LYONs. Valhi receives the regular quarterly dividend on the escrowed
Halliburton shares. During 1999, 2000 and 2001, holders representing $483,000,
$336,000 and $92.2 million principal amount at maturity, respectively, of LYONs
exchanged such LYONs for Halliburton shares. Under the terms of the indenture
governing the LYONs, the Company has the option to deliver, in whole or in part,
cash equal to the market value of the Halliburton shares that are otherwise
required to be delivered to the LYONs holder in an exchange, and a portion of
such exchanges during 2001 was so settled. Also during 2001, $50.4 million
principal amount at maturity of LYONs were redeemed by the Company for cash at
various redemption prices equal to the accreted value of the LYONs on the
respective redemption dates. The LYONs are redeemable, at the option of the
holder, in October 2002, at $636.27 per $1,000 principal amount (the issue price
plus accrued OID through such purchase date), or an aggregate of $27.4 million
based on the number of LYONs outstanding at December 31, 2001, and accordingly
the LYONs are classified as a current liability at December 31, 2001. Such
redemptions may be paid, at Valhi's option, in cash, shares of Halliburton
common stock, or a combination thereof. The LYONs are redeemable, at any time,
at Valhi's option, for cash equal to the issue price plus accrued OID through
the redemption date. At December 31, 2000 and 2001, the net carrying value of
the LYONs per $1,000 principal amount at maturity was $541 and $592
respectively, and the quoted market price of the LYONs was $605 and $580,
respectively.
At December 31, 2001, Valhi has a $55 million revolving bank credit
facility which matures in November 2002, generally bears interest at LIBOR plus
1.5% (for LIBOR-based borrowings) or prime (for prime-based borrowings), and is
collateralized by 30 million shares of NL common stock held by Valhi. The size
of the facility was increased to $70 million in January 2002, and was further
increased to $72.5 million in February 2002. The agreement limits dividends and
additional indebtedness of Valhi and contains other provisions customary in
lending transactions of this type. In the event of a change of control of Valhi,
as defined, the lenders would have the right to accelerate the maturity of the
facility. The maximum amount which may be borrowed under the facility is limited
to one-third of the aggregate market value of the shares of NL common stock
pledged as collateral. Based on NL's December 31, 2001 quoted market price of
$15.27 per share, the 30 million shares of NL common stock pledged under the
facility provide more than sufficient collateral coverage to allow for
borrowings up to the full amount of the facility, even after considering the
January and February 2002 increases in the size of the facility to $72.5
million. Valhi would become limited to borrowing less than the full $72.5
million amount of the facility, or would be required to pledge additional
collateral if the full amount of the facility had been borrowed, only if NL's
stock price were to fall below approximately $7.25 per share. At December 31,
2001, $35 million was outstanding under this facility, consisting of $30 million
of LIBOR-based borrowings (at an interest rate of 3.625%) and $5 million of
prime-based borrowings (at an interest rate of 4.75%). At December 31, 2001,
$18.9 million was available for borrowing under this facility.
Other Valhi indebtedness consists of an unsecured $2.9 million note payable
bearing interest at 6.2% and due in November 2002. Such note was issued in
connection with Valhi's purchase of 90,000 shares of Tremont Corporation common
stock from an officer of Tremont in 2000. See Note 18.
NL Industries. NL's 11.75% Senior Secured Notes due 2003 are collateralized
by a series of intercompany notes from Kronos International, Inc. ("KII"), a
wholly-owned subsidiary of Kronos, to NL, the terms of which mirror those of the
Senior Secured Notes (the "NL Mirror Notes"). The Senior Secured Notes are also
collateralized by a first priority lien on the stock of Kronos. In the event of
foreclosure, the Senior Secured noteholders would have access to the
consolidated assets, earnings and equity of NL and NL believes the
collateralization of the Senior Secured Notes, as described above, is the
functional economic equivalent to a full and unconditional guarantee by Kronos.
The Senior Secured Notes are redeemable, at NL's option, at par value. The
Senior Secured Notes are issued pursuant to an indenture which contains a number
of covenants and restrictions which, among other things, restricts the ability
of NL and its subsidiaries to incur debt, incur liens, pay dividends or merge or
consolidate with, or sell or transfer all or substantially all of their assets
to, another entity. In the event of a change of control of NL, as defined, NL
would be required to make an offer to purchase the Senior Secured Notes at 101%
of the principal amount. NL would also be required to make an offer to purchase
a specified amount of the Senior Notes at par value in the event NL generates a
certain amount of net proceeds from the sale of assets outside the ordinary
course of business, and such net proceeds are not otherwise used for specified
purposes within a specified time period. The quoted market price of the Senior
Secured Notes per $1,000 principal amount was $1,010 and $1,005 at December 31,
2000 and 2001, respectively. During 2000, NL redeemed $50 million principal
amount of its Senior Secured Notes with a 1.5% premium. In February 2002, NL
announced the redemption of an additional $25 million principal amount of the
Senior Secured Notes in March 2002 at par.
At December 31, 2001, notes payable consist of 27 million of
euro-denominated borrowings and 200 million of Norwegian Krona-denominated
borrowings (aggregating $46 million) which mature during 2002 and bear interest
at rates ranging from 3.8% to 7.3% (2000 - 51 million of euro-denominated
borrowings and 200 million of Norwegian Krona-denominated borrowings). At
December 31, 2001, NL had $8 million available for borrowing under non-U.S.
credit facilities.
CompX. CompX has a $100 million unsecured revolving bank credit facility
which matures in 2003 and bears interest at rates based upon the Eurodollar Rate
(4.2% at December 31, 2001). The facility contains certain covenants and
restrictions customary in lending transactions of this type which, among other
things, restricts the ability of CompX and its subsidiaries to incur debt, incur
liens and pay dividends. In the event of a change of control of CompX, as
defined, the lenders would have the right to accelerate the maturity of the
facility. CompX would also be required under certain conditions to use the net
proceeds from the sale of assets outside the ordinary course of business to
reduce outstanding borrowings under the facility, and such a transaction would
also result in a permanent reduction of the size of the facility. In December
2001, CompX amended the facility to permit the sale/leaseback of its
manufacturing facility in The Netherlands (see Note 12) without requiring the
use of the net proceeds from such transaction to reduce outstanding borrowings
under the facility and without requiring a permanent reduction in the size of
the facility. At December 31, 2001, $51 million was available for borrowing
under this facility.
Other indebtedness. In February 2001, a wholly-owned subsidiary of Valhi
purchased Waste Control Specialists' bank term loan from the lender at par
value, and such debt became payable to such Valhi subsidiary. Valcor's unsecured
9 5/8% Senior Notes due November 2003 are redeemable at the Company's option at
par value. At December 31, 2000 and 2001, the quoted market price of the Valcor
Notes was $982 and $1,006 per $1,000 principal amount, respectively.
Aggregate maturities of long-term debt at December 31, 2001
Years ending December 31, Amount
(In thousands)
2002 $ 66,891
2003 246,624
2004 270
2005 152
2006 144
2007 and thereafter 250,025
--------
564,106
Less unamortized OID on Valhi LYONs 1,919
--------
$562,187
The LYONs are reflected in the above table as due October 2002, the next
date they are redeemable at the option of the holder, at the aggregate
redemption price on such date of $27.4 million ($636.27 per $1,000 principal
amount at maturity in October 2007).
Restrictions. In addition to the NL Senior Secured Notes and the CompX bank
credit facility discussed above, other subsidiary credit agreements typically
require the respective subsidiary to maintain minimum levels of equity, require
the maintenance of certain financial ratios, limit dividends and additional
indebtedness and contain other provisions and restrictive covenants customary in
lending transactions of this type. At December 31, 2001, the restricted net
assets of consolidated subsidiaries approximated $586 million.
At December 31, 2001, amounts available for the payment of Valhi dividends
pursuant to the terms of Valhi's revolving bank credit facility aggregated $.05
per Valhi share outstanding per quarter, plus an additional $14.2 million.
Note 12 - Other income, net:
Years ended December 31,
1999 2000 2001
---- ---- ----
(In thousands)
Securities earnings:
Dividends and interest .................. $ 43,040 $ 40,250 $ 38,003
Securities transactions, net ............ 757 40 47,009
--------- --------- --------
43,797 40,290 85,012
Legal settlement gains, net ............... -- 69,465 31,871
Insurance gain ............................ -- -- 16,190
Business interruption insurance ........... -- -- 7,222
Currency transactions, net ................ 9,865 6,383 1,824
Noncompete agreement income ............... 4,000 4,000 4,000
Disposal of property and equipment, net ... (635) (1,178) 1,375
Pension curtailment gain .................. -- -- 116
Other, net ................................ 11,429 8,141 6,390
--------- --------- --------
$ 68,456 $ 127,101 $154,000
========= ========= ========
Interest and dividend income in 1999, 2000 and 2001 includes $23.5 million,
$22.7 million and $23.6 million, respectively, of dividend distributions
received from The Amalgamated Sugar Company LLC. See Note 5. Noncompete
agreement income relates to NL's agreement not to compete in the specialty
chemicals industry and is recognized in income ratably over the five-year
noncompete period ending in February 2003. The pension curtailment gain is
discussed in Note 17.
Net securities transactions gains in 2001 are comprised of (i) a $33.1
million realized gain related to LYONs exchanges and the resulting disposition
of a portion of the shares of Halliburton common stock, (ii) a $13.7 million
realized gain related to the sale of 390,000 shares of Halliburton common stock
in market transactions, (iii) a $14.2 million unrealized gain related to the
reclassification of 515,000 Halliburton shares from available-for-sale to
trading securities, (iv) an $11.6 million unrealized loss related to changes in
market value of the Halliburton shares classified as trading securities and (v)
a $2.3 million impairment charge for an other than temporary decline in value of
certain marketable securities held by the Company. See Notes 5 and 11.
Securities transactions in 2000 include a $5.6 million gain related to
certain shares of common stock NL received pursuant to the demutualization of an
insurance company from which NL had purchased certain policies. Such shares,
valued by NL based upon the insurance company's initial public offering price of
$14.25 per share, were placed by NL in a trust, the assets of which may only be
used to pay for certain of NL's retiree benefits. The Company accounted for the
$5.6 million contribution of the insurance company's common stock to the trust
as a reduction of its accrued OPEB costs. See Note 17. Securities transactions
in 2000 also include a $5.7 million impairment charge for an other than
temporary decline in value of certain marketable securities held by the Company.
Securities transactions during 1999 relate principally to LYON exchanges. See
Notes 5 and 11.
In 2000, NL recognized a $69.5 million net gain from legal settlements with
certain of its former insurance carriers. The settlements resolved court
proceedings in which NL sought reimbursement from the carriers for legal defense
expenditures and indemnity coverage for certain of its environmental remediation
expenditures. The gain is stated net of $3.1 million of commissions associated
with the settlements. In 2001, NL recognized $11.7 million of net gains from
legal settlements, of which $11.4 million relates to additional settlements with
certain of its former insurance carriers. Proceeds from substantially all of
these settlements were transferred by the carriers to special purpose trusts
formed by NL to pay for certain of its future remediation and other
environmental expenditures. At December 31, 2000 and 2001, restricted cash
equivalents and debt securities include an aggregate of $70 million and $74
million, respectively, held by such special purpose trusts.
In 2001, Waste Control Specialists recognized a $20.1 million net gain from
a legal settlement related to certain previously-reported litigation. Pursuant
to the settlement, Waste Control Specialists, among other things, received a
cash payment of approximately $20.1 million, net of attorney fees.
In March 2001, NL suffered a fire at its Leverkusen, Germany TiO2 facility.
Production at the facility's chloride-process plant returned to full capacity on
April 8, 2001. The facility's sulfate-process plant became approximately 50%
operational in September 2001, and became fully operational in late October
2001. The damages to property and the business interruption losses caused by the
fire were covered by insurance, but the effect on the financial results of the
Company on a quarter-to-quarter basis was impacted by the timing and amount of
insurance recoveries. Chemicals operating income in 2001 includes $27.3 million
of business interruption insurance recoveries losses caused by the Leverkusen
fire. Of such business interruption proceeds amount, $20.1 million was recorded
as a reduction of cost of sales to offset unallocated period costs that resulted
from lost production and the remaining $7.2 million, representing recovery of
lost margin, was recorded as other income. NL also recognized insurance
recoveries of $29.1 million in 2001 for property damage and related cleanup and
other extra costs, resulting in an insurance gain of $16.2 million as such
recoveries exceeded the carrying value of the property destroyed and the cleanup
and other extra expenses incurred. The Company does not expect to report any
additional insurance recoveries related to the Leverkusen fire.
Net gains from disposal of property and equipment in 2001 include a $2.2
million gain related to the sale/leaseback of CompX's manufacturing facility in
The Netherlands. Pursuant to the sale/leaseback, CompX sold the manufacturing
facility with a net carrying value of $8.2 million for $10.0 million cash
consideration in December 2001, and CompX simultaneously entered into a
leaseback of the facility with a nominal monthly rental for approximately 30
months. CompX has the option to extend the leaseback period for up to an
additional two years with monthly rentals of $40,000 to $100,000. CompX may
terminate the leaseback at any time without penalty. In addition to the cash
received up front, CompX included an estimate of the fair market value of the
monthly rental during the nominal-rental leaseback period as part of the sale
proceeds. A portion of the gain from the sale of the facility after transaction
costs, equal to the present value of the monthly rentals over the expected
leaseback period (including the fair market value of the monthly rental during
the nominal-rental leaseback period), has been deferred and will be amortized
into income over the expected leaseback period. CompX will recognize rental
expense over the leaseback period, including amortization of the prepaid rent
consisting of the estimated fair market value of the monthly rental during the
nominal-rental leaseback period.
Note 13 - Minority interest:
December 31,
2000 2001
---- ----
(In thousands)
Minority interest in net assets:
NL Industries ............................ $ 66,761 $ 68,566
Tremont Corporation ...................... 34,235 32,610
CompX International ...................... 49,003 44,767
Subsidiaries of NL ....................... 6,279 7,208
-------- --------
$156,278 $153,151
Years ended December 31,
1999 2000 2001
---- ---- ----
(In thousands)
Minority interest in net earnings
(losses) - continuing operations:
NL Industries ..................... $ 66,760 $ 30,869 $ 23,061
Tremont Corporation ............... -- 2,091 (175)
CompX International ............... 9,013 7,810 2,236
Subsidiaries of NL ................ 3,322 2,436 960
Subsidiaries of Tremont ........... -- 455 --
Subsidiaries of CompX ............. (103) (3) --
-------- -------- --------
$ 78,992 $ 43,658 $ 26,082
======== ======== ========
Tremont Corporation. The Company commenced consolidating Tremont's balance
sheet effective December 31, 1999, and commenced consolidating its results of
operations effective January 1, 2000. Accordingly, the Company commenced
reporting minority interest in Tremont's net earnings in 2000. See Note 3.
Waste Control Specialists. Waste Control Specialists was formed by Valhi
and another entity in 1995. See Note 3. Waste Control Specialists assumed
certain liabilities of the other owner and such liabilities exceeded the
carrying value of the assets contributed by the other owner. Consequently, all
of Waste Control Specialists aggregate inception-to-date net losses have accrued
to the Company for financial reporting purposes, and all of Waste Control
Specialists future net income or net losses will also accrue to the Company
until Waste Control Specialists reports positive equity attributable to the
other owner. Accordingly, no minority interest in Waste Control Specialists' net
assets or net losses is reported at December 31, 2001.
Other. Minority interest in the extraordinary losses of NL was $162,000 in
2000. See Note 1.
Note 14 - Stockholders' equity:
Shares of common stock
Issued Treasury Outstanding
(In thousands)
Balance at December 31, 1998 ......... 125,521 (10,545) 114,976
Issued ............................... 90 -- 90
------- ------- --------
Balance at December 31, 1999 ......... 125,611 (10,545) 115,066
Issued ............................... 119 -- 119
Reacquired ........................... -- (1) (1)
Other ................................ -- (24) (24)
------- ------- --------
Balance at December 31, 2000 ......... 125,730 (10,570) 115,160
Issued ............................... 81 -- 81
------- ------- --------
Balance at December 31, 2001 ......... 125,811 (10,570) 115,241
======= ======= ========
For financial reporting purposes, treasury stock includes the Company's
proportional interest in 1.2 million Valhi shares held by NL. However, under
Delaware Corporation Law, 100% of a parent company's shares held by a
majority-owned subsidiary of the parent is considered to be treasury stock. As a
result, shares outstanding for financial reporting purposes differ from those
outstanding for legal purposes.
In January 1998, the Company's board of directors authorized the Company to
purchase up to 2 million shares of its common stock in open market or
privately-negotiated transactions over an unspecified period of time. As of
December 31, 2001, the Company had purchased approximately 383,000 shares for an
aggregate of $3.7 million pursuant to such authorization.
Valhi options. Valhi has an incentive stock option plan that provides for
the discretionary grant of, among other things, qualified incentive stock
options, nonqualified stock options, restricted common stock, stock awards and
stock appreciation rights. Up to five million shares of Valhi common stock may
be issued pursuant to this plan. Options are generally granted at a price not
less than fair market value on the date of grant, generally vest ratably over a
five-year period beginning one year from the date of grant and expire 10 years
from the date of grant. Restricted stock, when granted, is generally forfeitable
unless certain periods of employment are completed and held in escrow in the
name of the grantee until the restriction period expires. No stock appreciation
rights have been granted.
Outstanding options at December 31, 2001 represent approximately 2% of
Valhi's outstanding shares at that date and expire at various dates through
2011, with a weighted-average remaining term of 3.5 years. At December 31, 2001,
options to purchase 1.9 million Valhi shares were exercisable at prices ranging
from $4.96 to $12.06 per share, or an aggregate amount payable upon exercise of
$13.2 million. All of such exercisable options are exercisable at various dates
through 2010 at prices lower than the Company's December 31, 2001 market price
of $12.70 per share. At December 31, 2001, options to purchase 170,000 shares
are scheduled to become exercisable in 2002, and an aggregate of 4.1 million
shares were available for future grants.
The following table sets forth changes in outstanding options during the
past three years under all option plans in effect during such periods.
Amount
Exercise payable
price per upon
Shares share exercise
(In thousands, except
per share amounts)
Outstanding at December 31, 1998 2,901 $ 4.76-$14.66 $20,059
Granted 323 12.00- 12.06 3,876
Exercised (87) 5.48- 9.50 (621)
Canceled (172) 6.56- 14.66 (2,500)
------ ------------ -------
Outstanding at December 31, 1999 2,965 4.76- 12.16 20,814
Granted 248 11.00- 11.06 2,728
Exercised (116) 4.76- 12.00 (848)
Canceled (415) 4.76- 12.16 (2,133)
------ ------------ -------
Outstanding at December 31, 2000 2,682 $ 4.96-$12.06 $20,561
Granted 8 10.50 84
Exercised (76) 4.96- 12.00 (591)
Canceled (230) 5.36- 12.00 (1,410)
------ ------------ -------
Outstanding at December 31, 2001 2,384 $ 4.96-$12.06 $18,644
====== ============= =======
Stock option plans of subsidiaries and affiliates. NL, CompX, Tremont and
TIMET each maintain plans which provide for the grant of options to purchase
their respective common stocks. Provisions of these plans vary by company.
Outstanding options to purchase common stock of NL, CompX, Tremont and TIMET at
December 31, 2001 are summarized below.
Amount
Exercise payable
price per upon
Shares share exercise
(In thousands, except
per share amounts)
NL Industries 2,014 $ 5.00-$21.97 $32,960
CompX 856 10.00- 20.00 14,161
Tremont 27 8.13- 56.50 628
TIMET 1,554 3.60- 35.31 29,957
Other. The following pro forma information, required by SFAS No. 123,
"Accounting for Stock-Based Compensation," is based on an estimation of the fair
value of options issued subsequent to January 1, 1995. The weighted average fair
values of Valhi options granted during 1999 and 2000 were $5.96 and $5.43 per
share, respectively. The aggregate fair value of the Valhi options granted
during 2001 was not material. The fair values of such options were calculated
using the Black-Scholes stock option valuation model with the following
weighted-average assumptions: stock price volatility of 39% to 40%, risk-free
rates of return of 6.0% to 6.8%, dividend yields of 1.7% to 1.8% and an expected
term of 10 years. The Black-Scholes model was not developed for use in valuing
employee stock options, but was developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
In addition, it requires the use of subjective assumptions including
expectations of future dividends and stock price volatility. Such assumptions
are only used for making the required fair value estimate and should not be
considered as indicators of future dividend policy or stock price appreciation.
Because changes in the subjective assumptions can materially affect the fair
value estimate, and because employee stock options have characteristics
significantly different from those of traded options, the use of the
Black-Scholes option-pricing model may not provide a reliable estimate of the
fair value of employee stock options.
Had the Company, NL, CompX, Tremont and TIMET each elected to account for
their respective stock-based employee compensation for all awards granted
subsequent to January 1, 1995 in accordance with the fair value-based accounting
method of SFAS No. 123, the Company's reported net income would have decreased
by $3.6 million, $3.8 million and $3.7 million in 1999, 2000 and 2001,
respectively, or $.03, $.04 and $.03 per basic share, respectively. For purposes
of this pro forma disclosure, the estimated fair value of options is amortized
to expense over the options' vesting period. Such pro forma impact on net income
and basic earnings per share is not necessarily indicative of future effects on
net income or earnings per share.
Note 15 - Financial instruments:
December 31,
2000 2001
---------------- ------------
Carrying Fair Carrying Fair
amount Valu amount value
(In millions)
Cash, cash equivalents and restricted
cash equivalents ...................... $ 227.2 $ 227.2 $ 222.4 $ 222.4
Marketable securities:
Current .............................. $ -- $ -- $ 18.5 $ 18.5
Noncurrent ........................... 268.0 268.0 186.5 186.5
Loan to Snake River Sugar Company ...... $ 80.0 $ 86.4 $ 80.0 $ 96.4
Notes payable and long-term debt
(excluding capitalized leases):
Publicly-traded
fixed rate debt:
Valhi LYONs ........................ $ 100.3 $ 112.3 $ 25.5 $ 25.0
NL Senior Secured Notes ............ 194.0 195.9 194.0 194.9
Valcor Senior Notes ................ 2.4 2.4 2.4 2.4
Snake River Sugar Company loans ...... 250.0 250.0 250.0 250.0
Other fixed-rate debt ................ 4.1 4.1 3.7 3.7
Variable rate debt ................... 148.6 148.6 132.7 132.7
Minority interest in:
NL common stock ...................... $ 66.8 $ 235.3 $ 68.6 $ 132.6
CompX common stock ................... 49.0 44.6 44.8 61.3
Tremont common stock ................. 34.2 33.9 32.6 36.7
Valhi common stockholders' equity ...... $ 628.2 $1,324.3 $ 622.3 $1,463.6
The fair value of the Company's publicly-traded marketable securities and
debt, minority interest in NL Industries, CompX and Tremont and Valhi's common
stockholders' equity are all based upon quoted market prices. The fair value of
the Company's investment in The Amalgamated Sugar Company LLC is based upon the
$250 million redemption price of such investment, less the $80 million
outstanding balance of the Company's loan to Snake River Sugar Company. The fair
value of the Company's fixed-rate loan to Snake River Sugar Company is based
upon relative changes in market interest rates since the interest rates were
fixed. The fair value of Valhi's fixed-rate nonrecourse loans from Snake River
Sugar Company is based upon the $250 million redemption price of Valhi's
investment in the Amalgamated Sugar Company LLC, which investment collateralizes
such nonrecourse loans. Fair values of variable interest rate debt and other
fixed-rate debt are deemed to approximate book value. See Notes 5 and 11.
The estimated fair value of CompX's currency forward contracts at
December 31, 2000 is insignificant. See Note 1.
Note 16 - Income taxes:
Years ended December 31,
1999 2000 2001
---- ---- ----
(In millions)
Components of pre-tax income:
United States:
Contran Tax Group ............................ $(14.2) $(20.7) $ 31.5
NL tax group ................................. 22.9 72.5 --
CompX tax group .............................. 14.0 7.6 (1.0)
Tremont tax group/Equity in Tremont .......... (48.7) (10.5) --
------ ------ ------
(26.0) 48.9 30.5
Non-U.S. subsidiaries .......................... 81.1 166.3 142.0
------ ------ ------
$ 55.1 $215.2 $172.5
====== ====== ======
Expected tax expense, at U.S. federal
statutory income tax rate of 35% ................ $ 19.3 $ 75.3 $ 60.4
Non-U.S. tax rates ............................... (.6) (7.1) (4.8)
Incremental U.S. tax and rate differences
on equity in earnings of non-tax group
companies ....................................... 15.7 17.8 8.0
Change in NL's and Tremont's deferred income
tax valuation allowance, net .................... (93.4) .7 (20.9)
Resolution of German income tax audits ........... (36.5) (5.5) --
Change in German income tax law .................. 24.1 4.4 --
U.S. state income taxes, net ..................... (.9) 2.1 2.5
No tax benefit for goodwill amortization ......... 4.1 5.4 5.8
Other, net ....................................... (3.1) 1.3 2.2
------ ------ ------
$(71.3) $ 94.4 $ 53.2
====== ====== ======
Components of income tax expense (benefit):
Currently payable (refundable):
U.S. federal and state ....................... $(11.1) $ (3.0) $ 11.2
Non-U.S ...................................... 32.6 54.5 34.3
------ ------ ------
21.5 51.5 45.5
------ ------ ------
Deferred income taxes (benefit):
U.S. federal and state ....................... (48.7) 40.0 21.0
Non-U.S ...................................... (44.1) 2.9 (13.3)
------ ------ ------
(92.8) 42.9 7.7
------ ------ ------
$(71.3) $ 94.4 $ 53.2
====== ====== ======
Comprehensive provision for income
taxes (benefit) allocable to:
Continuing operations .......................... $(71.3) $ 94.4 $ 53.2
Discontinued operations ........................ -- -- --
Extraordinary item ............................. -- (.5) --
Other comprehensive income:
Marketable securities ........................ 2.0 3.9 (24.7)
Currency translation ......................... (10.7) (14.9) (2.3)
Pension liabilities .......................... (1.9) .8 (3.9)
------ ------ ------
$(81.9) $ 83.7 $ 22.3
====== ====== ======
The components of the net deferred tax liability at December 31, 2000 and
2001, and changes in the deferred income tax valuation allowance during the past
three years, are summarized in the following tables. At December 31, 2000 and
2001, 98% and 95%, respectively, of the deferred tax valuation allowance relates
to NL tax jurisdictions, principally Germany, and all of the remainder relates
to Tremont's U.S. federal income tax jurisdiction.
December 31,
2000 2001
----------------- -------------
Assets Liabilities Assets Liabilities
(In millions)
Tax effect of temporary differences related to:
Inventories ...................................... $ 4.3 $ (3.2) $ 4.2 $ (3.5)
Marketable securities ............................ -- (84.8) -- (56.4)
Mining properties ................................ -- (1.4) -- (1.2)
Property and equipment ........................... 62.1 (99.4) 43.2 (94.1)
Accrued OPEB costs ............................... 21.1 -- 19.0 --
Accrued environmental liabilities and
other deductible differences .................... 76.5 -- 73.7 --
Other taxable differences ........................ -- (165.0) -- (167.8)
Investments in subsidiaries and affiliates not
members of the Contran Tax Group ................ 7.5 (29.0) 12.4 (38.9)
Tax loss and tax credit carryforwards ............ 126.2 -- 119.2 --
Valuation allowance ................................ (195.0) -- (163.3) --
------ ------ ------ ------
Adjusted gross deferred tax assets (liabilities) 102.7 (382.8) 108.4 (361.9)
Netting of items by tax jurisdiction ............... (86.5) 86.5 (91.6) 91.6
------ ------ ------ ------
16.2 (296.3) 16.8 (270.3)
Less net current deferred tax asset (liability) .... 14.2 (1.9) 13.0 (1.8)
------ ------ ------ ------
Net noncurrent deferred tax asset (liability) .. $ 2.0 $(294.4) $ 3.8 $(268.5)
====== ====== ====== ======
Years ended December 31,
1999 2000 2001
---- ---- ----
(In millions)
Increase (decrease) in valuation allowance:
Increase in certain deductible temporary
differences which the Company believes do
not meet the "more-likely-than-not"
recognition criteria ........................... $ 1.6 $ 3.3 $ 3.8
Recognition of certain deductible tax
attributes for which the benefit had not
previously been recognized under the
"more-likely-than-not" recognition criteria .... (95.0) (2.6) (24.7)
Change in German tax law ........................ 24.1 -- --
Foreign currency translation .................... (14.7) (15.7) (7.5)
Offset to the change in gross deferred
income tax assets due principally to
redeterminations of certain tax attributes
and implementation of certain tax
planning strategies ............................ 183.1 (25.0) (3.7)
Consolidation of Tremont Corporation:
For financial reporting purposes .............. 13.6 -- --
For income tax purposes ....................... -- (12.1) --
Other, net ...................................... .8 (.9) .4
------ ------ ------
$113.5 $(53.0) $(31.7)
====== ====== ======
In 1999, NL recognized a $90 million non-cash income tax benefit related to
(i) a favorable resolution of NL's previously-reported tax contingency in
Germany ($36 million) and (ii) a net reduction in NL's deferred income tax
valuation allowance due to a change in estimate of NL's ability to utilize
certain income tax attributes under the "more-likely-than-not" recognition
criteria ($54 million). The $54 million net reduction in NL's deferred income
tax valuation allowance was comprised of (i) a $78 million decrease in the
valuation allowance to recognize the benefit of certain deductible income tax
attributes which NL now believes meets the recognition criteria as a result of,
among other things, a corporate restructuring of NL's German subsidiaries and
(ii) a $24 million increase in the valuation allowance to reduce the
previously-recognized benefit of certain other deductible income tax attributes
which NL now believes do not meet the recognition criteria due to a change in
German tax law. The German tax law change was effective January 1, 1999 and
resulted in an increase in NL's current income tax expense.
A reduction in the German "base" income tax rate from 30% to 25% was
enacted in October 2000 and became effective in January 2001. This reduction in
the German income tax rate resulted in a $4.4 million increase in the Company's
income tax expense in 2000 because the Company had recognized a net deferred
income tax asset with respect to Germany.
In 2001, NL completed a restructuring of its German subsidiaries, and as a
result NL recognized a $17.6 million net income tax benefit. This benefit is
comprised of a $23.2 million decrease in NL's deferred income tax asset
valuation allowance due to a change in estimate of NL's ability to utilize
certain German income tax attributes that did not previously meet the
"more-likely-than-not" recognition criteria, offset by $5.6 million of
incremental U.S. taxes on undistributed earnings of certain foreign
subsidiaries.
Certain of the Company's U.S. and non-U.S. income tax returns are being
examined and tax authorities have or may propose tax deficiencies. For example,
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 10.4 million euro ($9 million at December 31, 2001). 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.
Tremont has received a tax assessment from the U.S. federal tax authorities
proposing tax deficiencies of $8.3 million. Tremont is appealing the proposed
deficiencies and believes they are substantially without merit.
No assurance can be given that these tax matters will be resolved in the
Company's favor in view of the inherent uncertainties involved in court and tax
proceedings. The Company believes that it has provided adequate accruals for
additional taxes and related interest expense which may ultimately result from
all such examinations and believes that the ultimate disposition of such
examinations should not have a material adverse effect on its consolidated
financial position, results of operations or liquidity.
At December 31, 2001, (i) NL had the equivalent of $317 million of German
income tax loss carryforwards with no expiration date, (ii) NL had $3 million of
U.S. net operating loss carryforwards expiring in 2019 and $5.7 million of
alternative minimum tax ("AMT") credit carryforwards with no expiration date,
(iii) Tremont had $9.5 million of U.S. net operating loss carryforwards expiring
in 2018 through 2020 and $.7 million of AMT credit carryforwards with no
expiration date and (iv) CompX had the equivalent of $4.7 million of net
operating loss carryforwards in The Netherlands with no expiration date and $8.4
million of U.S. net operating loss carryforwards expiring in 2007 through 2018.
The U.S. tax attribute carryforwards of NL and Tremont may only be used to
offset future taxable income of the respective company and are not available to
offset future taxable income of other members of the Contran Tax Group, and the
U.S. net operating loss carryforward of CompX may only be used to offset future
taxable income of an acquired subsidiary of CompX and are limited in utilization
to approximately $400,000 per year. During 1999, CompX utilized $300,000 of its
U.S. net operating loss carryforwards to reduce its current U.S. taxable income
(nil in 2000 and 2001).
Note 17 - Employee benefit plans:
Defined benefit plans. The Company maintains various defined benefit
pension plans. Variances from actuarially assumed rates will result in increases
or decreases in accumulated pension obligations, pension expense and funding
requirements in future periods. The funded status of the Company's defined
benefit pension plans, the components of net periodic defined benefit pension
cost related to the Company's consolidated business segments and charged to
continuing operations and the rates used in determining the actuarial present
value of benefit obligations are presented in the tables below. Effective
January 1, 2001, approximately 50 individuals previously compensated by Valhi
commenced being compensated by Contran. Accrued defined benefit pension costs
related to such individuals at December 31, 2000 were approximately $225,000.
During 2001, Valhi made a cash payment to Contran of $225,000, and the plan
assets and liabilities related to such individuals were transferred to Contran.
Effective January 1, 2001, CompX ceased providing future defined pension
benefits under its plan in The Netherlands, resulting in a curtailment gain of
$116,000. See Note 12. As of December 31, 2001, certain obligations related to
the terminated plan had not been fully settled and are reflected in accrued
defined benefit pension costs.
Years ended December 31,
2000 2001
---- ----
(In thousands)
Change in projected benefit obligations ("PBO"):
Benefit obligations at beginning of the year ....... $ 291,686 $ 281,540
Service cost ....................................... 4,368 3,974
Interest cost ...................................... 17,297 17,428
Participant contributions .......................... 1,027 1,004
Actuarial losses ................................... 1,890 10,359
Plan amendments .................................... -- 1,819
Curtailment gain ................................... -- (116)
Change in foreign exchange rates ................... (16,209) (3,385)
Benefits paid ...................................... (18,519) (17,432)
Transfer of obligations to Contran ................. -- (4,862)
--------- ---------
Benefit obligations at end of the year ......... $ 281,540 $ 290,329
========= =========
Change in plan assets:
Fair value of plan assets at beginning of the year . $ 244,555 $ 243,213
Actual return on plan assets ....................... 13,866 5,470
Employer contributions ............................. 16,620 7,577
Participant contributions .......................... 1,078 1,004
Change in foreign exchange rates ................... (14,387) (6,244)
Benefits paid ...................................... (18,519) (17,432)
Transfer of plan assets to Contran ................. -- (3,243)
--------- ---------
Fair value of plan assets at end of year ....... $ 243,213 $ 230,345
========= =========
Funded status at end of the year:
Plan assets less than PBO .......................... $ (38,327) $ (59,984)
Unrecognized actuarial loss ........................ 32,374 53,383
Unrecognized prior service cost .................... 1,948 4,371
Unrecognized net transition obligations ............ 788 4,269
--------- ---------
$ (3,217) $ 2,039
========= =========
Amounts recognized in the balance sheet:
Prepaid pension costs .............................. $ 22,789 $ 18,411
Unrecognized net pension obligations ............... -- 5,901
Accrued pension costs:
Current .......................................... (6,356) (6,241)
Noncurrent ....................................... (26,697) (33,823)
Accumulated other comprehensive income ............. 7,047 17,791
--------- ---------
$ (3,217) $ 2,039
========= =========
December 31,
Rate 1999 2000 2001
---- ---- ---- ----
Discount 4% - 7.5% 4% - 7.8% 5.8% - 7.3%
Increase in future compensation levels 2.5% - 4.5% 3% - 4.5% 2.8% - 4.5%
Long-term return on assets 4% -10.0% 4% -10.0% 6.8% -10.0%
Years ended December 31,
1999 2000 2001
---- ---- ----
(In thousands)
Net periodic pension cost:
Service cost benefits ...................... $ 4,316 $ 4,368 $ 3,974
Interest cost on PBO ....................... 18,329 17,297 17,428
Expected return on plan assets ............. (18,120) (17,832) (18,386)
Amortization of prior service cost ......... 287 258 201
Amortization of net transition obligations . 580 532 509
Recognized actuarial losses ................ 1,328 369 703
-------- -------- --------
$ 6,720 $ 4,992 $ 4,429
======== ======== ========
The projected benefit obligations, accumulated benefit obligations and fair
value of plan assets for all defined benefit pension plans with accumulated
benefit obligations in excess of fair value of plan assets were $257 million,
$235 million and $197 million, respectively, at December 31, 2001 (2000 - $218.4
million, $196.6 million and $172.8 million, respectively). At December 31, 2000
and 2001, approximately 65% and 69%, respectively, of such unfunded amount
relates to NL's non-U.S. plans, and most of the remainder relates to certain of
NL's U.S. plans.
Defined contribution plans. The Company maintains various defined
contribution pension plans with Company contributions based on matching or other
formulas. Defined contribution plan expense related to the Company's
consolidated business segments approximated $2.8 million in 1999, $3.4 million
in 2000 and $2.5 million in 2001.
Postretirement benefits other than pensions. Certain subsidiaries currently
provide certain health care and life insurance benefits for eligible retired
employees. At December 31, 2000 and 2001, 60% and 61%, respectively, of the
Company's aggregate accrued OPEB costs relates to NL, and substantially all of
the remainder relates to Tremont.
The components of the periodic OPEB cost and accumulated OPEB obligations
and the rates used in determining the actuarial present value of benefit
obligations are presented in the tables below. Variances from
actuarially-assumed rates will result in additional increases or decreases in
accumulated OPEB obligations, net periodic OPEB cost and funding requirements in
future periods. At December 31, 2001, the expected rate of increase in future
health care costs ranges from 8% to 11.2% in 2002, declining to rates of about
5.0% in 2010 and thereafter. If the health care cost trend rate was increased
(decreased) by one percentage point for each year, OPEB expense would have
increased by $.3 million (decreased by $.2 million) in 2001, and the actuarial
present value of accumulated OPEB obligations at December 31, 2001 would have
increased by $2.4 million (decreased by $2.2 million).
Years ended December 31,
2000 2001
---- ----
(In thousands)
Change in accumulated OPEB obligations:
Obligations at beginning of the year ................. $ 54,410 $ 53,942
Service cost ......................................... 84 94
Interest cost ........................................ 3,828 3,572
Actuarial losses (gains) ............................. 1,423 (230)
Plan asset reimbursements ............................ -- 1,197
Change in foreign exchange rates ..................... (67) (145)
Benefits paid ........................................ (5,736) (7,742)
-------- --------
Obligations at end of the year ....................... $ 53,942 $ 50,688
======== ========
Change in plan assets:
Fair value of plan assets at beginning of the year ... $ 5,968 $ 11,842
Actual return on plan assets ......................... 2,705 460
Employer contributions ............................... 8,905 1,840
Benefits paid ........................................ (5,736) (7,742)
-------- --------
Fair value of plan assets at end of the year ......... $ 11,842 $ 6,400
======== ========
Funded status at end of the year:
Plan assets less than benefit obligations ............ $(42,100) $(44,288)
Unrecognized net actuarial gain ...................... (2,676) (2,522)
Unrecognized prior service credit .................... (12,067) (9,551)
-------- --------
$(56,843) $(56,361)
======== ========
Accrued OPEB costs recognized in the balance sheet:
Current .............................................. $ (6,219) $ (6,215)
Noncurrent ........................................... (50,624) (50,146)
-------- --------
$(56,843) $(56,361)
======== ========
Years ended December 31,
1999 2000 2001
---- ---- ----
(In thousands)
Net periodic OPEB cost (credit):
Service cost ............................... $ 40 $ 84 $ 94
Interest cost .............................. 2,069 3,828 3,572
Expected return on plan assets ............. (526) (521) (773)
Amortization of prior service credit ....... (2,075) (2,516) (2,516)
Recognized actuarial losses (gains) ........ (573) 24 (123)
------- ------- -------
$(1,065) $ 899 $ 254
======= ======= =======
December 31,
Rate 1999 2000 2001
---- ---- ---- ----
Discount 7.5% 7.25%-7.3% 7%
Increase in future compensation levels nil - 6% nil - 6% nil - 6%
Long-term return on assets nil - 9% nil -7.7% nil - 7.7%
Note 18 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons. See Note
1. Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties, and (b) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. The Company
continuously considers, reviews and evaluates, and understands that Contran and
related entities consider, review and evaluate such transactions. Depending upon
the business, tax and other objectives then relevant, it is possible that the
Company might be a party to one or more such transactions in the future.
It is the policy of the Company to engage in transactions with related
parties on terms, in the opinion of the Company, no less favorable to the
Company than could be obtained from unrelated parties.
Receivables from and payables to affiliates are summarized in the table
below.
December 31,
2000 2001
---- ----
(In thousands)
Current receivables from affiliates:
TIMET ............................................ $ 599 $ 677
Other ............................................ 286 167
------- -------
$ 885 $ 844
======= =======
Noncurrent receivable from affiliate -
loan to Contran family trust ..................... $ -- $20,000
======= =======
Current payables to affiliates:
Demand loan from Contran:
Tremont Corporation ............................ $13,403 $ --
Valhi .......................................... 8,000 24,574
Income taxes payable to Contran .................. 1,666 6,410
Louisiana Pigment Company ........................ 8,710 6,362
Contran - trade items ............................ -- 501
TIMET ............................................ 252 286
Other ............................................ 11 15
------- -------
$32,042 $38,148
From time to time, loans and advances are made between the Company and
various related parties, including Contran, pursuant to term and demand notes.
These loans and advances are entered into principally for cash management
purposes. When the Company loans funds to related parties, the lender is
generally able to earn a higher rate of return on the loan than the lender would
earn if the funds were invested in other instruments. While certain of such
loans may be of a lesser credit quality than cash equivalent instruments
otherwise available to the Company, the Company believes that it has evaluated
the credit risks involved, and that those risks are reasonable and reflected in
the terms of the applicable loans. When the Company borrows from related
parties, the borrower is generally able to pay a lower rate of interest than the
borrower would pay if it borrowed from other parties.
In 2001, NL Environmental Management Services, Inc ("EMS"), NL's
majority-owned environmental management subsidiary, entered into a $25 million
revolving credit facility with one of the family trusts discussed in Note 1 ($20
million outstanding at December 31, 2001). The loan bears interest at prime, is
due on demand with 60 days notice and is collateralized by certain shares of
Contran's Class A common stock and Class E cumulative preferred stock held by
the trust. The value of the collateral is dependent, in part, on the value of
the Company as Contran's beneficial ownership interest in the Company is one of
Contran's more substantial assets. The terms of this loan were approved by
special committees of both NL's and EMS' respective board of directors composed
of independent directors. At December 31, 2001, $5 million is available for
borrowing by the family trust, and the loan has been classified as a noncurrent
asset because EMS does not presently intend to demand repayment within the next
12 months.
In 1998, Tremont entered into a revolving advance agreement with Contran.
Through February 2001, Tremont had net borrowings of $13.4 million from Contran
under such facility, primarily to fund Tremont's purchases of shares of NL and
TIMET common stock. Such borrowings from Contran bore interest at prime less .5%
and were payable upon demand. In February 2001, Tremont entered into a $13.4
million reducing revolving credit facility with EMS and used the proceeds to
repay its loan from Contran. Such intercompany loan between EMS and Tremont,
collateralized by 10 million shares of NL common stock owned by Tremont, is
eliminated in Valhi's consolidated financial statements at December 31, 2001.
The terms of Tremont's loans from both Contran and EMS were approved by the
independent directors of Tremont, and the terms of Tremont's loan from EMS was
approved by a special committee of EMS' board of directors composed of
independent directors.
During 1999, 2000 and 2001, Valhi borrowed varying amounts from Contran
pursuant to the terms of a demand note. Such unsecured borrowings bear interest
at a rate of prime less .5%.
Interest income on all loans to related parties was $.3 million in each of
1999 and 2000 and $.9 million in 2001. Interest expense on all loans from
related parties was $.5 million in 1999, $1.3 million in 2000 and $1.4 million
in 2001.
Payables to Louisiana Pigment Company are primarily for the purchase of
TiO2 (see Note 7). Purchases in the ordinary course of business from the
unconsolidated TiO2 manufacturing joint venture are disclosed in Note 7.
Under the terms of various intercorporate services agreements ("ISAs")
entered into between the Company and various related parties, including Contran,
employees of one company will provide certain management, tax planning,
financial and administrative services to the other company on a fee basis. Such
charges are based upon estimates of the time devoted by the employees of the
provider of the services to the affairs of the recipient, and the compensation
of such persons. Because of the large number of companies affiliated with
Contran, the Company believes it benefits from cost savings and economies of
scale gained by not having certain management, financial and administrative
staffs duplicated at each entity, thus allowing certain individuals to provide
services to multiple companies but only be compensated by one entity. These ISA
agreements are reviewed and approved by the applicable independent directors of
the companies that are parties to the agreements.
The net ISA fees charged by Contran to the Company aggregated approximately
$1.5 million in 1999, $2.6 million in 2000 and $8.5 million in 2001. Effective
July 1, 2000, three individuals who had previously been compensated by Valhi
commenced to be compensated by Contran, and effective January 1, 2001,
approximately 50 additional individuals who had previously been compensated by
Valhi also commenced to be compensated by Contran. The increases in the net ISA
fees charged by Contran from 1999 to 2000, and from 2000 to 2001, are due
principally to these changes.
NL has an ISA with TIMET whereby NL provides certain services to TIMET for
$300,000 in each of 1999, 2000 and 2001. TIMET has an ISA with Tremont whereby
TIMET provides certain services to Tremont for $200,000 in 1999, $300,000 in
2000 and $400,000 in 2001. Certain other subsidiaries of the Company are also
parties to similar ISAs among themselves, and expenses associated with these
agreements are eliminated in Valhi's consolidated financial statements.
Certain of the Company's insurance coverages that were reinsured in 1999,
2000 and 2001 were arranged for and brokered by EWI Re, Inc. Parties related to
Contran own all of the outstanding common stock of EWI. Through December 31,
2000, a son-in-law of Harold C. Simmons managed the operations of EWI.
Subsequent to December 31, 2000, such individual provides advisory services to
EWI as requested by EWI. The Company generally does not compensate EWI directly
for insurance, but understands that, consistent with insurance industry
practice, EWI receives a commission for its services from the insurance
underwriters.
Through January 2002, an entity controlled by one of Harold C. Simmons'
daughters owned a majority of EWI, and Contran owned all or substantially all of
the remainder of EWI. In January 2002, NL purchased EWI from its previous owners
for an aggregate cash purchase price of approximately $9 million, and EWI became
a wholly-owned subsidiary of NL. The purchase was approved by a special
committee of NL's board of directors consisting of two of its independent
directors, and the purchase price was negotiated by the special committee based
upon its consideration of relevant factors, including but not limited to due
diligence performed by independent consultants and an appraisal of EWI conducted
by an independent third party selected by the special committee.
Basic Management, Inc., among other things, provides utility services
(primarily water distribution, maintenance of a common electrical facility and
sewage disposal monitoring) to TIMET and other manufacturers within an
industrial complex located in Nevada. The other owners of BMI are generally the
other manufacturers located within the complex. Power and sewer services are
provided on a cost reimbursement basis, similar to a cooperative, while water is
provided at the same rates as are charged by BMI to an unrelated third party.
Amounts paid by TIMET to BMI for utility services were $1.0 million in 1999,
$1.6 million in 2000 and $1.5 million in 2001. TIMET also paid BMI a facilities
usage fee of $800,000 in 1999 and $1.3 million in each of 2000 and 2001. The
$1.3 million annual facilities usage fee will continue through 2005 and then
decline to $500,000 annually for 2006 through 2010, at which time the facilities
usage fee expires.
During 2001, Tremont paid BMI $600,000 pursuant to an agreement in which
Tremont and other owners of BMI agreed to cover the costs of certain land
improvements made by BMI to the land owned by Tremont and other BMI owners. The
cost of the land improvement was divided among the companies based on each
company's proportional share in the improved acreage.
During 2000, (i) Valhi purchased 90,000 shares of Tremont common stock from
an officer of Tremont for $2.9 million and 1,700 shares of its common stock from
an employee of Valhi for $19,000 and (ii) NL purchased 414,000 shares of its
common stock from officers and directors of NL for an aggregate of $9.4 million.
See Notes 3 and 11. Such purchases were at market prices on the respective dates
of purchase.
COAM Company is a partnership which has sponsored research agreements with
the University of Texas Southwestern Medical Center at Dallas to develop and
commercially market a safe and effective treatment for arthritis (the "Arthritis
Research Agreement") and to develop and commercially market patents and
technology resulting from a cancer research program (the "Cancer Research
Agreement"). At December 31, 2001, COAM partners are Contran, Valhi and another
Contran subsidiary. Harold C. Simmons is the manager of COAM. The Arthritis
Research Agreement, as amended, provides for payments by COAM of up to $2
million over the next three years and the Cancer Research Agreement, as amended,
provides for funds of up to $10.4 million over the next nine years. Funding
requirements pursuant to the Arthritis and Cancer Research Agreements are
without recourse to the COAM partners and the partnership agreement provides
that no partner shall be required to make capital contributions. Capital
contributions are expensed as paid. The Company's contributions to COAM were nil
in each of the past three years, and the Company does not currently expect it
will make any capital contributions to COAM in 2002.
Amalgamated Research, Inc., a wholly-owned subsidiary of the Company,
conducts certain research and development activities within and outside the
sweetener industry for The Amalgamated Sugar Company LLC and others. Amalgamated
Research has also granted to The Amalgamated Sugar Company LLC a non-exclusive,
perpetual royalty-free license to use all currently existing or hereafter
developed technology which is applicable to sugar operations and provides for
certain royalties to The Amalgamated Sugar Company from future sales or licenses
of the subsidiary's technology. Research and development services charged to The
Amalgamated Sugar Company LLC were $779,000 in 1999, $764,000 in 2000 and
$828,000 in 2001. The Amalgamated Sugar Company LLC also provides certain
administrative services to Amalgamated Research. The cost of such services
provided by the LLC, based upon estimates of the time devoted by employees of
the LLC to the affairs of Amalgamated Research, and the compensation of such
persons, is netted against the agreed-upon research and development services fee
paid by the LLC to Amalgamated Research.
Note 19 - Commitments and contingencies:
Legal proceedings
Lead pigment litigation. Since 1987, NL, other former manufacturers of lead
pigments for use in paint and lead-based paint and the Lead Industries
Association have been named as defendants in various legal proceedings seeking
damages for personal injury, property damage and government expenditures
allegedly caused by the use of lead-based paints. Certain of these actions have
been filed by or on behalf of states or large United States cities or their
public housing authorities, school districts and certain others have been
asserted as class actions. These legal proceedings seek recovery under a variety
of theories, including negligent product design, failure to warn, breach of
warranty, conspiracy/concert of action, enterprise liability, market share
liability, intentional tort, and fraud and misrepresentation.
The plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and asserted health concerns associated
with the use of lead-based paints, including damages for personal injury,
contribution and/or indemnification for medical expenses, medical monitoring
expenses and costs for educational programs. Most of these legal proceedings are
in various pre-trial stages; some are on appeal.
NL believes these actions are without merit, intends to continue to deny
all allegations of wrongdoing and liability and to defend against all actions
vigorously. NL has not accrued any amounts for the pending lead pigment and
lead-based paint litigation. Considering NL's previous involvement in the lead
and lead pigment businesses, there can be no assurance that additional
litigation similar to that currently pending will not be filed.
Environmental matters and litigation. The Company's operations are governed
by various federal, state, local and foreign environmental laws and regulations.
The Company's policy is to comply with environmental laws and regulations at all
of its plants and to continually strive to improve environmental performance in
association with applicable industry initiatives. The Company believes that its
operations are in substantial compliance with applicable requirements of
environmental laws. From time to time, the Company may be subject to
environmental regulatory enforcement under various statutes, resolution of which
typically involves the establishment of compliance programs.
Some of NL's current and former facilities, including several divested
secondary lead smelters and former mining locations, are the subject of civil
litigation, administrative proceedings or investigations arising under federal
and state environmental laws. Additionally, in connection with past disposal
practices, NL has been named as a defendant, potentially responsible party
("PRP"), or both, pursuant to CERCLA or similar state loans in approximately 75
governmental and private actions associated with waste disposal sites, mining
locations and facilities currently or previously owned, operated or used by NL,
its subsidiaries and their predecessors, certain of which are on the U.S. EPA's
Superfund National Priorities List or similar state lists. These proceedings
seek cleanup costs, damages for personal injury or property damage and/or
damages for injury to natural resources. Certain of these proceedings involve
claims for substantial amounts. Although NL may be jointly and severally liable
for such costs, in most cases, it is only one of a number of PRPs who may also
be jointly and severally liable. In addition, NL is a party to a number of
lawsuits filed in various jurisdictions alleging CERCLA or other environmental
claims. At December 31, 2001, NL had accrued $107 million for those
environmental matters which NL believes are reasonably estimable. NL believes it
is not possible to estimate the range of costs for certain sites. The upper end
of range of reasonably possible costs to NL for sites for which NL believes it
is possible to estimate costs is approximately $160 million.
At December 31, 2001, Tremont had accrued approximately $5 million for
environmental cleanup matters, principally related to one site in Arkansas.
Tremont believes it is only one of a number of apparently solvent PRPs that
would ultimately share in any cleanup costs for this site.
At December 31, 2001, TIMET had accrued approximately $4 million for
environmental cleanup matters, principally related to TIMET's facility in Nevada
and a former TIMET facility in California.
The Company has also accrued approximately $6 million at December 31, 2001
in respect of other environmental cleanup matters, including amounts related to
one Superfund site in Indiana where the Company, as a result of former
operations, has been named as a PRP and certain former sites of the disposed
building products segment. Such accrual is near the upper end of the range of
the Company's estimate of reasonably possible costs for such matters.
The imposition of more stringent standards or requirements under
environmental laws or regulations, new developments or changes with respect to
site cleanup costs or allocation of such costs among PRPs, or a determination
that the Company is potentially responsible for the release of hazardous
substances at other sites, could result in expenditures in excess of amounts
currently estimated by the Company to be required for such matters. No assurance
can be given that actual costs will not exceed accrued amounts or the upper end
of the range for sites for which estimates have been made, and no assurance can
be given that costs will not be incurred with respect to sites as to which no
estimate presently can be made. Further, there can be no assurance that
additional environmental matters will not arise in the future.
Other litigation. NL has been named as a defendant in various lawsuits in a
variety of jurisdictions alleging personal injuries as a result of occupational
exposure to asbestos, silica and/or mixed dust in connection with formerly-owned
operations. Various of these actions remain pending.
In March 1997, NL was served with a complaint filed in the Fifth Judicial
District Court of Cass County, Texas (Ernest Hughes, et al. v. Owens-Corning
Fiberglass Corporation, et al., No. 97-C-051) on behalf of approximately 4,000
plaintiffs and their spouses alleging injury due to exposure to asbestos, and
seeking compensatory and punitive damages. NL has filed an answer denying the
material allegations. The case has been inactive since 1998.
In February 1999, and October 2000, NL was served with complaints in Cosey,
et al. v. Bullard, et al., No. 95-0069, and Pierce, et al. v. GAF, et al., filed
in the Circuit Court of Jefferson County, Mississippi, on behalf of
approximately 1,600 and 275 plaintiffs, respectively, alleging injury due to
exposure to asbestos and/or silica and seeking compensatory and punitive
damages. NL has filed answers in both cases denying the material allegations of
the complaint. The Cosey Case was removed to federal court and has been
transferred to the U.S. District Court for the Eastern District of Pennsylvania
for consolidated proceedings.
NL is a defendant in various other asbestos, silica and/or mixed dust cases
pending in Ohio, Indiana and West Virginia on behalf of approximately 6,900
personal injury claimants.
In December 1997, a complaint was filed in the United States District Court
for the Northern District of Illinois against the Company (Finnsugar
Bioproducts, Inc. v. The Amalgamated Sugar Company LLC, et al., No. 97 C 8746).
The complaint, as amended, alleges certain technology used by The Amalgamated
Sugar Company LLC in its manufacturing processes infringes a certain patent of
Finnsugar and seeks, among other things, unspecified damages. The technology is
owned by Amalgamated Research and licensed to, among others, the LLC. Both
Amalgamated Research and the LLC are defendants in the action. Defendants have
answered the complaint denying infringement, and filed a counterclaim seeking to
have Finnsugar's patent declared invalid and unenforceable. Discovery on the
merits portion of both plaintiff's and defendants' claims has been completed.
Plaintiff and defendants each filed summary judgment motions. In April 2001, the
court granted certain of the defendants' summary judgment motions, and the court
also ruled that Finnsugar's patent was invalid. Finnsugar moved the court to
reconsider its decisions, and the remaining summary judgment motions filed by
both plaintiff and defendants remain pending. If such pending summary judgment
motions do not resolve the matter, a brief period of additional discovery will
occur. The Company believes, and understands the LLC believes, that the
complaint is without merit and that the Company's technology does not violate
Finnsugar's patent. The Company intends, and understands that the LLC intends,
to defend against this action vigorously.
In August and September 2000, NL and one of its subsidiaries, NLO, Inc.,
were named as defendants in each of the four lawsuits listed below that were
filed in federal court in the Western District of Kentucky against the
Department of Energy ("DOE") and a number of other defendants alleging that
nuclear material supplied by, among others, the Feed Material Production Center
("FMPC") in Fernald, Ohio, owned by the DOE and formerly managed under contract
by NLO, harmed employees and others at the DOE's Paducah, Kentucky Gaseous
Diffusion Plant ("PGDP"). With respect to each of the four cases listed below,
NL believes that the DOE is obligated to provide defense and indemnification
pursuant to its contract with NLO, and pursuant to its statutory obligation to
do so, as the DOE has done in several previous cases relating to management of
the FMPC. NL has so advised the DOE. Answers in the four cases have not been
filed and, as described below, three of the four cases have been settled. NL and
NLO have moved to dismiss the complaints in all four claims. If those motions
are not granted, NL and NLO intend to deny all allegations of wrongdoing and to
defend the cases vigorously.
o In Rainer, et al. v. E.I. du Pont de Nemours, et al., ("Rainer I") No.
5:00CV-223-J, plaintiffs purport to represent a class of former employees
at the PGDP and members of their households and seek actual and punitive
damages of $5 billion each for alleged negligence, infliction of emotional
distress, ultra-hazardous activity/strict liability and strict products
liability and battery. No answer or response to that complaint is yet due,
and pre-trial proceedings continue.
o In Rainer, et al. v. Bill Richardson, et al., ("Rainer II") No.
5:00CV-220-J, plaintiffs purport to represent the same classes regarding
the same matters alleged in Rainer I, and allege a violation of
constitutional rights and seek the same recovery sought in Rainer I, as
well as asserting claims for battery, fraud, deceit, and misrepresentation,
infliction of emotional distress, negligence, and conspiracy, concert of
action, joint venture and enterprise liability. No answer or response to
that complaint is yet due.
o In Dew, et al. v. Bill Richardson, et al., ("Dew") No. 5:00CV00221R,
plaintiffs purport to represent classes of all PGDP employees who sustained
pituitary tumors or cancer as a result of exposure to radiation and seek
actual and punitive damages of $2 billion each for alleged violation of
constitutional rights, assault and battery, fraud and misrepresentation,
infliction of emotional distress, negligence, ultra-hazardous
activity/strict liability, strict products liability, conspiracy, concert
of action, joint venture and enterprise liability, and equitable estoppel.
Pre-trial proceedings and discovery continue.
o In Shaffer, et al. v. Atomic Energy Commission, et al., ("Shaffer") No.
5:00CV00307M, plaintiffs purport to represent classes of PGDP employees and
household members, subcontractors at PGDP, and landowners near the PGDP and
seek actual and punitive damages of $1 billion each and medical monitoring
for the same counts alleged in Dew. In March 2001, the magistrate judge
ordered that the landowner plaintiffs be severed from the action and pursue
their claims in a separate action, Oreskovich v. Atomic Energy Commission,
No. 01CV-63-M. All of the Oreskovich plaintiffs subsequently dismissed
their claims against NL and NLO with prejudice. In addition, all but two of
the named plaintiffs in the Shaffer action have dismissed their claims
against the Settling Defendants without prejudice. In February 2002, the
court held that all causes of action asserted in the complaint that have a
one-year limitations period would be dismissed. In their motion to dismiss,
NL and NLO argued that all claims in the complaint, except the fraud claim,
were subject to dismissal because they have a one-year limitations period.
The court denied the motion to dismiss claims brought by certain decedents'
estates. The court reserved ruling on other arguments in the motion to
dismiss that, if granted, would dispose of all plaintiffs' claims,
indicating that it would address those arguments by separate opinion.
NL has reached an agreement pursuant to which the Rainer I, Rainer II, and
Shaffer cases against NL and NLO will be settled and dismissed with prejudice,
and in March 2002, the trial court approved the settlement. The time during
which the settlement may be appealed has not yet expired. The DOE has agreed to
reimburse NL for the settlement amount.
In September 2000, TIMET was named in an action filed by the U.S. Equal
Employment Opportunity Commission in federal district court in Las Vegas, Nevada
(U.S. Equal Employment Opportunity Commission v. Titanium Metals Corporation,
CV-S-00-1172DWH-RJJ). The complaint alleges that several female employees at
TIMET's Nevada plant were the subject of sexual harassment. TIMET intends to
vigorously defend this action, but in any event TIMET does not presently
anticipate that any adverse outcome in this case would be material to its
consolidated financial position, results of operations or liquidity.
In June 2001, Gutierrex-Palmenberg, Inc. ("GPI") filed a complaint in the
U.S. District Court, District of Arizona, against Waste Control Specialists LLC
(Guiterrez - Palmenberg, Inc. vs. Waste Control Specialists LLC, No. CIV '01
0981 PHX MS). The complaint alleges that Waste Control Specialists owes GPI in
excess of $380,000. Waste Control Specialists has counterclaimed for $55,000
that it believes it is owed from GPI. Waste Control Specialists intends to
defend against the action vigorously.
In addition to the litigation described above, the Company and its
affiliates are also involved in various other environmental, contractual,
product liability, patent (or intellectual property) and other claims and
disputes incidental to its present and former businesses. The Company currently
believes that the disposition of all claims and disputes, individually or in the
aggregate, should not have a material adverse effect on its consolidated
financial position, results of operations or liquidity.
Concentrations of credit risk. Sales of TiO2 accounted for substantially
all of NL's sales during the past three years. TiO2 is generally sold to the
paint, plastics and paper industries, which are generally considered
"quality-of-life" markets whose demand for TiO2 is influenced by the relative
economic well-being of the various geographic regions. TiO2 is sold to over
4,000 customers. In each of the past three years, approximately one-half of NL's
TiO2 sales volume were to Europe with about 38% attributable to North America,
and the ten largest customers accounted for about one-fourth of chemicals sales.
Component products are sold primarily to original equipment manufacturers
in North America and Europe. In 2001, the ten largest customers accounted for
approximately 36% of component products sales (2000 - 35%; 1999 - 33%).
The majority of TIMET's sales are to customers in the aerospace industry,
including airframe and engine manufacturers. TIMET's ten largest customers
accounted for about 30% of its sales in 1999 and about 48% in each of 2000 and
2001.
At December 31, 2001, consolidated cash, cash equivalents and restricted
cash includes $121 million invested in U.S. Treasury securities purchased under
short-term agreements to resell (2000 - $159 million), of which $62 million are
held in trust for the Company by a single U.S. bank (2000 - $67 million).
Capital expenditures. At December 31, 2001 the estimated cost to complete
capital projects in process approximated $13.5 million, of which $11 million
relates to NL's TiO2 facilities (including $4 million related to reconstruction
of the Leverkusen, Germany facility destroyed by fire in March 2001) and the
remainder relates to CompX. In addition, CompX is obligated to acquire
approximately 10 acres of land from the municipality of Maastricht, The
Netherlands, for approximately $2 million within the next two to three years as
part of an agreement made in conjunction with the sale/leaseback of its existing
Netherlands facility. See Note 12.
Royalties. Royalty expense, which relates principally to the volume of
certain products manufactured in Canada and sold in the United States under the
terms of a third-party patent license agreement, approximated $1.1 million in
each of 1999 and 2000 and $675,000 in 2001.
Long-term contracts. NL has long-term supply contracts that provide for
NL's chloride-process TiO2 feedstock requirements through 2006. The agreements
require NL to purchase certain minimum quantities of feedstock with average
minimum annual purchase commitments aggregating approximately $159 million.
TIMET has long-term agreements with certain major aerospace customers,
including The Boeing Company, Rolls-Royce plc, United Technologies Corporation
(and related companies) and Wyman-Gordon Company, pursuant to which TIMET is
intended to be the major supplier of titanium products to these customers. The
agreements are intended to provide for minimum market shares of the customer's
titanium requirements (generally at least 70%) for approximately 10-year
periods. The agreements generally provide for fixed or formula-determined
prices, at least for the first five years. With respect to TIMET's contract with
Boeing, although Boeing placed orders and accepted delivery of certain volumes
in 1999 and 2000, the level of orders was significantly below the contractual
volume requirements for those years. Boeing informed TIMET in 1999 that it was
unwilling to commit to the contract beyond the year 2000. In March 2000, TIMET
filed a lawsuit against The Boeing Company seeking damages for Boeing's breach
of the contract and a declaration from the court of TIMET's rights under the
contract. In June 2000, Boeing filed its answer to TIMET's complaint denying
substantially all of TIMET's allegations and making certain counterclaims
against TIMET. In April 2001, TIMET settled the litigation between TIMET and
Boeing related to their 1997 long-term purchase and supply agreement. Pursuant
to the settlement, TIMET received a cash payment of $82 million. The parties
also entered into an amended long-term agreement that, among other things,
allows Boeing to purchase up to 7.5 million pounds of titanium product annually
from TIMET from 2002 through 2007, subject to certain maximum quarterly volume
levels. In consideration, Boeing will annually advance TIMET $28.5 million for
purchases in the upcoming year. The initial advance for calendar year 2002 was
made in December 2001, with each subsequent advance made in early January of the
applicable calendar year beginning in 2003. The amended long-term agreement is
structured as a take-or-pay agreement such that Boeing will forfeit a
proportionate part of the $28.5 million annual advance in the event that its
orders for delivery for such calendar year are less than 7.5 million pounds.
Under a separate agreement TIMET will establish and hold buffer stock for Boeing
at TIMET's facilities.
TIMET also has a long-term arrangement for the purchase of titanium sponge.
The contract is effective through 2007, with firm pricing through 2002 (subject
to certain possible adjustments and possible early termination in 2004). The
agreement provides for annual purchases by TIMET of 6,000 metric tons, although
the supplier has agreed to reduced purchases by TIMET since 1999. TIMET is
currently operating under an agreement in principle that provides for minimum
purchases by TIMET of 1,500 metric tons in 2002 and certain other modified
terms. During 2001, TIMET accrued $3.0 million relating to its agreement with
the sponge supplier for settlement of purchases less than the required
contractual minimum for 2001 and prior years, of which $2.0 million remained
unpaid as of December 31, 2001. TIMET has no other long-term purchase
agreements.
Waste Control Specialists has agreed to pay two separate consultants fees
for performing certain services based on specified percentages of certain of
Waste Control Specialist's revenues. One such agreement currently provides for a
security interest in Waste Control Specialists' facility in West Texas to
collateralize Waste Control Specialists' obligation under that agreement, which
is limited to $18.4 million. A third similar agreement, under which Waste
Control Specialists was obligated to pay up to $10 million to another
independent consultant, was terminated during 2000. Expense related to all of
these agreements was not significant during the past three years.
Operating leases. Kronos' principal German operating subsidiary leases the
land under its Leverkusen TiO2 production facility pursuant to a lease expiring
in 2050. The Leverkusen facility, with approximately one-third of Kronos'
current TiO2 production capacity, is located within the lessor's extensive
manufacturing complex, and Kronos is the only unrelated party so situated. Under
a separate supplies and services agreement expiring in 2011, the lessor provides
some raw materials, auxiliary and operating materials and utilities services
necessary to operate the Leverkusen facility. Both the lease and the supplies
and services agreements restrict NL's ability to transfer ownership or use of
the Leverkusen facility. The Company also leases various other manufacturing
facilities and equipment. Most of the leases contain purchase and/or various
term renewal options at fair market and fair rental values, respectively. In
most cases the Company expects that, in the normal course of business, such
leases will be renewed or replaced by other leases. Rent expense related to the
Company's consolidated business segments approximated $10 million in 1999, $11
million in 2000 and $12 million in 2001. At December 31, 2001, future minimum
payments under noncancellable operating leases having an initial or remaining
term of more than one year were as follows:
Years ending December 31, Amount
(In thousands)
2002 $ 5,943
2003 4,509
2004 2,955
2005 1,818
2006 1,549
2007 and thereafter 20,269
-------
$37,043
Third-party indemnification. Amalgamated Research licenses certain of its
technology to third parties. With respect to such technology licensed to two
customers, Amalgamated Research has indemnified such customers for up to an
aggregate of $1.75 million against any damages they might incur resulting from
any claims for infringement of the Finnsugar patents discussed above. During
2000, Finnsugar filed a complaint against one of such customers in the U.S.
District Court for the Eastern District of Michigan alleging that the technology
licensed to such customer by the Company infringes certain of Finnsugar's
patents (Finnsugar Bioproducts, Inc. v. The Monitor Sugar Company, Civil No.
00-10381). Amalgamated Research is not a party to this litigation. The Company
denies such infringement, however the Company is providing defense costs to such
customer under the terms of their indemnification agreement up to the specified
limit of $750,000. Other than providing defense costs pursuant to the terms of
the indemnification agreements, Amalgamated Research does not believe it will
incur any losses as a result of providing such indemnification.
Note 20 - Accounting principles not yet adopted:
Goodwill. The Company will adopt SFAS No. 142, Goodwill and Other
Intangible Assets, effective January 1, 2002. Under SFAS No. 142, goodwill,
including goodwill arising from the difference between the cost of an investment
accounted for by the equity method and the amount of the underlying equity in
net assets of such equity method investee ("equity method goodwill"), will not
be amortized on a periodic basis. Instead, goodwill (other than equity method
goodwill) will be subject to an impairment test to be performed at least on an
annual basis, and impairment reviews may result in future periodic write-downs
charged to earnings. Equity method goodwill will not be tested for impairment in
accordance with SFAS No. 142; rather, the overall carrying amount of an equity
method investee will continue to be reviewed for impairment in accordance with
existing GAAP. There is currently no equity method goodwill associated with any
of the Company's equity method investees. Under the transition provisions of
SFAS No. 142, all goodwill existing as of June 30, 2001 will cease to be
periodically amortized as of January 1, 2002, but all goodwill arising in a
purchase business combination (including step acquisitions) completed on or
after July 1, 2001 would not be periodically amortized from the date of such
combination. The Company would have reported net income of approximately $109
million, or $.94 per diluted share, in 2001 if the goodwill amortization
included in the Company's reported net income had not been recognized.
As discussed in Note 9, the Company has assigned its goodwill to three
reporting units (as that term is defined in SFAS No. 142). Goodwill attributable
to the chemicals operating segment will be assigned to the reporting unit
consisting of NL in total. Goodwill attributable to the component products
operating segment will be assigned to two reporting units within that operating
segment, one consisting of CompX's security products operations and the other
consisting of CompX's ergonomic products and slide products operations. Under
SFAS No. 142, such goodwill will deemed to not be impaired if the estimated fair
value of the applicable reporting unit exceeds the respective net carrying value
of such reporting units, including the allocated goodwill. If the fair value of
the reporting unit is less than carrying value, then a goodwill impairment loss
would be recognized equal to the excess, if any, of the net carrying value of
the reporting unit goodwill over its implied fair value (up to a maximum
impairment equal to the carrying value of the goodwill). The implied fair value
of reporting unit goodwill would be the amount equal to the excess of the
estimated fair value of the reporting unit over the amount that would be
allocated to the tangible and intangible net assets of the reporting unit
(including unrecognized intangible assets) as if such reporting unit had been
acquired in a purchase business combination accounted for in accordance with
SFAS No. 141.
In determining the estimated fair value of the NL reporting unit, the
Company will consider quoted market prices for NL common stock. The Company will
also use other appropriate valuation techniques, such as discounted cash flows,
to estimate the fair value of the two CompX reporting units.
The Company has completed its initial, transitional goodwill impairment
analysis under SFAS No. 142 as of January 1, 2002, and no goodwill impairments
were deemed to exist. In accordance with the requirements of SFAS No. 142, the
Company will review goodwill of its three reporting units for impairment during
the third quarter of each year starting in 2002. Goodwill will also be reviewed
for impairment at other times during each year when events or changes in
circumstances indicate that an impairment might be present.
Impairment of long-lived assets. The Company will adopt SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, effective
January 1, 2002. SFAS No. 144 retains the fundamental provisions of existing
GAAP with respect to the recognition and measurement of long-lived asset
impairment contained in SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Lived-Lived Assets to be Disposed Of. However, SFAS
No. 144 provides new guidance intended to address certain implementation issues
associated with SFAS No. 121, including expanded guidance with respect to
appropriate cash flows to be used to determine whether recognition of any
long-lived asset impairment is required, and if required how to measure the
amount of the impairment. SFAS No. 144 also requires that any net assets to be
disposed of by sale to be reported at the lower of carrying value or fair value
less cost to sell, and expands the reporting of discontinued operations to
include any component of an entity with operations and cash flows that can be
clearly distinguished from the rest of the entity. Adoption of SFAS No. 144 will
not have a significant effect on the Company as of January 1, 2002.
Asset retirement obligations. The Company will adopt SFAS No. 143,
Accounting for Asset Retirement Obligations, no later than January 1, 2003.
Under SFAS No. 143, the fair value of a liability for an asset retirement
obligation covered under the scope of SFAS No. 143 would be recognized in the
period in which the liability is incurred, with an offsetting increase in the
carrying amount of the related long-lived asset. Over time, the liability would
be accreted to its present value, and the capitalized cost would be depreciated
over the useful life of the related asset. Upon settlement of the liability, an
entity would either settle the obligation for its recorded amount or incur a
gain or loss upon settlement. The Company is still studying this standard to
determine, among other things, whether it has any asset retirement obligations
which are covered under the scope of SFAS No. 143, and the effect, if any, on
the Company of adopting SFAS No. 143 has not yet been determined.
Note 21 - Quarterly results of operations (unaudited):
Quarter ended
--------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(In millions, except per share data)
Year ended December 31, 2000
Net sales ........................... $ 301.7 $ 320.0 $ 308.1 $ 262.1
Operating income .................... 49.1 66.6 57.4 44.6
Income from continuing
operations ......................... $ 10.5 $ 35.0 $ 13.0 $ 18.6
Extraordinary item .................. -- -- -- (.5)
------- ------- ------- -------
Net income ...................... $ 10.5 $ 35.0 $ 13.0 $ 18.1
======= ======= ======= =======
Basic earnings per common share:
Continuing operations ............. $ .09 $ .30 $ .11 $ .16
Extraordinary item ................ -- -- -- --
------- ------- ------- -------
Net income ...................... $ .09 $ .30 $ .11 $ .16
======= ======= ======= =======
Year ended December 31, 2001
Net sales ........................... $ 288.8 $ 276.3 $ 262.5 $ 231.9
Operating income .................... 49.2 39.7 31.5 21.8
Net income ...................... $ 31.6 $ 47.6 $ 10.3 $ 3.7
Basic earnings per common share ..... $ .27 $ .41 $ .09 $ .03
The sum of the quarterly per share amounts may not equal the annual per
share amounts due to relative changes in the weighted average number of shares
used in the per share computations.
During the fourth quarter of 2000, the Company recognized a $26.5 million
pre-tax gain related to NL's legal settlement with certain of its former
insurance carriers and a $5.7 million pre-tax impairment charge for an other
than temporary decline in value of certain marketable securities held by the
Company. See Note 12. During the fourth quarter of 2000, the Company also
recognized an extraordinary loss related to the early extinguishment of certain
NL indebtedness. See Notes 1 and 11.
During the fourth quarter of 2001, the Company recognized (i) an $11.7
million insurance gain related to insurance recoveries received by NL resulting
from fire at its Leverkusen facility, (ii) $16.6 million of business
interruption insurance proceeds related to the Leverkusen fire as payment for
unallocated period costs and lost margin attributable to prior 2001 quarters,
and (iii) a $17.6 million net income tax benefit related principally to a change
in estimate of NL's ability to utilize certain German income tax attributes. See
Notes 12 and 16. In addition, the Company's equity in earnings of TIMET during
the fourth quarter of 2001 includes the effect of TIMET's $61.5 million
provision for an other than temporary decline in value of certain preferred
securities held by TIMET and a $12.3 million increase in TIMET's deferred income
tax asset valuation allowance.
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Stockholders and Board of Directors of Valhi, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated March 15, 2002, appearing on page F-2 of the 2001 Annual Report on
Form 10-K of Valhi, Inc., also included an audit of the financial statement
schedules listed in the index on page F-1 of this Form 10-K. In our opinion,
these financial statement schedules present fairly, in all material respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
March 15, 2002
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheets
December 31, 2000 and 2001
(In thousands)
2000 2001
---- ----
Current assets:
Cash and cash equivalents ...................... $ 3,383 $ 3,520
Marketable securities .......................... -- 14,882
Accounts and notes receivable .................. 5,582 5,862
Receivables from subsidiaries and
affiliates:
Loan ......................................... -- 755
Dividends .................................... 6,362 --
Other ........................................ 27 136
Deferred income taxes .......................... 775 --
Other .......................................... 141 255
---------- ----------
Total current assets ....................... 16,270 25,410
---------- ----------
Other assets:
Marketable securities .......................... 267,556 170,212
Investment in and advances to
subsidiaries and affiliates ................... 739,865 748,697
Loans and notes receivable ..................... 99,334 104,933
Other assets ................................... 1,807 905
Property and equipment, net .................... 2,872 2,691
---------- ----------
Total other assets ......................... 1,111,434 1,027,438
---------- ----------
$1,127,704 $1,052,848
Current liabilities:
Current maturities of long-term debt ........... $ 31,000 $ 63,352
Payables to subsidiaries and affiliates:
Demand loan from Contran Corporation ......... 8,000 24,574
Income taxes, net ............................ 2,056 8,891
Other ........................................ 1,122 100
Accounts payable and accrued liabilities ....... 5,217 2,888
Income taxes ................................... 1,427 1,301
Deferred income taxes .......................... -- 617
---------- ----------
Total current liabilities .................. 48,822 101,723
---------- ----------
Noncurrent liabilities:
Long-term debt ................................. 353,213 250,000
Deferred income taxes .......................... 86,214 68,371
Other .......................................... 11,220 10,426
---------- ----------
Total noncurrent liabilities ............... 450,647 328,797
---------- ----------
Stockholders' equity ............................. 628,235 622,328
---------- ----------
$1,127,704 $1,052,848
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed Statements of Income
Years ended December 31, 1999, 2000 and 2001
(In thousands)
1999 2000 2001
---- ---- ----
Revenues and other income:
Interest and dividend income .............. $ 36,671 $ 33,108 $ 30,601
Securities transaction gains (losses), net 757 (2,490) 48,142
Other, net ................................ 7,804 4,356 2,997
-------- -------- --------
45,232 34,974 81,740
-------- -------- --------
Costs and expenses:
General and administrative ................ 14,942 11,118 9,862
Interest .................................. 33,097 34,646 31,295
-------- -------- --------
48,039 45,764 41,157
-------- -------- --------
(2,807) (10,790) 40,583
Equity in earnings of subsidiaries and
affiliates ................................. 32,870 86,895 70,190
-------- -------- --------
Income before income taxes ................ 30,063 76,105 110,773
Provision for income taxes (benefit) ........ (17,359) (986) 17,575
-------- -------- --------
Income from continuing operations ......... 47,422 77,091 93,198
Discontinued operations ..................... 2,000 -- --
Extraordinary item .......................... -- (477) --
-------- -------- --------
Net income ................................ $ 49,422 $ 76,614 $ 93,198
======== ======== ========
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed Statements of Cash Flows
Years ended December 31, 1999, 2000 and 2001
(In thousands)
1999 2000 2001
---- ---- ----
Cash flows from operating activities:
Net income ............................... $ 49,422 $ 76,614 $ 93,198
Securities transactions, net ............. (757) 2,490 (48,142)
Noncash interest expense ................. 8,058 8,802 5,089
Deferred income taxes .................... (4,182) (2,929) 8,546
Equity in earnings of subsidiaries
and affiliates:
Continuing operations .................. (32,870) (86,895) (70,190)
Discontinued operations ................ (2,000) -- --
Extraordinary item ..................... -- 477 --
Dividends from subsidiaries
and affiliates .......................... 3,819 20,792 55,696
Other, net ............................... 610 844 327
-------- -------- --------
22,100 20,195 44,524
Net change in assets and liabilities ..... (6,766) 9,483 (2,528)
-------- -------- --------
Net cash provided by
operating activities ................ 15,334 29,678 41,996
-------- -------- --------
Cash flows from investing activities:
Purchase of:
Tremont common stock ................... (1,945) (19,311) (198)
CompX common stock ..................... (816) -- --
Subsidiary debt from lender ............ -- -- (5,273)
Investment in Waste Control Specialists .. (10,000) (20,000) --
Proceeds from disposal of marketable
securities .............................. 6,588 -- 16,802
Loans to subsidiaries and affiliates:
Loans .................................. (11,833) (34,232) (11,505)
Collections ............................ 8,717 48,307 2,746
Other, net ............................... (350) (221) (176)
-------- -------- --------
Net cash provided (used) by
investing activities ................ (9,639) (25,457) 2,396
-------- -------- --------
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed Statements of Cash Flows (Continued)
Years ended December 31, 1999, 2000 and 2001
(In thousands)
1999 2000 2001
---- ---- ----
Cash flows from financing activities:
Indebtedness:
Borrowings ....................... $ 21,000 $ 56,880 $ 35,000
Principal payments ............... -- (44,000) (67,662)
Loans from affiliates:
Loans ............................ 45,000 15,768 81,905
Repayments ....................... (52,218) (8,982) (66,310)
Dividends .......................... (23,146) (24,328) (27,820)
Common stock reacquired ............ -- (19) --
Other, net ......................... 656 899 632
-------- -------- --------
Net cash used by
financing activities .......... (8,708) (3,782) (44,255)
-------- -------- --------
Cash and cash equivalents:
Net increase (decrease) ............ (3,013) 439 137
Balance at beginning of year ....... 5,957 2,944 3,383
-------- -------- --------
Balance at end of year ............. $ 2,944 $ 3,383 $ 3,520
======== ======== ========
Supplemental disclosures -
cash paid for:
Interest ........................... $ 24,900 $ 25,326 $ 26,785
Income taxes (received), net ....... (11,191) (12,612) 2,320
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Notes to Condensed Financial Information
Note 1 - Basis of presentation:
The Consolidated Financial Statements of Valhi, Inc. and Subsidiaries are
incorporated herein by reference.
Note 2 - Marketable securities:
December 31,
2000 2001
---- ----
(In thousands)
Current assets - Halliburton Company common stock:
Trading ........................................ $ -- $ 6,744
Available-for-sale ............................. -- 8,138
-------- --------
$ -- $ 14,882
======== ========
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC .............. $170,000 $170,000
Halliburton Company common stock ............... 97,108 --
Other securities ............................... 448 212
-------- --------
$267,556 $170,212
Note 3 - Investment in and advances to subsidiaries and affiliates:
December 31,
2000 2001
---- ----
(In thousands)
Investment in:
NL Industries (NYSE: NL) ........................... $483,524 $499,529
Tremont Group, Inc. ................................ 164,382 162,502
Valcor and subsidiaries ............................ 70,749 64,984
Waste Control Specialists LLC ...................... 19,169 6,364
-------- --------
737,824 733,379
Noncurrent loan to Waste Control Specialists LLC ..... 2,041 15,318
-------- --------
$739,865 $748,697
Current loan to Waste Control Specialists LLC ........ $ -- $ 755
======== ========
Tremont Group. is a holding company which owns 80% of Tremont Corporation
(NYSE: TRE) at December 31, 2000 and 2001. Prior to December 31, 2000, Valhi
owned 64% of Tremont Corporation and NL owned an additional 16% of Tremont.
Effective with the close of business on December 31, 2000, Valhi and NL each
contributed their Tremont shares to Tremont Group in return for an 80% and 20%
ownership interest, respectively, in Tremont Group. Tremont Corporation is a
holding company whose principal assets at December 31, 2001 are a 39% interest
in Titanium Metals Corporation (NYSE: TIE) and a 21% interest in NL.
Valcor's principal asset is a 66% interest in CompX International, Inc. at
December 31, 2001 (NYSE: CIX). Valhi owns an additional 3% of CompX directly,
and Valhi's direct investment in CompX is considered part of its investment in
Valcor.
Years ended December 31,
1999 2000 2001
---- ---- ----
(In thousands)
Equity in earnings of subsidiaries and affiliates
Continuing operations:
NL Industries .............................. $ 77,950 $ 79,190 $57,183
Tremont Group/Tremont Corporation .......... (48,652) 4,420 3,961
Valcor ..................................... 14,761 12,927 4,214
Waste Control Specialists LLC .............. (11,189) (9,642) 4,832
-------- -------- -------
$ 32,870 $ 86,895 $70,190
======== ======== =======
Discontinued operations - Valcor ............. $ 2,000 $ -- $ --
======== ======== =======
Extraordinary item - NL Industries ........... $ -- $ (477) $ --
======== ======== =======
Dividends from subsidiaries and affiliates
Declared:
NL Industries .............................. $ 4,219 $ 19,589 $24,108
Tremont Group/Tremont Corporation .......... 877 1,054 1,152
Valcor ..................................... 47 5,187 6,437
Waste Control Specialists LLC .............. -- -- 17,637
-------- -------- -------
5,143 25,830 49,334
Net change in dividends receivable ........... (1,324) (5,038) 6,362
-------- -------- -------
Cash dividends received .................. $ 3,819 $ 20,792 $55,696
======== ======== =======
Note 4 - Loans and notes receivable:
December 31,
2000 2001
---- ----
(In thousands)
Snake River Sugar Company:
Principal .......................... $ 80,000 $ 80,000
Interest ........................... 17,526 22,718
Other ................................ 1,808 2,215
-------- --------
$ 99,334 $104,933
Note 5 - Long-term debt:
December 31,
2000 2001
---- ----
(In thousands)
Snake River Sugar Company .................. $250,000 $250,000
LYONs ...................................... 100,333 25,472
Bank credit facility ....................... 31,000 35,000
Other ...................................... 2,880 2,880
-------- --------
384,213 313,352
Less current maturities .................... 31,000 63,352
-------- --------
$353,213 $250,000
Valhi's $250 million in loans from Snake River bear interest at a weighted
average fixed interest rate of 9.4%, are collateralized by the Company's
interest in The Amalgamated Sugar Company LLC and are due in January 2027.
Currently, these loans are nonrecourse to Valhi. Up to $37.5 million of such
loans will become recourse to Valhi when the balance of Valhi's loan to Snake
River (including accrued interest) becomes less than $37.5 million. See Note 4.
Under certain conditions, Snake River has the ability to accelerate the maturity
of these loans.
The zero coupon Senior Secured LYONs, $43.1 million principal amount at
maturity in October 2007 outstanding at December 31, 2001, were issued with
significant OID to represent a yield to maturity of 9.25%. No periodic interest
payments are required. Each $1,000 in principal amount at maturity of the LYONs
is exchangeable, at any time at the option of the holders of the LYONs, for
14.4308 shares of Halliburton common stock held by Valhi. Such shares of
Halliburton common stock, classified as available-for-sale, are collateral for
the LYONs debt obligation and are held in escrow for the benefit of holders of
the LYONs. Valhi receives the regular quarterly dividend on the escrowed
Halliburton shares. During 1999, 2000 and 2001, holders representing $483,000,
$336,000 and $92.2 million principal amount at maturity, respectively, of LYONs
exchanged such LYONs for Halliburton shares. Under the terms of the indenture
governing the LYONs, the Company has the option to deliver, in whole or in part,
cash equal to the market value of the Halliburton shares that are otherwise
required to be delivered to the LYONs holder in an exchange, and a portion of
such exchanges during 2001 was so settled. Also during 2001, $50.4 million
principal amount at maturity of LYONs were redeemed by the Company for cash at
various redemption prices equal to the accreted value of the LYONs on the
respective redemption dates. The LYONs are redeemable, at the option of the
holder, in October 2002, at $636.27 per $1,000 principal amount (the issue price
plus accrued OID through such purchase date), or an aggregate of $27.4 million
based on the number of LYONs outstanding at December 31, 2001, and accordingly
the LYONs are classified as a current liability at December 31, 2001. Such
redemptions may be paid, at Valhi's option, in cash, shares of Halliburton
common stock, or a combination thereof. The LYONs are redeemable, at any time,
at Valhi's option, for cash equal to the issue price plus accrued OID through
the redemption date.
At December 31, 2001, Valhi has a $55 million revolving bank credit
facility which matures in November 2002, generally bears interest at LIBOR plus
1.5% (for LIBOR-based borrowings) or prime (for prime-based borrowings), and is
collateralized by 30 million shares of NL common stock held by Valhi. The size
of the facility was increased to $70 million in January 2002, and was further
increased to $72.5 million in February 2002. The agreement limits dividends and
additional indebtedness of Valhi and contains other provisions customary in
lending transactions of this type. In the event of a change of control of Valhi,
as defined, the lenders would have the right to accelerate the maturity of the
facility. The maximum amount which may be borrowed under the facility is limited
to one-third of the aggregate market value of the shares of NL common stock
pledged as collateral. Based on NL's December 31, 2001 quoted market price of
$15.27 per share, the 30 million shares of NL common stock pledged under the
facility provide more than sufficient collateral coverage to allow for
borrowings up to the full amount of the facility, even after considering the
January and February 2002 increases in the size of the facility to $72.5
million. Valhi would become limited to borrowing less than the full $72.5
million amount of the facility, or would be required to pledge additional
collateral if the full amount of the facility had been borrowed, only if NL's
stock price were to fall below approximately $7.25 per share. At December 31,
2001, $35 million was outstanding under this facility consisting of $30 million
of LIBOR-based borrowings (at an interest rate of 3.625%) and $5 million of
prime-based borrowings (at an interest rate of 4.75%). At December 31, 2001,
$18.9 million was available for borrowing under this facility.
Other indebtedness consists of an unsecured note payable bearing interest
at a fixed rate of interest of 6.2% and due in November 2002.
Note 6 - Income taxes:
Years ended December 31,
1999 2000 2001
---- ---- ----
(In thousands)
Income tax provision (benefit)
attributable to continuing operations:
Currently payable (refundable) ........... $(13,177) $ 1,943 $ 9,029
Deferred income taxes (benefit) .......... (4,182) (2,929) 8,546
-------- -------- --------
$(17,359) $ (986) $ 17,575
======== ======== ========
Cash paid (received) for income taxes, net:
Paid to (received from) subsidiaries ..... $ 1,121 $ (1,019) $ (439)
Paid to (received from) Contran .......... (12,395) (11,600) 2,607
Paid to tax authorities, net ............. 83 7 152
-------- -------- --------
$(11,191) $(12,612) $ 2,320
======== ======== ========
At December 31, 2000, NL, Tremont Corporation and CompX were separate U.S.
taxpayers and were not members of the Contran Tax Group. Effective January 1,
2001, Tremont and NL became members of the Contran Tax Group. Waste Control
Specialists LLC and The Amalgamated Sugar Company LLC are treated as
partnerships for federal income tax purposes. Valhi Parent Company's provision
for income taxes (benefit) includes a tax provision (benefit) attributable to
Valhi's equity in earnings (losses) of Waste Control Specialists.
Deferred tax
asset (liability)
December 31,
2000 2001
---- ----
(In thousands)
Components of the net deferred tax asset
(liability) - tax effect of temporary
differences related to:
Marketable securities .............................. $(85,767) $(56,836)
Investment in subsidiaries and affiliates not
members of the Contran Tax Group .................. 1,562 1,760
Reduction of deferred income tax assets of
subsidiaries that are members of the Contran Tax
Group - separate company U.S. net operating loss
carryforwards and other tax attributes that do not
exist at the Valhi level .......................... -- (9,748)
Accrued liabilities and other deductible differences 4,884 4,729
Other taxable differences .......................... (6,118) (8,893)
-------- --------
$(85,439) $(68,988)
======== ========
Current deferred tax asset (liability) ................. $ 775 $ (617)
Noncurrent deferred tax liability ...................... (86,214) (68,371)
-------- --------
$(85,439) $(68,988)
======== ========
VALHI, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
Balance at charged to Balance
beginning costs and Net Currency at end
Description of year expenses deductions translation Other(a) of year
--------------------------------- ------ ------ ----- ----- ---- -----
Year ended December 31, 1999:
Allowance for doubtful accounts $ 2,687 $ 787 $ (269) $ (262) $ 3,270 $ 6,213
======= ======== ======= ======= ======== =======
Amortization of intangibles:
Goodwill .................... $33,241 $ 11,753 $ -- $ -- $ -- $44,994
Other ....................... 10,601 2,058 -- (1,573) -- 11,086
------- -------- ------- ------- -------- -------
$43,842 $ 13,811 $ -- $(1,573) $ -- $56,080
======= ======== ======= ======= ======== =======
Year ended December 31, 2000:
Allowance for doubtful accounts $ 6,213 $ 645 $ (787) $ (163) $ -- $ 5,908
======= ======== ======= ======= ======== =======
Amortization of intangibles:
Goodwill .................... $44,994 $ 15,952 $ -- $ (55) $ -- $60,891
Other ....................... 11,086 474 (8,245) (2,530) -- 785
------- -------- ------- ------- -------- -------
$56,080 $ 16,426 $(8,245) $(2,585) $ -- $61,676
======= ======== ======= ======= ======== =======
Year ended December 31, 2001:
Allowance for doubtful accounts $ 5,908 $ 1,588 $(1,080) $ (90) $ -- $ 6,326
======= ======== ======= ======= ======== =======
Amortization of intangibles:
Goodwill .................... $60,891 $ 16,963 $ -- $ (75) $ -- $77,779
Other ....................... 785 229 -- (4) -- 1,010
------- -------- ------- ------- -------- -------
$61,676 $ 17,192 $ -- $ (79) $ -- $78,789
======= ======== ======= ======= ======== =======
(a) 1999 - Consolidation of Waste Control Specialists LLC and Tremont
Corporation.
Note - Certain prior year amounts have been reclassified to conform to the
current year presentation.