SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 - For the fiscal year ended December 31, 2004
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
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Common stock New York Stock Exchange
($.01 par value per share)
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act). Yes X No
The aggregate market value of the 10.4 million shares of voting stock held by
nonaffiliates of Valhi, Inc. as of June 30, 2004 (the last business day of the
Registrant's most recently-completed second fiscal quarter) approximated $118.4
million.
As of February 28, 2005, 119,485,878 shares of the Registrant's common stock
were outstanding.
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.
Explanatory Note Regarding Amendment No. 1
The Registrant hereby files this Annual Report on Form 10-K/A ("Form
10-K/A") to amend its Annual Report on Form 10-K for the year ended December 31,
2004, as filed with the Securities and Exchange Commission ("SEC") on March 30,
2005 ("Original Form 10-K"). As discussed in Note 1 to the Consolidated
Financial Statements, on December 21, 2005, the Registrant and its audit
committee concluded that the Registrant would file this Form 10-K/A to restate
the Registrant's consolidated balance sheet as of December 31, 2003 and 2004,
and the Registrant's consolidated statements of income, comprehensive income,
cash flows and stockholders' equity for each of the three years in the period
ended December 31, 2004, in each case as contained in the Original Form 10-K.
As previously disclosed, in January 1997 the Registrant transferred control
of the refined sugar operations previously conducted by the Registrant'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 the
Registrant aggregating $250 million. Such loans from Snake River are
collateralized by the Registrant's interest in the LLC. Snake River's sources of
funds for its loans to the Registrant, 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 the Registrant, of which $100 million was subsequently
repaid in 1997 when Snake River obtained an equal amount of third-party term
loan financing. After such repayments, $80 million principal amount of the
Registrant's loans to Snake River have remained outstanding since June 30, 1997
through December 31, 2004.
The Registrant 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 Registrant. To the extent the LLC's distributions are below
this base level in any given year, the Registrant 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
Registrant is entitled to receive additional cash distributions from the LLC.
The Registrant may, at its option, require the LLC to redeem the Registrant's
interest in the LLC beginning in 2012, and the LLC has the right to redeem the
Registrant'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 Registrant. In the event the Registrant requires the LLC to redeem the
Registrant's interest in the LLC, Snake River has the right to accelerate the
maturity of and call Registrant's $250 million loans from Snake River.
The Registrant reports the cash distributions received from the LLC as
dividend income. The amount of such future distributions is dependent upon,
among other things, the future performance of the LLC's operations. Because the
Registrant 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 Registrant accounts for
its investment in the LLC as a debt security at its estimated fair value.
In 1997 when the Company obtained its interest in the LLC, the Registrant
concluded that the earnings process with respect to the refined sugar operations
contributed by the Registrant to the LLC was not complete. Accordingly, the
Registrant did not recognize any gain in earnings. The Registrant did treat its
investment in the LLC as equivalent to a SFAS No. 115 debt security. Thus, the
excess of the fair value of the Registrant's investment in the LLC over the $34
million cost basis of such investment was recognized as a component of other
comprehensive income, net of applicable deferred income taxes. In estimating the
fair value of the Registrant's interest in the LLC, the Registrant considered,
among other things, the outstanding balance of the Registrant's loans to Snake
River and the outstanding balance of the Registrant's loans from Snake River,
with the result that the estimated fair value of the Registrant's LLC investment
was deemed to be $170 million ever since June 30, 1997. Under this accounting,
the Registrant would have reported a gain in earnings for financial reporting
purposes at the time its LLC interest was redeemed, with a corresponding
reduction in accumulated other income.
In connection with finalizing the preparation of the Company's consolidated
financial statements for the quarter ended September 30, 2005, the Registrant
re-evaluated its original conclusions regarding how it accounts for its
investment in the LLC. As a result, the Registrant has now concluded that a
proper application of accounting principles generally accepted in the United
States of America ("GAAP") would have been to recognize a gain in earnings in
1997 equal to the difference between $250 million (the fair value of the
Registrant's interest in the LLC) and the $34 million cost basis of the net
assets contributed to the LLC, net of applicable deferred income taxes. This
correction constitutes a prior period adjustment under GAAP. Accordingly, the
Registrant has retroactively restated its consolidated financial statements to
reflect this correction. The effect of this correction on the Registrant's
December 31, 2004 consolidated balance sheet, as contained herein, as compared
to such consolidated balance sheet contained in the Original Form 10-K, is to
(i) increase the carrying value of the Registrant's investment in the LLC
(included as part of noncurrent marketable securities) by $80 million, (ii)
increase noncurrent deferred income tax liabilities by $31.2 million and (iii)
increase total stockholders' equity by $48.8 million (with retained earnings
increasing by $131.7 million and accumulated other comprehensive income related
to marketable securities decreasing by $82.9 million). A similar balance sheet
adjustment would be applicable to Registrant's previously-reported consolidated
balance sheet at December 31, 2003 contained in the Original Form 10-K, and each
consolidated balance sheet prior thereto until June 30, 1997. Under this revised
accounting, the Company would not be expected to report a gain in earnings for
financial reporting purposes at the time its LLC interest is redeemed, as the
redemption price of $250 million is expected to equal the carrying value of its
investment in the LLC at the time of redemption.
As discussed below in Notes 1 and 3 to the Consolidated Financial
Statements, prior to December 2003 Kronos Worldwide, Inc. was a wholly-owned
subsidiary of NL Industries, Inc., a majority-owned subsidiary of the
Registrant. In December 2003, NL completed the distribution of approximately
48.8% of Kronos' common stock on a pro-rata basis to its shareholders, including
Valhi, and during 2004 NL paid each of its four $.20 per share regular quarterly
dividends in the form of shares of Kronos common stock. In its previously-issued
consolidated financial statements, the Registrant accounted for its pro-rata
share of any current income tax resulting from the distribution of shares of
Kronos common stock to NL's stockholders as a direct charge to equity. In
addition, the Registrant has never recognized deferred income taxes with respect
to the excess of the GAAP book basis of its investment in Kronos over the income
tax basis of such shares. The Registrant has now concluded, among other things,
that (i) a portion of the current income taxes resulting from the distribution
of shares of Kronos common stock to NL's shareholders should be included in the
Registrant's provision for income taxes included in the determination of net
income and (ii) the Registrant should have commenced to recognize deferred
income taxes with respect to the excess of the GAAP book basis of its investment
in Kronos over the income tax basis of such shares starting in December 2003,
concurrent with NL's December 2003 distribution of 48.8% of Kronos' common stock
(the first time in which the Registrant owned shares of Kronos directly),
including recognition of such deferred income taxes with respect to the excess
of the GAAP book basis of its investment in Kronos over the income tax basis of
such shares that existed as of the date of such December 2003 distribution.
Accordingly, during the Registrant's close process for its fiscal quarter ended
September 30, 2005, the Registrant concluded that:
o its provision for income taxes included in the determination of income
from continuing operations was misstated by an aggregate of $1.7
million ($1.4 million, or $.01 per diluted share, net of minority
interest) in 2002, by $142.4 million ($124.4 million, or $1.04 per
diluted share, net of minority interest) in 2003 and by $93.6 million
($84.5 million, or $.70 per diluted share, net of minority interest)
in 2004;
o its provision for deferred income taxes included in the determination
of total other comprehensive income related to foreign currency
translation and pension liabilities, net of minority interest, was
misstated by an aggregate of $339,000 in 2002, by $3.7 million in 2003
and by $8.5 million in 2004;
o its provision for income taxes accounted for as a direct reduction to
stockholders' equity, net of minority interest, was misstated by $19.0
million in 2003 and by $6.8 million in 2004; and
o with respect to its statement of changes in stockholders' equity, and
in addition to the effect of the items noted above, total
stockholders' equity was misstated by $16.1 million as of December 31,
2001,
in each case as they related to the appropriate provision for income taxes and
related items which should have been recognized in accordance with accounting
principles generally accepted in the United States of America ("GAAP") as
provided by the guidance contained in Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, principally with respect to the
following items: o Deferred income taxes with respect to the income tax effect
of the excess of the GAAP book basis over the income tax basis of the
Registrant's investment in Kronos Worldwide, Inc., a majority-owned subsidiary
of the Registrant; o Current income taxes related to distributions of shares of
Kronos common stock made by NL Industries, Inc., the Registrant's majority-owned
subsidiary, to NL's stockholders; and o Current and deferred income tax
provisions related to other items.
This amendment was required to correct for the aggregate effect of these
misstatements. See Note 1 to the Consolidated Financial Statements for a summary
of financial statement amounts that are affected by this restatement. While the
effect of these misstatements have no effect on the Company's
previously-reported total cash flows from operating, investing and financing
activities, these misstatements do have a significant effect on the Company's
provision for income taxes, related income tax accounts (principally deferred
income taxes) and stockholders' equity.
The guidance set forth in Auditing Standards No. 2 of the Public Company
Accounting Oversight Board states that a restatement of previously-issued
financial statements to reflect the correction of a misstatement should be
regarded as at least a significant control deficiency and as a strong indicator
that a material weakness in internal control over financial reporting exists. As
a result of this amendment, the Registrant has concluded that a material
weakness existed at December 31, 2004 that precludes the Registrant from
concluding that its internal control over financial reporting was effective as
of such date. Therefore, the Registrant's previous conclusion that it maintained
effective internal control over financial reporting as of December 31, 2004, as
set forth in the Original Form 10-K, has been restated. See Item 9A - "Controls
and Procedures."
For the convenience of the reader, this Form 10-K/A sets forth the Original Form
10-K, as amended hereby, in its entirety. However, this Form 10-K/A only amends
and restates Items 6, 7, 8 and 9A of the Original Form 10-K, in each case solely
as a result of and to reflect the corrections discussed above, and no other
information in the Original Form 10-K is amended hereby. The foregoing items
have not been updated to reflect other events occurring after the filing of the
Original Form 10-K, or to modify or update those disclosures affected by other
subsequent events. In addition, pursuant to the rules of the SEC, Exhibits 31.1,
31.2 and 32.1 have been updated to contain currently-dated certifications of the
Registrant's Chief Executive Officer and Chief Financial Officer.
[INSIDE FRONT COVER]
A chart showing, as of December 31, 2004, (i) Valhi's 62% ownership of NL
Industries, Inc., 46% ownership of Kronos Worldwide, Inc., 100% ownership of
Waste Control Specialists LLC, 100% ownership of Tremont LLC and 1% ownership of
Titanium Metals Corporation ("TIMET"), (ii) NL's 37% ownership of Kronos
Worldwide and 68% ownership of CompX International Inc., (iii) Tremont's 21%
ownership of NL, 11% ownership of Kronos Worldwide and 40% ownership of TIMET
and (x) TIMET's 17% ownership of CompX. The chart also indicates that Tremont
distributed its ownership interest in NL and Kronos to Valhi in January 2005.
PART I
ITEM 1. BUSINESS
As more fully described on the condensed organizational 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 Kronos is a leading global producer and
Kronos Worldwide, Inc. marketer of value-added titanium dioxide
pigments ("TiO2"), which are used for
imparting whiteness, brightness and
opacity to a diverse range of customer
applications and end-use markets,
including coatings, plastics, paper and
other industrial and consumer
"quality-of-life" products. Kronos has
production facilities in Europe and
North America. Sales of TiO2 represent
about 90% of Kronos' total sales in
2004, with sales of other products that
are complementary to Kronos' TiO2
business comprising the remainder.
Component Products CompX is a leading manufacturer of
CompX International Inc. precision ball bearing slides, security
products and ergonomic computer support
systems used in office furniture,
computer-related applications and a
variety of other industries. CompX has
production facilities in North America
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 and mixed low-level
radioactive wastes. Waste Control
Specialists is seeking additional
regulatory authorizations to expand its
treatment, storage and disposal
capabilities for low-level and mixed
low-level radioactive wastes.
Titanium Metals Titanium Metals Corporation ("TIMET") is
Titanium Metals Corporation a leading global producer of titanium
sponge, melted products (ingot and slab)
and mill products for commercial and
military aerospace, industrial and other
markets, including new applications for
titanium in the automotive and other
emerging markets. TIMET is the only
producer with major production
facilities in both the U.S. and Europe,
the world's principal markets for
titanium consumption.
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 91% 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, or is held by Mr. Simmons or
persons or other entities related to Mr. Simmons. Consequently, Mr. Simmons may
be deemed to control such companies. NL (NYSE: NL), Kronos (NYSE: KRO), CompX
(NYSE: CIX) and TIMET (NYSE: TIE) each currently file periodic reports with the
Securities and Exchange Commission ("SEC"). The information set forth below with
respect to such companies has been derived from such reports.
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 from those described herein are the risks and uncertainties
discussed in this Annual Report and those described from time to time in the
Company's other filings with the SEC including, but not limited to, the
following:
o Future supply and demand for the Company's products,
o The extent of the dependence of certain of the Company's businesses on
certain market sectors (such as the dependence of TIMET's titanium
metals business on the aerospace industry),
o The cyclicality of certain of the Company's businesses (such as
Kronos' TiO2 operations and TIMET's titanium metals operations),
o The impact of certain long-term contracts on certain of the Company's
businesses (such as the impact of TIMET's long-term contracts with
certain of its customers and such customers' performance thereunder
and the impact of TIMET's long-term contracts with certain of its
vendors on its ability to reduce or increase supply or achieve lower
costs),
o Customer inventory levels (such as the extent to which Kronos'
customers may, from time to time, accelerate purchases of TiO2 in
advance of anticipated price increases or defer purchases of TiO2 in
advance of anticipated price decreases, or the relationship between
inventory levels of TIMET's customers and such customers' current
inventory requirements and the impact of such relationship on their
purchases from TIMET),
o Changes in raw material and other operating costs (such as energy
costs),
o The possibility of labor disruptions,
o General global economic and political conditions (such as changes in
the level of gross domestic product in various regions of the world
and the impact of such changes on demand for, among other things,
TiO2),
o Competitive products and substitute products,
o Customer and competitor strategies,
o The impact of pricing and production decisions,
o Competitive technology positions,
o The introduction of trade barriers,
o Fluctuations in currency exchange rates (such as changes in the
exchange rate between the U.S. dollar and each of the euro, the
Norwegian kroner and the Canadian dollar),
o Operating interruptions (including, but not limited to, labor
disputes, leaks, fires, explosions, unscheduled or unplanned downtime
and transportation interruptions),
o The ability of the Company to renew or refinance credit facilities,
o Uncertainties associated with new product development (such as TIMET's
ability to develop new end-uses for its titanium products),
o The ultimate outcome of income tax audits, tax settlement initiatives
or other tax matters,
o The ultimate ability to utilize income tax attributes, the benefit of
which has been recognized under the "more-likely-than-not" recognition
criteria (such as Kronos' ability to utilize its German net operating
loss carryforwards),
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o Government laws and regulations and possible changes therein (such as
changes in government regulations which might impose various
obligations on present and former manufacturers of lead pigment and
lead-based paint, including NL, with respect to asserted health
concerns associated with the use of such products),
o The ultimate resolution of pending litigation (such as NL's lead
pigment litigation and litigation surrounding environmental matters of
NL, Tremont and TIMET), and
o Possible future litigation.
Should one or more of these risks materialize (or the consequences of such
a development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected. The
Company disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of changes in information, future
events or otherwise.
CHEMICALS - KRONOS WORLDWIDE, INC.
Products and operations. Kronos is a leading global producer and marketer
of value-added TiO2, inorganic chemical products used for imparting whiteness,
brightness and opacity to a diverse range of customer applications and end-use
markets, including coatings, plastics, paper, fiber, food, ceramics and
cosmetics. TiO2 is considered a "quality-of-life" product with demand affected
by gross domestic product in various regions of the world. TiO2, the largest
commercially used whitening pigment by volume, derives its value from its
whitening properties and opacifying ability (commonly referred to as hiding
power). As a result of TiO2's high refractive index rating, it can provide more
hiding power than any other commercially produced white pigment. In addition,
TiO2 demonstrates excellent resistance to chemical attack, good thermal
stability and resistance to ultraviolet degradation. TiO2 is supplied to
customers in either a powder or slurry form.
Approximately one-half of Kronos' 2004 TiO2 sales volumes were to Europe,
with about 38% to North America and the balance to export markets. Kronos is the
second-largest producer of TiO2 in Europe, with an estimated 20% share of
European TiO2 sales volumes in 2004. Kronos has an estimated 14% share of North
American TiO2 sales volumes.
TiO2 is produced in two crystalline forms: rutile and anatase. Both the
chloride and sulfate production processes (discussed below) produce rutile TiO2.
Chloride process rutile is preferred for the majority of customer applications.
From a technical standpoint, chloride process rutile has a bluer undertone and
higher durability than sulfate process rutile TiO2. Although many end-use
applications can use either form of TiO2, chloride process rutile TiO2 is the
preferred form for use in coatings and plastics, the two largest end-use
markets. Anatase TiO2, which is produced only through the sulfate production
process, represents a much smaller percentage of annual global TiO2 production
and is preferred for use in selected paper, ceramics, rubber tires, man-made
fibers, food and cosmetics.
Per capita consumption of Ti02 in the United States and Western Europe far
exceeds consumption in other areas of the world and these regions are expected
to continue to be the largest consumers of TiO2. Significant markets for TiO2
could emerge in Eastern Europe, the Far East or China, as the economies in these
regions continue to develop to the point that quality-of-life products,
including TiO2, experience greater demand.
Kronos believes that there are no effective substitutes for TiO2.
Extenders, such as kaolin clays, calcium carbonate and polymeric opacifiers, are
used in a number of end-use markets as white pigments, however the opacity in
these products is not able to duplicate the performance characteristics of TiO2,
and Kronos believes these products are unlikely to replace TiO2.
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, plastics and paper manufacturers.
Kronos and its distributors and agents sell and provide technical services
for its products to over 4,000 customers in over 100 countries 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, and
Kronos is the only leading TiO2 producer committed to producing TiO2 and related
products as its sole business. 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.
Sales of TiO2 represented about 90% of Kronos' total sales in 2004. Sales
of other products, complementary to Kronos' TiO2 business, are comprised of the
following:
o Kronos operates an ilmenite mine in Norway pursuant to a governmental
concession with an unlimited term. Ilmenite is a raw material used
directly as a feedstock by some sulfate-process TiO2 plants, including
all of Kronos' European sulfate-process plants. The mine has estimated
reserves that are expected to last at least 20 years. Ilmenite sales
to third-parties represented approximately 4% of chemicals sales in
2004.
o Kronos manufactures and sells iron-based chemicals, which are
by-products and process by-products of the TiO2 pigment production
process. These co-products chemicals are marketed through Kronos'
Ecochem division, and are used primarily as treatment and conditioning
agents for industrial effluents and municipal wastewater as well as in
the manufacture of iron pigments, cement and agricultural products.
Sales of iron based products were about 3% of chemical sales in 2004.
o Kronos manufactures and sells certain titanium chemical products
(titanium oxychloride and titanyl sulfate), which are side-stream
products from the production of TiO2. Titanium oxychloride is used in
specialty applications in the formulation of pearlescent pigments,
production of electroceramic capacitors for cell phones and other
electronic devices. Titanyl sulfate products are used primarily in
pearlescent pigments. Sales of these products were about 1% of
chemical sales in 2004.
Manufacturing process, properties and raw materials. Kronos manufactures
TiO2 using both the chloride process and the sulfate process. Approximately 73%
of Kronos' current production capacity is based on the chloride process. The
chloride process is a continuous process in which chlorine is used to extract
rutile Ti02. The chloride process typically has lower manufacturing costs than
the sulfate process due to higher yield and production of less waste and lower
energy requirements and labor costs. Because much of the chlorine is recycled
and feedstock bearing a higher titanium content is used, the chloride process
produces less waste than the sulfate process. The sulfate process is a batch
chemical process that uses sulfuric acid to extract TiO2. Sulfate technology can
produce either anatase or rutile pigment. Once an intermediate TiO2 pigment has
been produced by either the chloride or sulfate process, it is "finished" into
products with specific performance characteristics for particular end-use
applications through proprietary processes involving various chemical surface
treatments and intensive micronizing (milling). 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 industry-wide chloride-process production facilities in 2004 represented
approximately 64% of industry capacity.
During 2004, Kronos operated four TiO2 facilities in Europe (one in each of
Leverkusen, Germany, Nordenham, Germany, Langerbrugge, Belgium and Fredrikstad,
Norway). In North America, Kronos has a Ti02 facility in Varennes, Quebec and,
through a manufacturing joint venture discussed below, a one-half interest in a
Ti02 plant in Lake Charles, Louisiana. TiO2 is produced using the chloride
process at the Leverkusen, Langerbrugge, Varennes and Lake Charles facilities,
while TiO2 is produced using the sulfate process at the Nordenham, Leverkusen,
Fredrikstad and Varennes facilities. Kronos operates an ilmenite mine in Norway
pursuant to a governmental concession with an unlimited term, and Kronos also
owns a Ti02 slurry facility in Louisiana and leases various corporate and
administrative offices in the U.S. and various sales offices in the U.S. and
Europe. Kronos' co-products are produced at its Norwegian, Belgian and German
facilities, and its titanium chemicals are produced at its Belgian and Canadian
facilities.
All of Kronos' principal production facilities are owned, except for the
land under the Leverkusen and Fredrikstad facilities. The Fredrikstad plant is
located on public land and is leased until 2013, with an option to extend the
lease for an additional 50 years. Kronos leases the land under its Leverkusen
Ti02 production facility pursuant to a lease expiring in 2050. The Leverkusen
facility, representing about one-third of Kronos' current TiO2 production
capacity, is located within an extensive manufacturing complex owned by Bayer
AG. Rent for the Leverkusen facility is periodically established by agreement
with Bayer AG for periods of at least two years at a time. Under a separate
supplies and services agreement expiring in 2011, Bayer provides some raw
materials (including chlorine and certain amounts of sulfuric acid), auxiliary
and operating materials and utilities services necessary to operate the
Leverkusen facility. The lease and the supplies and services agreement have
certain restrictions regarding ownership and use of the Leverkusen facility.
Kronos produced a new company record 484,000 metric tons of TiO2 in 2004,
compared to the prior records of 476,000 metric tons in 2003 and 442,000 metric
tons in 2002. Such production amounts include Kronos' one-half interest in the
joint-venture owned Louisiana plant discussed below. Kronos' average production
capacity utilization rate in 2003 and 2004 were near full capacity, up from 96%
in 2002. Kronos' production capacity has increased by approximately 30% over the
past ten years due to debottlenecking programs, with only moderate capital
investment. Kronos believes its annual attainable production capacity for 2005
is approximately 500,000 metric tons, with some slight additional capacity
available in 2006 through Kronos' continued debottlenecking efforts.
The primary raw materials used in the TiO2 chloride production process are
titanium-containing feedstock, chlorine and coke. 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, but increasing, number
of suppliers around the world, principally in Australia, South Africa, Canada,
India and the United States. Kronos purchased approximately 410,000 metric tons
of chloride feedstock in 2004, of which the vast majority was slag. Kronos
purchased chloride process grade slag in 2004 from a subsidiary of Rio Tinto plc
UK - Richards Bay Iron and Titanium Limited of South Africa under a long-term
supply contract that expires at the end of 2007. Natural rutile ore is purchased
primarily from Iluka Resources, Limited (Australia) under a long-term supply
contract that expires at the end of 2007. 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 process
feedstock requirements over the next several years.
The primary raw materials used in the TiO2 sulfate production process are
titanium-containing feedstock, derived primarily from rock and beach sand
ilmenite, and sulfuric acid. 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 rock ilmenite mine in Norway which
provided all of Kronos' feedstock for its European sulfate-process pigment
plants in 2004. Kronos produced approximately 867,000 metric tons of ilmenite in
2004, of which approximately 311,000 metric tons were used internally by Kronos,
with the remainder sold to third parties. For its Canadian sulfate-process
plant, Kronos also purchases sulfate grade slag (approximately 20,000 metric
tons in 2004), primarily from Q.I.T. Fer et Titane Inc. of Canada, a subsidiary
of Rio Tinto, under a long-term supply contract that expires at the end of 2009.
Raw materials purchased under these contracts and extensions thereof are
expected to meet Kronos' sulfate process feedstock requirements over the next
several years.
Kronos has sought to minimize the impact of potential changes in the price
of its feedstock raw materials by entering into the contracts discussed above
which fix, to a large extent, the price of its raw materials. The contracts
contain fixed quantities that Kronos is required to purchase, although certain
of these contracts allow for an upward or downward adjustment in the quantity
purchased, generally no more than 10%, based on Kronos' feedstock requirements.
The quantities under these contracts do not require Kronos to purchase feedstock
in excess of amounts that Kronos would reasonably consume in any given year. The
pricing under these agreements is generally based on a fixed price with price
escalation clauses primarily based on consumer price indices, as defined in the
respective contracts.
The number of sources of, and availability of, certain raw materials is
specific to the particular geographic region in which a facility is located. As
noted above, Kronos purchases titanium-bearing ore from three different
suppliers in different countries under multiple-year contracts. 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 Kronos' consolidated
financial position, results of operations or liquidity.
TiO2 manufacturing joint venture. Subsidiaries of Kronos and Huntsman
Holdings LLC 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 Huntsman
pursuant to separate offtake agreements.
A supervisory committee, composed of two members appointed by each of
Kronos and Huntsman, directs the business and affairs of the joint venture,
including production and output decisions. Two general managers, one appointed
and compensated by each of Kronos and Huntsman, manage the operations of the
joint venture acting under the direction of the supervisory committee.
Kronos is required to purchase one-half of the Ti02 produced by the joint
venture. Because Kronos does not control the joint venture, the joint venture is
not consolidated in the Company's financial statements. The Company accounts for
its interest in the joint venture by the equity method. The manufacturing joint
venture operates on a break-even basis, and accordingly Kronos does not report
any equity in earnings of the joint venture. With the exception of raw material
costs for the pigment grades produced, Kronos and Huntsman share all costs and
capital expenditures of the joint venture equally. Kronos' share of the net
costs of the joint venture is reported as cost of sales as the related TiO2
acquired from the joint venture is sold. See Note 7 to the Consolidated
Financial Statements.
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 2004,
Kronos had an estimated 12% share of worldwide TiO2 sales volumes, and Kronos
believes that it is the leading seller of TiO2 in several countries, including
Germany and Canada. Overall, Kronos is the world's fifth-largest producer of
Ti02, with an estimated 12% share of sales volumes in 2004.
Kronos' principal competitors are E.I. du Pont de Nemours & Co. ("DuPont"),
Millennium Chemicals, Inc., Huntsman, Kerr-McGee Corporation and Ishihara Sangyo
Kaisha, Ltd. These five largest competitors have estimated individual shares of
TiO2 production capacity ranging from 4% to 24%, and an estimated aggregate 70%
share of worldwide TiO2 production volumes. DuPont has about one-half of total
North American 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 Kronos' experience). No greenfield
plants are currently under construction in North America or Europe. Kronos does
expect that industry capacity will increase as Kronos and its competitors
continue to debottleneck their existing facilities. Certain competitors have
recently either idled or shut down facilities. In the past year, certain
competitors have announced the idling or shut down of an aggregate of
approximately 135,000 metric tons of sulfate production capacity by early 2005.
Based on the factors described above, Kronos 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 Kronos' expectations. If actual developments differ from
Kronos' expectations, Kronos and the TiO2 industry's performances could be
unfavorably affected.
Research and development. Kronos' annual expenditures for research and
development, process technology and quality assurance activities have averaged
approximately $6 million in 2002, $7 million in 2003 and $8 million in 2004.
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.
Kronos continually seeks to improve the quality of its grades, and has been
successful at developing new grades for existing and new applications to meet
the needs of customers and increase product life cycle. Over the last five
years, ten new grades have been added for plastics, coatings, fiber and paper
laminate applications.
Patents and trademarks. Patents held for products and production processes
are important to Kronos and its continuing business activities. Kronos 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. Kronos' existing patents generally have a term
of 20 years from the date of filing, and have remaining terms ranging from one
to 19 years at December 31, 2004. Kronos seeks to protect its intellectual
property rights, including patent rights, and from time to time Kronos is
engaged in disputes related to the protection and use of intellectual property
relating to its products.
Kronos' major trademarks, including Kronos, are protected by registration
in the United States and elsewhere with respect to those products it
manufactures and sells. Kronos also relies on unpatented proprietary know-now
and continuing technological innovation and other trade secrets to develop and
maintain its competitive position. Kronos' proprietary chloride production
process is an important part of Kronos' technology, and Kronos' business could
be harmed if Kronos should fail to maintain confidentiality of its trade secrets
used in this technology.
Customer base and annual seasonality. Kronos believes that neither its
aggregate sales nor those of any of its principal product groups are
concentrated in or materially dependent upon any single customer or small group
of customers. Kronos' ten largest customers accounted for approximately 25% of
its sales during 2004. Neither Kronos' business as a whole nor that of any of
its principal product groups is seasonal to any significant extent. Due in part
to the increase in paint production in the spring to meet spring and summer
painting season demand, TiO2 sales are generally higher in the first half of the
year than in the second half of the year.
Employees. As of December 31, 2004, Kronos employed approximately 2,420
persons (excluding employees of the Louisiana joint venture), with 50 employees
in the United States, 420 employees in Canada and 1,950 employees in Europe.
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. In Europe, Kronos' union employees
are covered by master collective bargaining agreements in the chemicals industry
that are renewed annually. In Canada, our union employees are covered by a
collective bargaining agreement that expires in June 2007. Kronos believes its
labor relations are good.
Regulatory and environmental matters. Kronos' operations are governed by
various environmental laws and regulations. Certain of Kronos' operations are
and have been engaged in the handling, manufacture or use of substances or
compounds that may be considered toxic or hazardous within the meaning of
applicable environmental laws and regulations. As with other companies engaged
in similar businesses, certain past and current operations and products of
Kronos have the potential to cause environmental or other damage. Kronos has
implemented and continues to implement various policies and programs in an
effort to minimize these risks. Kronos' 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 Kronos' production,
handling, use, storage, transportation, sale or disposal of such substances as
well as Kronos' consolidated financial position, results of operations or
liquidity.
Kronos' 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,,
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. Kronos believes that the Louisiana Ti02 plant owned and operated by
the joint venture and a Louisiana slurry facility owned by Kronos are in
substantial compliance with applicable requirements of these laws or compliance
orders issued thereunder. Kronos has no other U.S. plants.
While the laws regulating operations of industrial facilities in Europe
vary from country to country, a common regulatory framework is provided by the
European Union ("EU"). Germany and Belgium members of the EU and follow its
initiatives. Norway, although not a member of the EU, generally patterns its
environmental regulatory actions after the EU. Kronos believes it has obtained
all required permits and is in substantial compliance with applicable EU
requirements.
At Kronos' sulfate plant facilities in Germany, Kronos recycles weak
sulfuric acid either through contracts with third parties or using its own
facilities. At Kronos' Norwegian plant, Kronos ships its spent acid to a third
party location where it is treated and disposed. Kronos' Canadian sulfate plant
neutralizes its spent acid and sells its gypsum byproduct to a local wallboard
manufacturer. Kronos has a contract with a third party to treat certain
sulfate-process effluents generated from its German sulfate process plants.
Either party may terminate the contract after giving four years notice with
regard to the Nordenham plant.
From time to time, Kronos' facilities may be subject to environmental
regulatory enforcement under U.S. and foreign 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
Kronos' consolidated financial position, results of operations or liquidity.
Kronos believes that all of its plants are in substantial compliance with
applicable environmental laws.
Kronos' capital expenditures related to its ongoing environmental
compliance, protection and improvement programs were approximately $7 million in
2004, and are currently expected to approximate $7 million in 2005.
COMPONENT PRODUCTS - COMPX INTERNATIONAL INC.
General. CompX is a leading manufacturer of precision ball bearing slides,
security products (cabinet locks and other locking mechanisms) and ergonomic
computer support systems used office furniture, computer-related applications
and a variety of other industries. CompX's products are principally designed for
use in medium- to high-end product applications, where design, quality and
durability are critical to CompX's customers. CompX believes that it is among
the world's largest producers of precision ball bearing slides, security
products and ergonomic computer support systems . In 2004, precision ball
bearing slides, security products and ergonomic computer support systems
accounted for approximately 43%, 42% and 15%,respectively, of sales related to
its continuing operations.
In January 2005, CompX completed the disposition of all of the net assets
of its Thomas Regout operations conducted in the Netherlands. Thomas Regout's
results of operations are classified as discontinued operations in the Company's
Consolidated Financial Statements. See Note 22 to the Consolidated Financial
Statements.
Products, product design and development. Precision ball bearing slides
manufactured to stringent industry standards are used in such applications as
office furniture, computer-related equipment, file cabinets, desk drawers,
automated teller machines, refrigerators and other applications. These products
include CompX's patented Integrated Slide Lock in which a file cabinet
manufacturer can reduce the possibility of multiple drawers being opened at the
same time, the adjustable patented Ball Lock which reduces the risk of
heavily-filled drawers, such as auto mechanic tool boxes, from opening while in
movement, and the Butterfly Take Apart System, which is designed to easily
disengage drawers from cabinets.
Security products are used in various applications including ignition
systems, office furniture, vending and gaming machines, parking meters,
electrical circuit panels, storage compartments, security devices for laptop and
desktop computers as well as mechanical and electronic locks for the toolbox
industry. These products 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 and its patented high security TuBar locking system.
CompX believes that it is a North American market leader in the manufacture and
sale of cabinet locks and other locking mechanisms.
Ergonomic computer support systems include articulating computer keyboard
support arms (designed to attach to desks in the workplace and home office
environments to alleviate possible strains and stress and maximize usable
workspace), CPU storage devices which minimize adverse effects of dust and
moisture and a number of complimentary accessories, including ergonomic wrist
rest aids, mouse pad supports and computer monitor support arms. These products
include CompX's Leverlock keyboard arm, which is designed to make the adjustment
of an ergonomic keyboard arm easier. In addition, CompX offers its engineering
and design capabilities for the design capabilities for the design and
manufacture of products on a proprietary basis for key customers for those
Canadian manufactured products.
CompX's precision ball bearing slides are sold under the CompX Waterloo,
Waterloo Furniture Components and Dynaslide brand names. Security products are
sold under the CompX Security Products, National Cabinet Lock, Fort Lock,
Timberline Lock, Chicago Lock, STOCK LOCKS, KeSet and TuBar brand names.
Ergonomic products are sold under the CompX ErgonomX and CompX Waterloo brand
names. CompX believes that its brand names are well recognized in the industry.
Sales, marketing and distribution. CompX sells components to original
equipment manufacturers ("OEMs") and to distributors through a dedicated sales
force. The majority of CompX's sales are to OEMs, while the balance represents
standardized products sold through distribution channels. Sales to large OEM
customers are made through the efforts of factory-based sales and marketing
professionals and engineers working in concert with field salespeople and
independent manufacturers' representatives. Manufacturers' representatives are
selected based on special skills in certain markets or relationships with
current or potential customers.
A significant portion of CompX's sales are made through distributors. CompX
has a significant market share of cabinet lock sales to the locksmith
distribution channel. CompX supports its distributor sales with a line of
standardized products used by the largest segments of the marketplace. These
products are packaged and merchandised for easy availability and handling by
distributors and the end users. Based on CompX's successful STOCK LOCKS
inventory program, similar programs have been implemented for distributor sales
of ergonomic computer support systems and to some extent precision ball bearing
slides. CompX also operates a small tractor/trailer fleet associated with its
Canadian facilities to provide an industry-unique service response to major
customers for those Canadian manufactured products.
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 2004,
the ten largest customers accounted for about 43% of component products sales
(2003 - 44%; 2002 - 38%). In 2004, one customer accounted for 11% of CompX's
sales. No single customer accounted for more than 10% of CompX's sales in either
2002 or 2003.
Manufacturing and operations. At December 31, 2004, CompX operated five
manufacturing facilities in North America related to its continuing operations
(two in Illinois and one in each of South Carolina, Michigan and Canada) and two
facilities in Taiwan. Precision ball bearing slides are manufactured in the
facilities located in Canada, Michigan and Taiwan. Security products are
manufactured in the facilities located in South Carolina and Illinois. Ergonomic
products are manufactured in the facility located in Canada. All of such
facilities are owned by CompX except for one of the facilities in Taiwan, which
is leased. CompX also leases a distribution center in California and a warehouse
in Taiwan. CompX believes that all its facilities are well maintained and
satisfactory for their intended purposes.
Raw materials. Coiled steel is the major raw material used in the
manufacture of precision ball bearing slides and ergonomic computer support
systems. Plastic resins for injection molded plastics are also an integral
material for ergonomic computer support systems. Purchased components and zinc,
are the principal raw materials used in the manufacture of security products.
These raw materials are purchased from several suppliers and are readily
available from numerous sources.
CompX occasionally enters into raw material purchase arrangements to
mitigate the short-term impact of future increases in raw material costs. While
these arrangements do not commit CompX to a minimum volume of purchases, they
generally provide for stated unit prices based upon achievement of specified
volume purchase levels. This allows CompX to stabilize raw material purchase
prices, provided the specified minimum monthly purchase quantities are met.
Materials purchased outside of these arrangements are sometimes subject to
unanticipated and sudden price increases, such as rapidly increasing worldwide
steel prices in 2002through 2004. Due to the competitive nature of the markets
served by CompX's products, it is often difficult to recover such increases in
raw material costs through increased product selling prices. Consequently,
overall operating margins can be affected by such raw material cost pressures.
Competition. The office furniture and security products markets are highly
competitive. CompX competes primarily on the basis of product design, including
ergonomic and aesthetic factors, product quality and durability, price, on-time
delivery, service and technical support. CompX focuses its efforts on the
middle- and high-end segments of the market, where product design, quality,
durability and service are placed at a premium.
CompX competes in the precision ball bearing slide market primarily on the
basis of product quality and price with two large manufacturers and a number of
smaller domestic and foreign manufacturers. CompX competes in the security
products market with a variety of relatively small domestic and foreign
competitors. CompX competes in the ergonomic computer support system market
primarily on the basis of product quality, features and price with one major
producer and a number of smaller domestic unique manufacturers and primarily on
the basis of price with a number of smaller domestic and foreign manufacturers.
Although CompX believes that it has been able to compete successfully in its
markets to date, price competition from foreign-sourced products has intensified
in the current economic market. There can be no assurance that CompX will be
able to continue to successfully compete in all of its existing markets in the
future.
Patents and trademarks. CompX holds a number of patents relating to its
component products, certain of which are believed by CompX to be important to
its continuing business activity, and owns a number of trademarks and brand
names, including CompX, CompX Security Products, CompX Waterloo, CompX ErgonomX,
National Cabinet Lock, KeSet, Fort Lock, Timberline Lock, Chicago Lock, ACE II,
TuBar, 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 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, 2004, CompX employed approximately 1,450
persons, including 800 in the United States, 470 in Canada, and 180 in Taiwan.
Approximately 76% of CompX's employees in Canada are represented by a labor
union covered by a collective bargaining agreement which provides for annual
wage increases from 1% to 2.5% over the term of the contract expiring in January
2006. Wage increases for these Canadian employees historically have also been in
line with overall inflation indices. 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 low-level radioactive wastes and the disposal of certain types of exempt
low-level radioactive wastes.
Facility, operations, services and customers. Waste Control Specialists has
been issued permits by the Texas Commission on Environmental Quality ("TCEQ"),
formerly the Texas Natural Resource Conservation Commission, and the U.S.
Environmental Protection Agency ("EPA") to accept hazardous and toxic wastes
governed by RCRA and TSCA. The ten-year RCRA and TSCA permits, which initially
expired in November 2004, were administratively extended while the agencies
complete their review. The final renewal will be for a new ten-year period and
are subject to additional renewals by the agencies assuming Waste Control
Specialists remains in compliance with the provisions of the permits.
In November 1997, the Texas Department of State Health Services ("TDSHS"),
formerly the Texas Department of Health, issued a license to Waste Control
Specialists for the treatment and storage, but not disposal, of low-level and
mixed low-level radioactive wastes. The current provisions of this license
generally enable Waste Control Specialists to accept such wastes for treatment
and storage from U.S. commercial and federal facility generators, including the
Department of Energy ("DOE") and other governmental agencies. Waste Control
Specialists accepted the first shipments of such wastes in 1998. Waste Control
Specialists has also been issued a permit by the TCEQ to establish a research,
development and demonstration facility in which third parties could use the
facility to develop and demonstrate new technologies in the waste management
industry, including possibly those involving low-level and mixed low-level
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 low-level
radioactive wastes which continue to be ineligible for disposal under the
increased authority, Waste Control Specialists intends to pursue additional
regulatory authorizations to expand its storage, treatment and disposal
capabilities for low-level and mixed low-level 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. Waste
Control Specialists owns approximately 13,500 additional acres of land
surrounding the permitted site, a small portion of which is located in New
Mexico. This presently undeveloped additional acreage is available for future
expansion assuming appropriate permits could be obtained. The 1,338-acre site
has, in Waste Control Specialists' opinion, superior geological characteristics
which make it an environmentally-desirable location. The site is located in a
relatively remote and arid section of West Texas. The ground is composed of
triassic red bed clay for which the possibility of leakage into any underground
water table is considered highly remote. In addition, based in part on extensive
drilling by the oil and gas industry in the area and its own test wells, Waste
Control Specialists does not believe there are any underground aquifers or other
usable sources of water below the site.
While the West Texas facility operates as a final repository for wastes
that cannot be further reclaimed and recycled, it also serves as a staging and
processing location for material that requires other forms of treatment prior to
final disposal as mandated by the U.S. EPA or other regulatory bodies. The
20,000 square foot treatment facility provides for waste
treatment/stabilization, warehouse storage, treatment facilities for hazardous,
toxic and mixed low-level radioactive wastes, drum to bulk, and bulk to drum
materials handling and repackaging capabilities. Treatment operations involve
processing wastes through one or more chemical or other treatment methods,
depending upon the particular waste being disposed and regulatory and customer
requirements. Chemical treatment uses chemical oxidation and reduction, chemical
precipitation of heavy metals, hydrolysis and neutralization of acid and
alkaline wastes, and 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 Waste Control
Specialists' landfill disposal site, (ii) stored onsite in drums or other
specialized containers or (iii) shipped to third-party facilities for 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.
Waste Control Specialists' target customers are industrial companies,
including chemical, aerospace and electronics businesses and governmental
agencies, including the DOE, which generate hazardous, mixed low-level
radioactive and other wastes. Waste Control Specialists employs its own
salespeople as well as third-party brokers to market its services to potential
customers.
Competition. The hazardous waste industry (other than low-level and mixed
low-level 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-level radioactive waste streams provides certain
competitive advantages, a key element of Waste Control Specialists' long-term
strategy to provide "one-stop shopping" for hazardous, low-level and mixed
low-level radioactive wastes includes obtaining additional regulatory
authorizations for the disposal of a broad range of low-level and mixed
low-level 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 Perma-Fix
Environmental 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 rail transportation network
leading to the facility and capability for future site expansion.
Employees. At December 31, 2004, Waste Control Specialists employed
approximately 110 persons.
Regulatory and environmental matters. While the waste management industry
has benefited from increased governmental regulation, the industry itself has
become subject to extensive and evolving regulation by federal, state and local
authorities. The regulatory process requires businesses in the waste management
industry to obtain and retain numerous operating permits covering various
aspects of their operations, any of which could be subject to revocation,
modification or denial. Regulations also allow public participation in the
permitting process. Individuals as well as companies may oppose the grant of
permits. In addition, governmental policies and the exercise of broad discretion
by regulators are by their nature subject to change. It is possible that Waste
Control Specialists' ability to obtain any desired applicable permits on a
timely basis, and to retain those permits, could in the future be impaired. The
loss of any individual permit could have a significant impact on Waste Control
Specialists' financial condition, results of operations or liquidity, especially
because Waste Control Specialists owns and operates only one disposal site. For
example, adverse decisions by governmental authorities on permit applications
submitted by Waste Control Specialists could result in the abandonment of
projects, premature closing of the facility or operating restrictions. Waste
Control Specialists' RCRA and TSCA permits and its license from the TDSHS, as
amended, are expected to expire in 2014, and such permits and licenses can be
renewed subject to compliance with the requirements of the application process
and approval by the TCEQ or TDSHS, as applicable.
Prior to June 2003, the state law in Texas (where Waste Control
Specialists' disposal facility is located) prohibited the applicable Texas
regulatory agency from issuing a license for the disposal of a broad range of
low-level and mixed low-level radioactive waste to a private enterprise
operating a disposal facility in Texas. In June 2003, a new Texas state law was
enacted that allows TCEQ to issue a low-level radioactive waste disposal license
to a private entity, such as Waste Control Specialists. Waste Control
Specialists applied for such a disposal license with TCEQ in 2004, and Waste
Control Specialists was the only entity to submit an application for such a
disposal license. The length of time that TCEQ will take to review and act upon
the license application is uncertain, although Waste Control Specialists does
not currently expect the agency would issue any final decision on the license
application before 2007. There can be no assurance that Waste Control
Specialists will be successful in obtaining any such license.
Waste Control Specialists applied to the TDSHS for a license to dispose of
by product 11.e(2) waste material in June 2004. Waste Control Specialists can
currently treat and store byproduct material, but may not dispose of it. The
length of time that TDSHS will take to review and act upon the license
application is uncertain, but Waste Control Specialists expects the TDSHS will
issue a final decision on the license application by the end of 2005. There can
be no assurance that Waste Control Specialists will be successful in obtaining
any such license.
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. TIMET is a leading global producer of titanium sponge, melted
products (ingot and slab) and mill products. TIMET is the only producer with
major titanium production facilities in both the United States and Europe, the
world's principal markets for titanium consumption. TIMET estimates that in 2004
it accounted for approximately 18% of worldwide industry shipments of mill
products and approximately 10% of worldwide sponge production. Demand for
titanium is also increasing in emerging markets with such diverse uses as
offshore oil and gas production installations, military armor, automotive,
geothermal facilities and architectural applications.
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 where 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, 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. TIMET is
currently the only commercial producer of titanium sponge, a key raw material,
in the United States.
Industry conditions. The titanium industry historically has derived a
substantial portion of its business from the aerospace industry. Aerospace
demand for titanium products, which includes both jet engine components (e.g.
blades, discs, rings and engine cases) and air frame components (e.g. bulkheads,
tail sections, landing gear, wing supports and fasteners) can be broken down
into commercial and military sectors. The commercial aerospace sector has a
significant influence on titanium companies, particularly mill product producers
such as TIMET. Military aerospace sector shipments are largely driven by
government defense spending in North America and Europe.
The following table illustrates TIMET's estimates of titanium industry mill
product shipments during 2003 and 2004:
Year ended December 31,
2003 2004 % change
-------- -------- --------
(metric tons)
Mill product shipments to:
Commercial aerospace sector 16,000 20,900 +31%
Military aerospace sector 4,100 4,000 -2%
------ ------
Total aerospace industry 20,100 24,900 +24%
====== ======
Aggregate mill product shipments
to all industries 50,200 61,800 +23%
====== ======
As discussed further below, new aircraft programs generally are in
development for several years, followed by multi-year procurement contracts.
TIMET's business is more dependent on aerospace demand than the overall titanium
industry, as approximately 70% of TIMET's mill product shipment volume in 2004
was to the aerospace industry (58% commercial aerospace and 12% military
aerospace) as compared to approximately 40% for the overall titanium industry.
The cyclical nature of the aerospace industry has been the principal driver
of the historical fluctuations in the performance of most titanium companies.
Over the past 20 years, the titanium industry had cyclical peaks in mill product
shipments in 1989, 1997 and 2001 and cyclical lows in 1983, 1991, 1999 and 2002.
Prior to 2004, demand for titanium reached its highest level in 1997 when
industry mill product shipments reached approximately 60,700 metric tons.
However, since 1997, industry mill product shipments have fluctuated
significantly, primarily due to a continued change in demand for titanium from
the commercial aerospace sector. TIMET estimates that industry shipments
approximated 50,200 metric tons in 2003 and 61,800 metric tons in 2004. TIMET
currently expects total industry mill product shipments will increase from 2004
levels to approximately 71,000 metric tons in 2005.
The Airline Monitor, a leading aerospace publication, traditionally issues
forecasts for commercial aircraft deliveries each January and July. According to
The Airline Monitor, large commercial aircraft deliveries for the 1996 to 2004
period peaked in 1999 with 889 aircraft, including 254 wide body aircraft that
use substantially more titanium than their narrow body counterparts. Large
commercial aircraft deliveries totaled 602 (including 147 wide bodies) in 2004.
The following table summarizes The Airline Monitor's most recently issued
forecast (January 2005) for large commercial aircraft deliveries over the next
five years:
% increase (decrease)
Forecasted deliveries over previous year
Year Total Wide bodies Total Wide bodies
2005 680 172 13% 17%
2006 720 171 6% (1%)
2007 760 200 6% 17%
2008 805 240 6% 20%
2009 795 255 (1%) 6%
Deliveries of titanium generally precede aircraft deliveries by about one
year, although this varies considerably by titanium product. This correlates to
TIMET's cycle, which historically precedes the cycle of the aircraft industry
and related deliveries. Although global traffic increased in 2004 compared to
2003, persistently high oil prices had an adverse impact on the commercial
airline industry. According to The Airline Monitor, the worldwide commercial
airline industry's estimated operating loss for 2004 was $5.9 billion, and the
projected 2005 operating loss is $2.9 billion. According to ROM Associates,
Inc., a leading aerospace research company, global airline passenger traffic
returned to pre-September 11, 2001 levels in October 2003. TIMET estimates that
industry mill product shipments into the commercial aerospace sector will
approximate 26,000 metric tons in 2005.
Military aerospace programs were the first to utilize titanium's unique
properties on a large scale, beginning in the 1950s. Titanium shipments to
military aerospace markets reached a peak in the 1980s before falling to
historical lows in the early 1990s after the end of the Cold War. However, the
importance of military markets to the titanium industry is expected to rise in
coming years as defense spending budgets increase in reaction to terrorist
activities and global conflicts.
Several of today's active U.S. military programs, including the C-17,
F/A-18, F-16 and F-15 began during the Cold War and are forecast to continue
production through the end of the current decade. In addition to these
established U.S. programs, new U.S. programs offer growth opportunities for
increased titanium consumption. The F/A-22 Raptor is currently in low-rate
initial production, and the U.S. Air Force currently plans to purchase between
276 and 300 aircraft over the life of the program, depending on funding levels.
The recent budget proposed by President Bush provides for an overall increase in
spending compared to current levels, principally to continue funding military
ground efforts in Iraq and Afghanistan. The current budget proposal also calls
for an end to procurement of the F/A-22 in 2008, with total F/A-22 production
capped at 179 aircraft. However, final procurement decisions must receive
Congressional approval.
In October 2001, Lockheed-Martin Corporation was awarded the contract for
construction of the F-35 Joint Strike Fighter ("JSF"). The JSF is expected to
enter low-rate initial production in 2006, and although no specific delivery
patterns have been established, procurement is expected to extend over the next
30 to 40 years and to include as many as 3,000 to 4,000 planes. European
military programs also have active aerospace programs offering the possibility
for increased titanium consumption. Production levels for the Saab Gripen,
Eurofighter Typhoon, Dassault Rafale and Dassault Mirage 2000 are all forecasted
to remain steady through the end of the decade.
Since titanium's initial applications in the aerospace sector, the number
of end-use markets for titanium has significantly expanded. Established
industrial uses for titanium include chemical plants, power plants, desalination
plants and pollution control equipment. Rapid growth of the Chinese and other
Southeast Asian economies has brought unprecedented demand for titanium
intensive industrial equipment. Titanium continues to gain acceptance in many
emerging market applications, including automotive, military armor, energy and
architecture. Although titanium is generally higher cost than other competing
metals, in many cases customers find the physical properties of titanium to be
attractive from the standpoint of weight, performance, longevity, design
alternatives, life cycle value and other factors. Although TIMET estimates that
emerging market demand presently represents only about 5% of the 2004 total
industry demand for titanium mill products, TIMET believes emerging market
demand, in the aggregate, could grow at double-digit rates over the next several
years. TIMET is actively pursuing these markets.
The automotive market continues to be an attractive emerging market segment
due to its potential for sustainable long-term growth. For this reason, in 2002,
TIMET established a new division, TIMET Automotive, focused on developing and
marketing proprietary alloys and processes specifically suited for automotive
applications. Titanium is now used in several consumer car applications as well
as in numerous motorcycles.
At the present time, titanium is primarily used for exhaust systems,
suspension springs and engine valves in consumer vehicles. In exhaust systems,
titanium provides for significant weight savings, while its corrosion resistance
provides life-of-vehicle durability. In suspension spring applications,
titanium's low modulus of elasticity allows the spring's height to be reduced by
20% to 40% compared to a steel spring, which, when combined with the titanium's
low density, permits 30% to 60% weight savings over steel spring suspension
systems. Titanium suspension springs and exhaust applications are also
attractive compared to alternative lightweight technologies because the titanium
component can often be formed and fabricated on the same tooling used for the
steel component it is typically replacing.
Titanium is also making inroads into other automotive applications,
including turbo charger wheels, brake parts and connecting rods. Titanium engine
components provide mass-reduction benefits that directly improve vehicle
performance and fuel economy. 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 titanium
offers.
Utilization of titanium on military ground combat vehicles for armor
applique and integrated armor or structural components continues to gain
acceptance within the military market segment. Titanium armor components provide
the necessary ballistic performance while achieving a mission critical vehicle
performance objective of reduced weight. In order to counteract increased threat
levels, titanium is being utilized on vehicle upgrade programs in addition to
new builds. Based on active programs, as well as programs currently under
evaluation, TIMET believes there will be additional usage of titanium on ground
combat vehicles that will provide continued growth in the military market
segment.
The oil and gas market utilizes titanium for down-hole logging tools,
critical riser components, fire water systems and saltwater-cooling systems.
Additionally, as offshore development of new oil and gas fields moves into the
ultra deep-water depths, market demand for titanium's light-weight,
high-strength and corrosion-resistance properties is creating new opportunities
for the material. TIMET has a group dedicated to developing the expansion of
titanium use in this market and in other non-aerospace applications.
Products and operations. TIMET is a vertically integrated titanium
manufacturer whose products include (i) titanium sponge, the basic form of
titanium metal used in processed titanium products, (ii) melted products (ingot
and slab), the result of melting sponge and titanium scrap, either alone or with
various other alloying elements, (iii) mill products that are forged and rolled
from ingot or slab, including long products (billet and bar), flat products
(plate, sheet and strip) and pipe and (iv) fabrications (spools, pipefittings,
manifolds and vessels) that are cut, formed, welded and assembled from titanium
mill products.
Titanium sponge (so called because of its appearance) is the commercially
pure, elemental form of titanium metal. The first step in TIMET's sponge
production involves the chlorination of titanium-containing rutile ores (derived
from beach sand) with chlorine and petroleum coke to produce titanium
tetrachloride. Titanium tetrachloride is purified and then reacted with
magnesium in a closed system, producing titanium sponge and magnesium chloride
as co-products. TIMET's titanium sponge production facility in Nevada
incorporates vacuum distillation process ("VDP") technology, which removes the
magnesium and magnesium chloride residues by applying heat to the sponge mass
while maintaining a vacuum in the chamber. The combination of heat and vacuum
boils the residues from the sponge mass, and then the mass is mechanically
pushed out of the distillation vessel, sheared and crushed, while the residual
magnesium chloride is electrolytically separated and recycled.
Titanium ingot is a cylindrical solid shape and which, in TIMET's case,
weighs up to 8 metric tons. Titanium slab is a rectangular solid shape and
which, in TIMET's case, weighs up to 16 metric tons in the case of slab. Each
ingot or slab is formed by melting titanium sponge, scrap or both, usually with
various other alloying elements such as vanadium, aluminum, molybdenum, tin and
zirconium. Titanium scrap is a by-product of the forging, rolling, milling and
machining operations, and significant quantities of scrap are generated in the
production process for finished titanium products and components. The melting
process for ingot and slab is closely controlled and monitored utilizing
computer control systems to maintain product quality and consistency and to meet
customer specifications. In most cases, TIMET uses its ingot and slab as the
starting material for further processing into mill products. However, it also
sells ingot and slab to third parties.
During the production process and following the completion of
manufacturing, TIMET performs extensive testing on its products. The inspection
process is critical to ensuring that TIMET's products meet the high quality
requirements of its customers, particularly in aerospace component production.
TIMET certifies that its products meet customer specification at the time of
shipment for substantially all customer orders.
TIMET currently is reliant on several outside processors (one of which is
owned by a competitor) to perform certain rolling, finishing and other
processing steps in the U.S., and certain melting and forging steps in France.
In France, the processor is also a joint venture partner in TIMET's 70%-owned
subsidiary. During the past several years, TIMET has made significant strides
toward reducing the reliance on competitor-owned sources for these services, so
that any interruption in these functions should not have a material adverse
effect on TIMET's business, results of operations, financial position or
liquidity.
Distribution. TIMET sells its products through its own sales force based in
the U.S. and Europe and through independent agents and distributors worldwide.
TIMET's distribution system also includes eight Company-owned service centers
(five in the U.S. and three in Europe), which sell TIMET's products on a
just-in-time basis. The service centers primarily sell value-added and
customized mill products including bar, flat-rolled sheet and strip. TIMET
believes its service centers provide a competitive advantage because of their
ability to foster customer relationships, customize products to suit specific
customer requirements and respond quickly to customer needs.
Raw materials. The principal raw materials used in the production of
titanium ingot, slab and mill products are titanium sponge, titanium scrap and
alloys. During 2004, TIMET's raw material usage requirements for its melted and
mill products were provided by internally produced sponge (30%), purchased
sponge (32%), titanium scrap (31%) and other alloying elements (7%).
The primary raw materials used in the production of titanium sponge are
titanium-containing rutile ore, chlorine, magnesium and petroleum coke. Rutile
ore is currently available from a limited number of suppliers around the world,
principally located in Australia, South Africa and Sri Lanka. TIMET purchases
the majority of its supply of rutile ore from Australia. TIMET believes the
availability of rutile ore will be adequate for the foreseeable future and does
not anticipate any interruptions of its rutile supplies. However, there can be
no assurance that TIMET will not experience interruptions.
Chlorine is currently obtained from a single supplier near TIMET's sponge
plant in Nevada. While TIMET does not presently anticipate any chlorine supply
problems, there can be no assurances the chlorine supply will not be
interrupted. In the event of supply disruption, TIMET has taken steps to
mitigate this risk, including establishing the feasibility of certain equipment
modifications to enable it to utilize material from alternative chlorine
suppliers or to purchase and utilize an intermediate product which will allow
TIMET to eliminate the purchase of chlorine if needed. Magnesium and petroleum
coke are generally available from a number of suppliers.
During 2004, TIMET was the only major U.S. producer of titanium sponge, and
one of only five worldwide producers. However, TIMET cannot supply all of its
needs for all grades of titanium sponge internally and is dependent, therefore,
on third parties for a substantial portion of its sponge requirements. Titanium
melted and mill products require varying grades of sponge and/or scrap depending
on the customers' specifications and expected end use. Presently, TIMET and
certain companies in Japan are the only producers of premium quality sponge that
currently have complete approval for all significant demanding aerospace
applications. Over the past few years, sponge producers in Russia and Kazakhstan
have progressed in their efforts to obtain approval for the use of their sponge
into all aerospace applications. This qualification process is likely to
continue for several more years.
Historically, TIMET has purchased sponge predominantly from producers in
Japan and Kazakhstan. In September 2002, TIMET entered into a sponge supply
agreement, effective from January 1, 2002 through December 31, 2007, which
requires minimum annual purchases by TIMET. TIMET has no other long-term sponge
supply agreements. Since 2000, TIMET has also purchased sponge from the U.S.
Defense Logistics Agency ("DLA") stockpile, however the DLA stockpile is
expected to become fully depleted during 2005. TIMET expects to continue to
purchase sponge from a variety of sources during 2005.
TIMET utilizes a combination of internally produced, customer returned and
externally purchased titanium scrap at its melting locations. Such scrap
consists of alloyed and commercially pure solids and turnings. Internally
produced scrap is generated in TIMET's factories during both melting and mill
product processing. Customer returned scrap is generally part of a supply
agreement with a customer, which provides a "closed loop" arrangement resulting
in supply and cost stability. Externally purchased scrap comes from a wide range
of sources, including customers, collectors, processors and brokers. TIMET
anticipates that 50% to 60% of the scrap it will utilize during 2005 will be
purchased from external suppliers, as compared to 52% for 2004. TIMET also
occasionally sells scrap, usually in a form or grade it cannot economically
recycle.
Market forces can significantly impact the supply or cost of externally
produced scrap. During cycles in the titanium business, the amount of scrap
generated in the supply chain varies during the titanium business cycles. During
the middle of the cycle, scrap generation and consumption are in relative
equilibrium, minimizing disruptions in supply or significant changes in market
prices for scrap. Increasing or decreasing cycles tend to cause significant
changes in the market price of scrap. Early in the titanium cycle, when the
demand for titanium melted and mill products begins to increase, TIMET's
requirements (and those of other titanium manufacturers) precede the increase in
scrap generation by downstream customers and the supply chain, placing upward
pressure on the market price of scrap. The opposite situation occurs when demand
for titanium melted and mill products begins to decline, placing downward
pressure on the market price of scrap. As a net purchaser of scrap, TIMET is
susceptible to price increases during periods of increasing demand, Although
this phenomenon normally results in higher selling prices for melted and mill
products, which tends to offset the increased material costs, TIMET is somewhat
limited in its ability to raise prices by the portion of its business that is
under long-term pricing agreements.
All of TIMET's major competitors utilize scrap as a raw material in their
melt operations. In addition to use by titanium manufacturers, titanium scrap is
used in steel-making operations during production of interstitial-free steels,
stainless steels and high-strength-low-alloy steels. Recent strong demand for
these steel products, especially from China, has produced a significant increase
in demand for titanium scrap at a time when titanium scrap generation rates are
at low levels, partly due to lower commercial aircraft build rates. These events
created a significantly tightened supply of titanium scrap during 2004, and
TIMET expects this trend to continue and possibly worsen during 2005. The
shortage of titanium scrap and consequently higher scrap prices will directly
impact the scrap TIMET purchases from external sources. For TIMET, this trend is
expected to result in lower availability and higher cost for externally
purchased scrap in the near term. TIMET's ability to recover these material
costs via higher selling prices to its customers is uncertain. The expected
increase in commercial aircraft build rates over the next several years, as
previously discussed, could have the effect of relieving the shortage of
titanium scrap.
Various alloys elements used in the production of titanium products are
also available from a number of suppliers. However, the recent high level of
global demand for steel products also has resulted in a significant increase in
the prices for several alloying elements, such as vanadium and molybdenum.
Although availability is not expected to be a problem, TIMET's cost for these
alloying elements during 2005 could be as much as double that of 2004.
Properties. TIMET currently has manufacturing facilities in the United
States in Nevada, Ohio, Pennsylvania and California, and also has two facilities
in the United Kingdom and one facility in France. TIMET's sponge is produced at
the Nevada facility while ingot, slab and mill products are produced at the
other facilities. The facilities in Nevada, Ohio and Pennsylvania, and one of
the facilities in the United Kingdom, are owned, and all of the remainder are
leased.
In addition to its U.S. sponge capacity discussed below, TIMET's worldwide
melting capacity presently aggregates approximately 45,000 metric tons
(estimated 29% of world capacity), and its mill product capacity aggregates
approximately 20,000 metric tons (estimated 16% of world capacity). Of TIMET's
worldwide melting capacity, 35% 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 2004, the plants operated at
approximately 73% of practical capacity, as compared to 56% in 2003 and 55% in
2002. In 2005, TIMET's plants are expected to operate at approximately 75% to
80% 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 its full annual
practical capacity of 8,600 metric tons during 2005, which is consistent with
2004. VDP sponge is used principally as a raw material for TIMET's melting
facilities in the U.S. and Europe. The raw materials processing facility in
Morgantown, Pennsylvania primarily processes scrap used as melting feedstock,
either in combination with sponge or separately.
TIMET's U.S. melting facilities in Nevada, Pennsylvania and California
produce ingot and slab, which are either used as feedstock for TIMET's mill
products operations or sold to third parties. These melting facilities are
expected to operate at approximately 85% of aggregate annual practical capacity
in 2005, up from 76% in 2004.
Titanium mill products are produced by TIMET in the U.S. at its forging and
rolling facility in Ohio, which receives ingot or slab principally from TIMET's
U.S. melting facilities. TIMET's U.S. forging and rolling facility is expected
to operate at approximately 83% of annual practical capacity in 2005, up from
66% in 2004. Capacity utilization across TIMET's individual mill product lines
varies.
One of TIMET facilities in the United Kingdom produces VAR ingot used
primarily as feedstock at the same facility. The forging operations process the
ingot into billet product for sale to third parties or into an intermediate
product for further processing into bar or plate at its other facility in the
United Kingdom. TIMET's United Kingdom melting and mill products production in
2005 is expected to operate at approximately 76% and 59%, respectively, of
annual practical capacity, compared to 73% and 54%, respectively, in 2004.
The capacity of TIMET's facility in France is to a certain extent dependent
upon the level of activity of the other owner of such business, which may from
time to time provide TIMET with capacity in excess of that to which TIMET is
contractually entitled. During 2005, the other owner has agreed to provide TIMET
more than the maximum annual capacity that TIMET is contractually entitled.
Sponge for melting requirements at both United Kingdom and French
facilities that is not supplied by TIMET's Nevada plant is purchased principally
from suppliers in Kazakhstan and Japan.
Customer agreements. TIMET has long-term agreements with certain major
aerospace customers, including, among others, The Boeing Company, Rolls-Royce
plc and its German and U.S. affiliates, United Technologies Corporation (Pratt &
Whitney and related companies) and Wyman-Gordon Company, a unit of Precision
Castparts Corporation ("PCC"). Most of these agreements expire from 2005 through
2008, subject to certain conditions, and generally provide for (i) minimum
market shares of the customers' titanium requirements or firm annual volume
commitments and (ii) fixed or formula-determined prices (although some contain
elements based on market pricing). Generally, the LTAs 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. Certain
provisions of these long-term agreements have been amended in the past and may
be amended in the future to meet changing business conditions.
In certain events of nonperformance by TIMET or the customer, the long-term
agreements may be terminated early. Although it is possible that some portion of
the business would continue on a non-long-term agreement basis, the termination
of one or more of the long-term agreements could result in a material effect on
TIMET's business, results of operations, financial position or liquidity. The
long-term agreements were designed to limit selling price volatility to the
customer, while providing TIMET with a committed base of volume throughout the
aerospace business cycles. To varying degrees, these long-term agreements
effectively obligate TIMET to bear the majority of the risks of increases in raw
material and other costs, but also allow TIMET to benefit from decreases in such
costs.
During 2001, TIMET reached a settlement of certain litigation between TIMET
and Boeing related to the parties' LTA entered into in 1997. Pursuant to the
settlement, TIMET received a cash payment of $82 million from Boeing. Under the
terms of the long-term agreement with Boeing, as amended, in 2002 through 2007,
Boeing advances TIMET $28.5 million annually less $3.80 per pound of titanium
product purchased by Boeing subcontractors under the long-term agreement during
the preceding year. Effectively, TIMET collects $3.80 less from Boeing than the
LTA selling price for each pound of titanium product sold directly to Boeing and
reduces the related customer advance recorded by TIMET. For titanium products
sold to Boeing subcontractors, TIMET collects the full long-term agreement
selling price, but gives Boeing credit by reducing the next year's annual
advance by $3.80 per pound. The Boeing customer advance is also reduced as TIMET
recognizes income under the take-or-pay provisions of the long-term agreement.
Under a separate agreement TIMET must establish and hold buffer stock for Boeing
at TIMET's facilities, for which Boeing will be invoiced by TIMET when such
material is produced into a mill product.
TIMET also has an long-term agreement with VALTIMET SAS, a manufacturer of
welded stainless steel and titanium tubing that is principally sold into the
industrial markets. VALTIMET is a 44%-owned affiliate of TIMET. The agreement
with VALTIMET was entered into in 1997 and expires in 2007. Under this
agreement, VALTIMET has agreed to provide a certain percentage of VALTIMET's
titanium requirements from TIMET at formula-determined selling prices, subject
to certain conditions. Certain provisions of this contract have been amended in
the past and may be amended in the future to meet changing business conditions.
Markets and customer base. During 2004, approximately 55% of TIMET's sales
were to customers located in North America, with 40% in Europe. Substantially
all of TIMET's sales and operating income are derived from operations based in
the U.S., the U.K., France and Italy. TIMET generates over two-thirds of its
sales revenue from sales to the commercial and military aerospace industry (70%
in 2004). TIMET expects that a similar percentage of its 2005 sales revenue will
be to the aerospace industry. As discussed above, TIMET has long-term agreements
with certain major aerospace customers, including Boeing, Rolls-Royce, UTC and
Wyman-Gordon. During 2004, approximately 44% of TIMET's total sales were
attributable to such long-term agreements. TIMET's ten largest customers
accounted for 48% of its sales in 2004 (2003 - 44%; 2002- 43%), including
Rolls-Royce and suppliers under the Rolls-Royce long-term agreement (15% of
TIMET's sales in 2004). Such concentration of customers may impact TIMET's
overall exposure to credit and other risks, either positively or negatively, in
that such customers may be similarly affected by economic or other conditions.
The primary market for titanium products in the commercial aerospace
industry consists of two major manufacturers of large (over 100 seats)
commercial airframes - Boeing Commercial Airplanes Group (a unit of Boeing) and
Airbus (80% owned by European Aeronautic Defence and Space Company and 20% owned
by BAE Systems). In addition to the airframe manufacturers, the following four
manufacturers of large civil aircraft engines are also significant titanium
users - Rolls-Royce, General Electric Aircraft Engines, Pratt & Whitney and
Societe Nationale dEtude et de Construction de Moteurs dAviation ("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 aircraft and/or jet engine
build rates from those currently expected, there could be a material adverse
effect, both directly and indirectly, on TIMET.
The backlogs for Boeing and Airbus reflect orders for aircraft to be
delivered over several years. Changes in the economic environment and the
financial condition of airlines can result in rescheduling or cancellation of
contractual orders. Accordingly, aircraft manufacturer backlogs are not
necessarily a reliable indicator of near-term business activity, but may be
indicative of potential business levels over a longer-term horizon. The
following table shows the estimated firm order backlogs for Boeing and Airbus,
as reported by The Airline Monitor:
At December 31,
2002 2003 2004
------ ------ -----
Firm order backlog - all planes:
Airbus 1,505 1,454 1,500
Boeing 1,144 1,101 1,089
----- ----- -----
2,649 2,555 2,589
===== ===== =====
Firm order backlog - wide body planes:
Airbus 423 471 466
Boeing 286 230 287
----- ----- -----
709 701 753
===== ===== =====
Wide body planes as % of total firm
order backlog 27% 27% 29%
== == ==
Wide body planes (e.g., Boeing 747, 767, 777 and 787 and Airbus A330, A340
and A380) tend to use a higher percentage of titanium in their airframes,
engines and parts than narrow body planes (e.g., Boeing 737 and 757 and Airbus
A318, A319 and A320), and newer models of planes tend to use a higher percentage
of titanium than older models. Additionally, Boeing generally uses a higher
percentage of titanium in its airframes than Airbus. For example, TIMET
estimates that approximately 58 metric tons, 43 metric tons and 18 metric tons
of titanium are purchased for the manufacture of each Boeing 777, 747 and 737,
respectively, including both the airframes and engines. TIMET estimates that
approximately 24 metric tons, 17 metric tons and 12 metric tons of titanium are
purchased for the manufacture of each Airbus A340, A330 and A320, respectively,
including both the airframes and engines.
At December 31, 2004, a total of 139 firm orders had been placed for the
Airbus A380 superjumbo jet, a program officially launched in 2000 with
anticipated first deliveries in 2006. Current estimates are that approximately
77 metric tons of titanium (50 metric tons for the airframe and 27 metric tons
for the engines) will be purchased for each A380 manufactured. Additionally, at
year-end 2004, a total of 56 firm orders have been placed for the Boeing 787
Dreamliner, a program officially launched in April 2004 with anticipated first
deliveries in 2008. Although the 787 will contain more composite materials than
a typical Boeing airplane, TIMET's preliminary estimates are that approximately
91 metric tons of titanium (80 metric tons for the airframe and 11 metric tons
for the engines) will be purchased for each 787 manufactured. Howeveer, the
final titanium buy weight is likely to vary because the 787 is still in the
design phase.
Outside of aerospace markets, TIMET manufactures a wide range of products,
including sheet, plate, tube, bar, billet, pipe and skelp, for customers in the
chemical process, oil and gas, consumer, sporting goods, automotive, power
generation and armor/armament industries. Approximately 18% of TIMET's sales
revenue in 2002, 19% in 2003 and 17% in 2004 was generated by sales into
industrial and emerging markets, including sales to VALTIMET for the production
of welding tubing. For the oil and gas industry, TIMET provides seamless pipe
for downhole casing, risers, tapered stress joints and other offshore oil and
gas production equipment, along with firewater piping systems. In armor and
armament, TIMET sells plate products for fabrication into applique plate for
protection of the entire ground combat vehicle as well as the primary vehicle
structure.
In addition to melted and mill products, which are sold into the aerospace,
industrial and emerging markets, TIMET sells certain other products such as
titanium sponge, titanium tetrachloride and certain titanium fabrications. Sales
of these other products represented 15% of TIMET's sales revenue in 2002 and 13%
in both 2004 and 2003.
During 2004, TIMET modified its method of calculating its backlog to
include replenishment purchase orders placed under consignment relationships.
TIMET believes inclusion of these orders provides a more accurate reflection of
TIMET's overall backlog. Using the modified methodology for all periods, TIMET's
backlog of unfilled orders was approximately $450 million at December 31, 2004,
compared to $205 million at December 31, 2003 and $185 million at December 31,
2002. Over 94% of the 2004 year-end backlog is scheduled for shipment during
2005. TIMET's order backlog may not be a reliable indicator of future business
activity.
TIMET has explored and will continue to explore strategic arrangements in
the areas of product development, production and distribution. TIMET also will
continue to work with existing and potential customers to identify and develop
new or improved applications for titanium that take advantage of its unique
qualities.
Competition. The titanium metals industry is highly competitive on a
worldwide basis. Producers of melted and mill products are located primarily in
the United States, Japan, France, Germany, Italy, Russia, China and the United
Kingdom. In addition, producers of other metal products, such a steel and
aluminum, maintain forging, rolling and finishing facilities that could be used
or modified without substantial capital expenditures to process titanium
products. There are currently five major, and several minor, producers of
titanium sponge in the world. TIMET is currently the only major sponge producer
in the U.S.. Three of the major producers have announced plans to increase
sponge capacity. TIMET believes that entry as producer of titanium sponge would
require a significant capital investment and substantial technical expertise.
TIMET's principal competitors in the aerospace titanium market are
Allegheny Technologies Incorporated and RTI International Metals, Inc.("RTI"),
both based in the United States, and Verkhnaya Salda Metallurgical Production
Organization ("VSMPO"), based in Russia. UNITI, a joint venture between RTI and
VSMPO, RTI and certain Japanese producers are the Company's principal
competitors in the industrial and emerging markets. TIMET competes primarily on
the basis of price, quality of products, technical support and the availability
of products to meet customers' delivery schedules.
In the U.S. market, the increasing presence of non-U.S. participants has
become a significant competitive factor. Until 1993, imports of foreign titanium
products into the U.S. had not been significant. This was primarily attributable
to relative currency exchange rates and, with respect to Japan, Russia,
Kazakhstan and Ukraine, import duties (including antidumping duties). However,
since 1993, imports of titanium sponge, ingot and mill products, principally
from Russia and Kazakhstan, have increased and have had a significant
competitive impact on the U.S. titanium industry. To the extent TIMET is able to
take advantage of this situation by purchasing sponge from such countries for
use in its own operations, the negative effect of these imports on TIMET can be
somewhat mitigated.
Generally, imports of titanium products into the U.S. are subject to a 15%
"normal trade relations" tariff. For tariff purposes, titanium products are
broadly classified as either wrought (billet, bar, sheet, strip, plate and
tubing) or unwrought (sponge, ingot and slab).
The United States maintains a trade program, referred to as the
"generalized system of preferences" or "GSP" program designed, to promote the
economies of a number of lesser-developed countries (referred to as "beneficiary
developing countries") by eliminating duties on a specific list of products
imported from any of these beneficiary developing countries. Of the key titanium
producing countries outside the U.S., Russia and Kazakhstan are currently
regarded as beneficiary developing countries under the GSP program.
For most periods since 1993, imports of titanium wrought products from any
beneficiary developing country (notably Russia, as a producer of wrought
products) were exempted from U.S. import duties under the GSP program. In 2002,
TIMET filed a petition seeking the removal of duty-free treatment under the GSP
program for imports of titanium wrought products into the U.S. from Russia.
During the third quarter of 2004, President Bush approved the petition. This
action resulted in a return to the normal 15% tariff on imports of titanium
wrought product from Russia.
In 2002, Kazakhstan filed a petition seeking GSP status on imports of
titanium sponge into the U.S., which, if granted, would have eliminated the 15%
tariff currently imposed on titanium sponge imported into the U.S. from any
beneficiary developing country (notably Russia and Kazakhstan, as producers of
titanium sponge). Kazakhstan's petition was denied in 2003.
The Japanese government has recently raised the elimination or
harmonization of tariffs on titanium products, including titanium sponge, for
consideration in the next round of multi-lateral trade negotiations through the
World Trade Organization (the so-called "Doha Round") scheduled to start in late
2005. A U.S. competitor has recommended the elimination of U.S. tariffs on
titanium sponge imports for consideration in the Doha Round. TIMET has urged
that no change be made to these tariffs, either on wrought or unwrought
products.
TIMET has successfully resisted, and will continue to resist, efforts to
eliminate duties on sponge and unwrought titanium products (whether through the
GSP or otherwise), and TIMET has pursued and will continue to pursue the removal
of GSP status for titanium wrought products, although no assurances can be made
that TIMET will continue to be successful in these activities. Further
reductions in, or the complete elimination of, any or all of these tariffs,
including expansion of the GSP program to unwrought titanium products, could
lead to increased imports of foreign sponge, ingot and mill products into the
U.S. and an increase in the amount of such products on the market generally,
which could adversely affect pricing for titanium sponge, ingot and mill
products and thus TIMET's business, results of operations, financial position or
liquidity.
Research and development. TIMET's research and development activities are
directed toward expanding the use of titanium and titanium alloys in all market
sectors. Key research activities include the development of new alloys,
development of technology required to enhance the performance of TIMET's
products in the traditional industrial and aerospace markets and applications
development for automotive and other emerging markets. TIMET conducts the
majority of its research and development activities at its Henderson Technical
Laboratory in Henderson, Nevada, with additional activities at its Witton,
England facility. TIMET incurred research and development costs of $2.9 million
in 2002, $2.8 million in 2003 and $2.9 million in 2004.
Patents and trademarks. TIMET holds U.S. and non-U.S. patents applicable to
certain of its titanium alloys and manufacturing technology. TIMET continually
seeks patent protection with respect to its technical base and has occasionally
entered into cross-licensing arrangements with third parties. TIMET believes the
trademarks TIMET(R) and TIMETAL(R), which are protected by registration in the
U.S. and other countries, are important to its business. Further, TIMET feels
its proprietary TIMETAL Exhaust Grade, patented TIMETAL 62S connecting rod
alloy, patented TIMETAL LCB spring alloy and patented TIMETAL Ti-1100 engine
valve alloy give it competitive advantages in the automotive market. However,
most of the titanium alloys and manufacturing technology used by TIMET do not
benefit from patent or other intellectual property protection. These patents
expire at various dates from 2004 through 2013.
Employees. The cyclical nature of the aerospace industry and its impact on
TIMET's business is the principal reason TIMET periodically implements cost
reduction restructurings, reorganizations and other changes that impact TIMET's
employment levels. At December 31, 2004, TIMET employed approximately 1,380
persons in the U.S. and 850 persons in Europe. TIMET currently expects
employment to slightly increase throughout 2005 as production continues to
increase.
TIMET's production, maintenance, clerical and technical workers in Toronto,
Ohio, and its production and maintenance workers in Henderson, Nevada are
represented by the United Steelworkers of America under contracts expiring in
July 2008 and January 2008, respectively. Employees at TIMET's other U.S.
facilities are not covered by collective bargaining agreements. Approximately
60% of the salaried and hourly employees at TIMET's European facilities are
represented by various European labor unions. TIMET has a labor agreement in
place with its U.K. employees through 2005. TIMET's labor agreement with its
French employees is renewed annually.
TIMET currently considers its employee relations to be satisfactory.
However, it is possible that there could be future work stoppages or other labor
disruptions that could materially and adversely affect TIMET's business, results
of operations, financial position or liquidity.
Regulatory and environmental matters. TIMET's operations are governed by
various Federal, state, local and foreign environmental and worker safety laws
and regulations. In the U.S., such laws include the Occupational, Safety and
Health Act, the Clean Air Act, the Clean Water Act and the CERCLA. TIMET uses
and manufactures substantial quantities of substances that are considered
hazardous, extremely hazardous or toxic under environmental and worker safety
and health laws and regulations. TIMET has used and manufactured such substances
throughout the history of its operations. As a result, risk of environmental,
health and safety issues 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 assurance that some, or all, of the risks discussed
under this heading will not result in liabilities that would be material to
TIMET's business, results of operations, financial position or liquidity.
TIMET believes that its operations are in compliance in all material
respects with applicable requirements of environmental and worker health and
safety laws. TIMET's policy is to continually strive to improve environmental,
health and safety performance. TIMET incurred capital expenditures related to
health, safety and environmental compliance and improvement of approximately
$1.4 million in 2002, $1.9 million in 2003 and $5.1 million in 2004. The 2004
amount includes $3.9 million related to the construction of a wastewater
treatment facility at its Henderson, Nevada location. TIMET's capital budget
provides for approximately $16 million for environmental, health and safety
capital expenditures in 2005, including approximately $13 million for completion
of the wastewater treatment facility.
From time to time, TIMET may be subject to health, safety or environmental
regulatory enforcement under various statutes, resolution of which typically
involves the establishment of compliance programs. Occasionally, resolution of
these matters may result in the payment of penalties. 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 currently
estimated to be required for such matters.
OTHER
NL Industries, Inc. In addition to its 68% ownership of CompX (through
CompX Group) and its 37% ownership of Kronos at December 31, 2004, NL also holds
certain marketable securities and other investments. In addition, NL owns 100%
of EWI Re., Inc., an insurance brokerage and risk management services company.
See Note 17 to the Consolidated Financial Statements.
Tremont LLC. Tremont is primarily a holding company which at December 31,
2004 owns 21% of NL, 40% of TIMET and 11% of Kronos. In addition, Tremont owns
indirect ownership interests in Basic Management, Inc. ("BMI"), which provides
utility services to, and owns property (the "BMI Complex") adjacent to, TIMET's
facility in Nevada, and The Landwell Company L.P. ("Landwell"), which is engaged
in efforts to develop certain land holdings for commercial, industrial and
residential purposes surrounding the BMI Complex. Tremont also directly owns
certain land which could be developed for commercial or industrial purposes.
Foreign operations. Through its subsidiaries and affiliate, the Company has
substantial operations and assets related to continuing operations 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 Taiwan. See Note 2 to the Consolidated Financial Statements for
certain geographic financial information concerning the Company. Approximately
72% of Kronos' 2004 TiO2 sales were to non-U.S. customers, including 9% to
customers in areas other than Europe and Canada. Approximately 24% of CompX's
2004 sales were to non-U.S. customers located principally in Canada. About 45%
of TIMET's 2004 sales are to non-U.S. customers, primarily in Europe. Foreign
operations are subject to, among other things, currency exchange rate
fluctuations and the Company's results of operations have in the past been both
favorably and unfavorably affected by fluctuations in currency exchange rates.
See Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Item 7A - "Quantitative and Qualitative Disclosures
About Market Risk."
CompX's Canadian component products subsidiary has, from time to time,
entered into currency forward contracts to mitigate exchange rate fluctuation
risk for a portion of its receivables denominated in currencies other than the
Canadian dollar (principally the U.S. dollar) or for similar risks associated
with future sales. Kronos and CompX may, from time to time, enter into currency
forward contracts to mitigate exchange rate fluctuation risk associated with
specific transactions, such as intercompany dividends or the acquisition of a
significant amount of assets. See Note 21 to the Consolidated Financial
Statements. Otherwise, the Company does not generally engage in currency
derivative transactions.
Political and economic uncertainties in certain of the countries in which
the Company operates may expose the Company to risk of loss. The Company does
not believe that there is currently any likelihood of material loss through
political or economic instability, seizure, nationalization or similar event.
The Company cannot predict, however, whether events of this type in the future
could have a material effect on its operations. The Company's manufacturing and
mining operations are also subject to extensive and diverse environmental
regulations in each of the foreign countries in which they operate, as discussed
in the respective business sections elsewhere herein.
Regulatory and environmental matters. Regulatory and environmental matters
are discussed in the respective business sections contained elsewhere herein and
in Item 3 - "Legal Proceedings." In addition, the information included in Note
18 to the Consolidated Financial Statements under the captions "Legal
proceedings -- lead pigment litigation" and - "Environmental matters and
litigation" is incorporated herein by reference.
Insurance. The Company maintains insurance for its businesses and
operations, with customary levels of coverage, deductibles and limits. See also
Note 17 to the Consolidated Financial Statements.
Acquisition and restructuring activities. The Company routinely compares
its liquidity requirements and alternative uses of capital against the estimated
future cash flows to be received from its subsidiaries and unconsolidated
affiliates, and the estimated sales value of those units. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify its dividend policy, consider
the sale of interests in subsidiaries, business units, marketable securities or
other assets, or take a combination of such steps or other steps, to increase
liquidity, reduce indebtedness and fund future activities. Such activities have
in the past and may in the future involve related companies. From time to time,
the Company and related entities also evaluate the restructuring of ownership
interests among its subsidiaries and related companies and expects to continue
this activity in the future.
The Company and other entities that may be deemed to be controlled by or
affiliated with Mr. Harold C. Simmons routinely evaluate acquisitions of
interests in, or combinations with, companies, including related companies,
perceived by management to be undervalued in the marketplace. These companies
may or may not be engaged in businesses related to the Company's current
businesses. In a number of instances, the Company has actively managed the
businesses acquired with a focus on maximizing return-on-investment through cost
reductions, capital expenditures, improved operating efficiencies, selective
marketing to address market niches, disposition of marginal operations, use of
leverage and redeployment of capital to more productive assets. In other
instances, the Company has disposed of the acquired interest in a company prior
to gaining control. The Company intends to consider such activities in the
future and may, in connection with such activities, consider issuing additional
equity securities and increasing the indebtedness of Valhi, its subsidiaries and
related companies.
Website and availability of Company reports filed with the SEC. Valhi files
reports, proxy and information statements and other information with the SEC.
Valhi maintains a website on the internet at www.valhi.net. Copies of this
Annual Report on Form 10-K for the year ended December 31, 2004, copies of the
Company's Quarterly Reports on Form 10-Q for 2004 and 2005 and any Current
Reports on Form 8-K for 2004 and 2005, and amendments thereto, are or will be
available free of charge at such website as soon as reasonably practical after
they have been filed with the SEC. Additional information regarding the Company,
including the Company's Audit Committee charter, the Company's Code of Business
Conduct and Ethics and the Company's Corporate Governance Guidelines, may also
be found at this website. Information contained on the Company's website is not
part of this Annual Report. The Company will also provide to anyone without
charge copies of such documents upon written request to the Company. Such
requests should be directed to the attention of the Corporate Secretary at the
Company's address on the cover page of this Form 10-K.
The general public may read and copy any materials the Company files with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington,
DC 20549, and may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The Company is an electronic filer,
and the SEC maintains an Internet website at www.sec.gov that contains reports,
proxy and information statements and other information regarding issuers that
file electronically with the SEC, including the Company.
ITEM 2. PROPERTIES
Valhi leases 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 18 to the Consolidated Financial Statements, which
information is incorporated herein by reference.
NL lead pigment litigation.
NL's former operations included the manufacture of lead pigments for use in
paint and lead-based paint. NL, other former manufacturers of lead pigments for
use in paint and lead-based paint (together, the "former pigment
manufacturers"), and the Lead Industries Association ("LIA"), which discontinued
business operations in 2002, have been named as defendants in various legal
proceedings seeking damages for personal injury, property damage and
governmental expenditures allegedly caused by the use of lead-based paints.
Certain of these actions have been filed by or on behalf of states, large U.S.
cities or their public housing authorities and school districts, and certain
others have been asserted as class actions. These lawsuits seek recovery under a
variety of theories, including public and private nuisance, negligent product
design, negligent failure to warn, strict liability, breach of warranty,
conspiracy/concert of action, aiding and abetting, enterprise liability, market
share liability, intentional tort, fraud and misrepresentation, violations of
state consumer protection statutes, supplier negligence and similar claims.
The plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and health concerns associated with the
use of lead-based paints, including damages for personal injury, contribution
and/or indemnification for medical expenses, medical monitoring expenses and
costs for educational programs. A number of cases are inactive or have been
dismissed or withdrawn. Most of the remaining cases are in various pre-trial
stages. Some are on appeal following dismissal or summary judgment rulings in
favor of the defendants. In addition, various other cases are pending (in which
NL is not a defendant) seeking recovery for injury allegedly caused by lead
pigment and lead-based paint. Although NL is not a defendant in these cases, the
outcome of these cases may have an impact on cases that might be filed against
NL in the future.
NL believes these actions are without merit, intends to continue to deny
all allegations of wrongdoing and liability and to defend against all actions
vigorously. NL has neither lost nor settled any of these cases. NL has not
accrued any amounts for the pending lead pigment and lead-based paint
litigation. Liability that may result, if any, cannot reasonably be estimated.
There can be no assurance that NL will not incur liability in the future in
respect of this pending litigation in view of the inherent uncertainties
involved in court and jury rulings in pending and possible future cases.
In June 1989, a complaint was filed in the Supreme Court of the State of
New York, County of New York, against the former pigment manufacturers and the
LIA. Plaintiffs sought damages in excess of $50 million for monitoring and
abating alleged lead paint hazards in public and private residential buildings,
diagnosing and treating children allegedly exposed to lead paint in city
buildings, the costs of educating city residents to the hazards of lead paint,
and liability in personal injury actions against the New York City and the New
York City Housing Authority based on alleged lead poisoning of city residents
(The City of New York, the New York City Housing Authority and the New York City
Health and Hospitals Corp. v. Lead Industries Association, Inc., et al., No.
89-4617). As a result of pre-trial motions, the New York City Housing Authority
is the only remaining plaintiff in the case and is pursuing damage claims only
with respect to two housing projects. No activity has occurred since September
2001.
In August 1992, NL was served with an amended complaint in Jackson, et al.
v. The Glidden Co., et al., Court of Common Pleas, Cuyahoga County, Cleveland,
Ohio (Case No. 236835). Plaintiffs seek compensatory and punitive damages for
personal injury caused by the ingestion of lead, and an order directing
defendants to abate lead-based paint in buildings. Plaintiffs purport to
represent a class of similarly situated persons throughout the State of Ohio.
The trial court has denied plaintiffs' motion for class certification. In
September 2003, defendants have filed a motion for summary judgment on all
claims. The court has not yet ruled on the motion.
In September 1999, an amended complaint was filed in Thomas v. Lead
Industries Association, et al. (Circuit Court, Milwaukee, Wisconsin, Case No.
99-CV-6411) adding as defendants the former pigment manufacturers to a suit
originally filed against plaintiff's landlords. Plaintiff, a minor, alleges
injuries purportedly caused by lead on the surfaces of premises in homes in
which he resided. Plaintiff seeks compensatory and punitive damages, and NL has
denied liability. In January 2003, the trial court granted defendants' motion
for summary judgment, dismissing all counts of the complaint. The plaintiff
appealed the dismissal, and in July 2004 the appellate court affirmed the
dismissal. The matter is now before the Wisconsin Supreme Court.
In October 1999, NL was served with a complaint in State of Rhode Island v.
Lead Industries Association, et al. (Superior Court of Rhode Island, No.
99-5226). The State seeks compensatory and punitive damages for medical and
educational expenses, and public and private building abatement expenses that
the State alleges were caused by lead paint, and for funding of a public
education campaign and health screening programs. Plaintiff seeks judgments of
joint and several liability against the former pigment manufacturers and the
LIA. Trial began before a Rhode Island state court jury in September 2002 on the
question of whether lead pigment in paint on Rhode Island buildings is a public
nuisance. On October 29, 2002, the trial judge declared a mistrial in the case
when the jury was unable to reach a verdict on the question, with the jury
reportedly deadlocked 4-2 in the defendants' favor. Other claims made by the
Attorney General, including violation of the Rhode Island Unfair Trade Practices
and Consumer Protection Act, strict liability, negligence, negligent and
fraudulent misrepresentation, civil conspiracy, indemnity, and unjust enrichment
were not the subject of the 2002 trial. In March 2003, the court denied motions
by plaintiffs and defendants for judgment notwithstanding the verdict. In
January 2004, plaintiff requested the court to dismiss its claims for
state-owned buildings, claiming all remaining claims did not require a jury and
asking the court to reconsider the trial schedule. In February 2004, the court
dismissed the strict liability, negligence, negligent misrepresentation and
fraud claims with prejudice, and the time for the state to appeal this dismissal
has not yet run. In March 2004, the court ruled that the defendants have a
constitutional right to a trial by jury under the Rhode Island Constitution.
Plaintiff appealed such ruling, and in July 2004 the Rhode Island Supreme Court
dismissed plaintiff's appeal of, and plaintiff's petition to reverse, the trial
court's ruling. The court also set September 2005 as the date for the retrial of
all claims in this case.
In October 1999, NL was served with a complaint in Smith, et al. v. Lead
Industries Association, et al. (Circuit Court for Baltimore City, Maryland, Case
No. 24-C-99-004490). Plaintiffs, seven minors from four families, each seek
compensatory damages of $5 million and punitive damages of $10 million for
alleged injuries due to lead-based paint. Plaintiffs allege that the former
pigment manufacturers and other companies alleged to have manufactured paint
and/or gasoline additives, the LIA and the National Paint and Coatings
Association are jointly and severally liable. NL has denied liability. The trial
court, on defendants' motion, dismissed all claims of the first four families
except those relating to product liability for lead paint and the Maryland
Consumer Protection Act. Plaintiff appealed, and in May 2004 the court of
appeals reinstated certain claims. In September 2004, the court of appeals
granted plaintiffs' petition for review of such court's affirmation of the
dismissal of certain of the plaintiffs' remaining claims. Pre-trial proceedings
and discovery against the other plaintiffs are continuing, but trial dates for
these plaintiffs are stayed pending the appeal of the summary judgment ruling.
In February 2000, NL was served with a complaint in City of St. Louis v.
Lead Industries Association, et al. (Missouri Circuit Court 22nd Judicial
Circuit, St. Louis City, Cause No. 002-245, Division 1). Plaintiff seeks
compensatory and punitive damages for its expenses discovering and abating
lead-based paint, detecting lead poisoning and providing medical care and
educational programs for City residents, and the costs of educating children
suffering injuries due to lead exposure. Plaintiff seeks judgments of joint and
several liability against the former pigment manufacturers and the LIA. In
November 2002, defendants' motion to dismiss was denied. In May 2003, plaintiffs
filed an amended complaint alleging only a nuisance claim. Defendants renewed
motion to dismiss and motion for summary judgment were denied by the trial court
in March 2004, but the trial court limited plaintiff's complaint to monetary
damages from 1990 to 2000, specifically excluding future damages. A trial date
has been set for January 2006.
In April 2000, NL was served with a complaint in County of Santa Clara v.
Atlantic Richfield Company, et al. (Superior Court of the State of California,
County of Santa Clara, Case No. CV788657) brought against the former pigment
manufacturers, the LIA and certain paint manufacturers. The County of Santa
Clara seeks to represent a class of California governmental entities (other than
the state and its agencies) to recover compensatory damages for funds the
plaintiffs have expended or will in the future expend for medical treatment,
educational expenses, abatement or other costs due to exposure to, or potential
exposure to, lead paint, disgorgement of profit, and punitive damages. Santa
Cruz, Solano, Alameda, San Francisco, and Kern counties, the cities of San
Francisco and Oakland, the Oakland and San Francisco unified school districts
and housing authorities and the Oakland Redevelopment Agency have joined the
case as plaintiffs. In February 2003, defendants filed a motion for summary
judgment. In July 2003, the court granted defendants' motion for summary
judgment on all remaining claims. Plaintiffs have appealed.
In June 2000, a complaint was filed in Illinois state court, Lewis, et al.
v. Lead Industries Association, et al. (Circuit Court of Cook County, Illinois,
County Department, Chancery Division, Case No. 00CH09800). Plaintiffs seek to
represent two classes, one of all minors between the ages of six months and six
years who resided in housing in Illinois built before 1978, and one of all
individuals between the ages of six and twenty years who lived between the ages
of six months and six years in Illinois housing built before 1978 and had blood
lead levels of 10 micrograms/deciliter or more. The complaint seeks damages
jointly and severally from the former pigment manufacturers and the LIA to
establish a medical screening fund for the first class to determine blood lead
levels, a medical monitoring fund for the second class to detect the onset of
latent diseases, and a fund for a public education campaign. In March 2002, the
court dismissed all claims. Plaintiffs appealed, and in June 2003 the appellate
court affirmed the dismissal of five of the six counts of plaintiffs, but
reversed the dismissal of the conspiracy count. In May 2004, defendants filed a
motion for summary judgment on plaintiffs' conspiracy count, which was granted
in February 2005. The time for plaintiffs' appeal has not yet run.
In February 2001, NL was served with a complaint in Barker, et al. v. The
Sherwin-Williams Company, et al. (Circuit Court of Jefferson County,
Mississippi, Civil Action No. 2000-587, and formerly known as Borden, et al. vs.
The Sherwin-Williams Company, et al.). 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. In 2003, the court ordered
that the claims of ten of the plaintiffs be transferred to Holmes County,
Mississippi state court. In April 2004, the parties jointly petitioned the
Mississippi Supreme Court to transfer these ten plaintiffs to their appropriate
venue, and in May 2004 the Mississippi Supreme Court remanded the case to the
trial court in Holmes County and instructed the court to transfer these ten
plaintiffs to their appropriate venues. Two of these plaintiffs have been
dismissed without prejudice with respect to NL. With respect to the eight
plaintiffs remaining in Jefferson County, one plaintiff dropped his claim, and
in July 2004 the Mississippi Supreme Court denied plaintiffs' motion to add
additional defendants. Pre-trial proceedings 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. In
July 2003, defendants' motion for summary judgment was granted by the trial
court. In November 2004, the appellate court reversed this ruling and remanded
the case. Defendants filed a petition for review of the appellate court's ruling
in December 2004 with the Wisconsin Supreme Court.
In January and February 2002, NL was served with complaints by 25 different
New Jersey municipalities and counties which have been consolidated as In re:
Lead Paint Litigation (Superior Court of New Jersey, Middlesex County, Case Code
702). Each complaint seeks abatement of lead paint from all housing and all
public buildings in each jurisdiction and punitive damages jointly and severally
from the former pigment manufacturers and the LIA. In November 2002, the court
entered an order dismissing this case with prejudice. Plaintiffs have appealed.
In January 2002, NL was served with a complaint in Jackson, et al., v.
Phillips Building Supply of Laurel, et al. (Circuit Court of Jones County,
Mississippi, Dkt. Co. 2002-10-CV1). The complaint seeks joint and several
liability from three local retailers and six non-Mississippi companies that sold
paint for compensatory and punitive damages on behalf of three adults for
injuries alleged to have been caused by the use of lead paint. After removal to
federal court, in February 2003 the case was remanded to state court. NL has
denied all allegations of liability and pre-trial proceedings are continuing. In
August 2004, plaintiffs voluntarily agreed to dismiss one plaintiff and to sever
the remaining two plaintiffs.
In June 2000, NL was served with a complaint in Houston Independent School
District v. Lead Industries Association, et al. (District Court of Harris
County, Texas, No. 2000-33725). The complaint seeks actual and punitive damages
resulting from the presence of lead-based paint in the district's buildings from
the former pigment manufacturers and the LIA. NL has denied all liability. This
case has been abated since 2003, and no further proceedings are anticipated.
In May 2001, NL was served with a complaint in Harris County, Texas v. Lead
Industries Association, et al. (District Court of Harris County, Texas, No.
2001-21413). The complaint seeks actual and punitive damages and asserts that
the former pigment manufacturers and the LIA are jointly and severally liable
for past and future damages due to the presence of lead paint in county-owned
buildings. NL has denied all liability. This case has been abated since 2003,
and no further proceedings are anticipated.
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 compliant seeks compensatory and
punitive damages jointly and severally from the former pigment manufacturers and
the LIA for property damage to its buildings. The complaint was amended to add
Liberty County, the City of Liberty, and the Dayton Independent School District
as plaintiffs and drop the LIA as a defendant. NL has denied all allegations of
liability. This case has been abated since 2003, and no further proceedings are
anticipated.
In May 2002, NL was served with a complaint in Brownsville Independent
School District v. Lead Industries Association, et al. (District Court of
Cameron County, Texas, No. 2002-052081 B), seeking compensatory and punitive
damages jointly and severally from NL, other former manufacturers of lead
pigment and the LIA for property damage. NL has denied all allegations of
liability. This case has been abated since 2003, and no further proceedings are
anticipated.
In September 2002, NL was served with a complaint in City of Chicago v.
American Cyanamid, et al. (Circuit Court of Cook County, Illinois, No.
02CH16212), seeking damages to abate lead paint in a single-count complaint
alleging public nuisance against NL and seven other former manufacturers of lead
pigment. In October 2003, the trial court granted defendants' motion to dismiss.
In January 2005, the appellate court affirmed the trial court's ruling.
Plaintiff has notified the court of its intention to seek review of this
decision by the Illinois Supreme Court.
In October 2002, NL was served with a complaint in Walters v. NL
Industries, et al. (Kings County Supreme Court, New York, No. 28087/2002), in
which an adult seeks compensatory and punitive damages from NL and five other
former manufacturers of lead pigment for childhood exposures to lead paint. The
complaint alleges negligence and strict product liability, and seeks joint and
several liability with claims of civil conspiracy, concert of action, enterprise
liability, and market share or alternative liability. In March 2003, the court
granted defendants' motion to dismiss the product defect allegations in the
negligence and strict liability counts. In December 2004, the case was dismissed
for plaintiff's failure to file a notice of entry.
In April 2003, NL was served with a complaint in Russell v. NL Industries,
Inc., et al. (Circuit Court of LeFlore County, Mississippi, Civil Action No.
No.2002-0235-CICI). Initially six painters sued NL, four paint companies, and a
local retailer, alleging strict liability, negligence, fraudulent concealment,
misrepresentation, and conspiracy, and seeking compensatory and punitive damages
for alleged injuries caused by lead paint. NL denied all liability, and the case
has been, removed to federal court. In May 2004, four of the six defendants
voluntarily dismissed their claims. In November 2004, defendants filed a motion
for summary judgment, and in January 2005 defendants filed a motion to dismiss.
In April 2003, NL was served with a complaint in Jones v. NL Industries,
Inc., et al. (Circuit Court of LeFlore County, Mississippi, Civil Action No.
2002-0241-CICI). The plaintiffs, fourteen children from five families, have sued
NL and one landlord alleging strict liability, negligence, fraudulent
concealment and misrepresentation, and seek compensatory and punitive damages
for alleged injuries caused by lead paint. Defendants removed this case to
federal court, and in June 2004 the federal court set a trial date for February
2006. Discovery is proceeding.
In November 2003, NL was served with a complaint in Lauren Brown v. NL
Industries, Inc., et al. (Circuit Court of Cook County, Illinois, County
Department, Law Division, Case No. 03L 012425). The complaint seeks damages
against NL and two local property owners on behalf of a minor for injuries
alleged to be due to exposure to lead paint contained in the minor's residence.
NL has denied all allegations of liability. Discovery is proceeding.
In December 2004, NL was served with a complaint in Terry, et al. v. NL
Industries, Inc., et al. (United States District Court, Southern District of
Mississippi, Case No. 4:04 CV 269 PB). The plaintiffs, seven children from three
families, have sued NL and one landlord alleging strict liability, negligence,
fraudulent concealment and misrepresentation, and seek compensatory and punitive
damages for alleged injuries caused by lead paint. The plaintiffs in the Terry
case are alleged to have resided in the same housing complex as the plaintiffs
in the Jones case discussed above. NL has denied all allegations of liability
and has filed a motion to dismiss plaintiffs' fraud claim.
In addition to the foregoing litigation, various legislation and
administrative regulations have, from time to time, been proposed that seek to
(a) impose various obligations on present and former manufacturers of lead
pigment and lead-based paint with respect to asserted health concerns associated
with the use of such products and (b) effectively overturn court decisions in
which NL and other pigment manufacturers have been successful. Examples of such
proposed legislation include bills which would permit civil liability for
damages on the basis of market share, rather than requiring plaintiffs to prove
that the defendant's product caused the alleged damage, and bills which would
revive actions barred by the statute of limitations. While no legislation or
regulations have been enacted to date that are expected to have a material
adverse effect on NL's consolidated financial position, results of operations or
liquidity, the imposition of market share liability or other legislation could
have such an effect.
Environmental matters and litigation.
General. The Company's operations are governed by various environmental
laws and regulations. Certain of the Company's businesses are and have been
engaged in the handling, manufacture or use of substances or compounds that may
be considered toxic or hazardous within the meaning of applicable environmental
laws. As with other companies engaged in similar businesses, certain past and
current operations and products of the Company have the potential to cause
environmental or other damage. The Company has implemented and continues to
implement various policies and programs in an effort to minimize these risks.
The Company's policy is to maintain compliance with applicable environmental
laws and regulations at all of its plants and to strive to improve its
environmental performance. From time to time, the Company may be subject to
environmental regulatory enforcement under U.S. and foreign statutes, resolution
of which typically involves the establishment of compliance programs. It is
possible that future developments, such as stricter requirements of
environmental laws and enforcement policies thereunder, could adversely affect
the Company's production, handling, use, storage, transportation, sale or
disposal of such substances. The Company believes all of its plants are in
substantial compliance with applicable environmental laws.
Certain properties and facilities used in the Company's former businesses,
including divested primary and secondary lead smelters and former mining
locations of NL, are the subject of civil litigation, administrative proceedings
or investigations arising under federal and state environmental laws.
Additionally, in connection with past disposal practices, the Company has been
named as a defendant, potential responsible party ("PRP") or both, pursuant to
the CERCLA and similar state laws in various governmental and private actions
associated with waste disposal sites, mining locations, and facilities currently
or previously owned, operated or used by the Company or its subsidiaries, or
their predecessors, certain of which are on the U.S. EPA's Superfund National
Priorities List or similar state lists. These proceedings seek cleanup costs,
damages for personal injury or property damage and/or damages for injury to
natural resources. Certain of these proceedings involve claims for substantial
amounts. Although the Company may be jointly and severally liable for such
costs, in most cases it is only one of a number of PRPs who may also be jointly
and severally liable.
Environmental obligations are difficult to assess and estimate for numerous
reasons including the complexity and differing interpretations of governmental
regulations, the number of PRPs and the PRPs' ability or willingness to fund
such allocation of costs, their financial capabilities and the allocation of
costs among PRPs, the solvency of other PRPs, the multiplicity of possible
solutions, and the years of investigatory, remedial and monitoring activity
required. In addition, the imposition of more stringent standards or
requirements under environmental laws or regulations, new developments or
changes respecting site cleanup costs or allocation of such costs among PRPs,
solvency of other PRPs, the results of future testing and analysis undertaken
with respect to certain sites or a determination that the Company is potentially
responsible for the release of hazardous substances at other sites, could result
in expenditures in excess of amounts currently estimated by the Company to be
required for such matters. In addition, with respect to other PRPs and the fact
that the Company may be jointly and severally liable for the total remediation
cost at certain sites, the Company could ultimately be liable for amounts in
excess of its accruals due to, among other things, reallocation of costs among
PRPs or the insolvency of one or more PRPs. No assurance can be given that
actual costs will not exceed accrued amounts or the upper end of the range for
sites for which estimates have been made, and no assurance can be given that
costs will not be incurred with respect to sites as to which no estimate
presently can be made. Further, there can be no assurance that additional
environmental matters will not arise in the future.
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, 2003 and 2004, no receivables for recoveries have been
recognized.
The exact time frame over which the Company makes payments with respect to
its accrued environmental costs is unknown and is dependent upon, among other
things, the timing of the actual remediation process that in part depends on
factors outside the control of the Company. At each balance sheet date, the
Company makes an estimate of the amount of its accrued environmental costs that
will be paid out over the subsequent 12 months, and the Company classifies such
amount as a current liability. The remainder of the accrued environmental costs
is classified as a noncurrent liability.
NL. Certain properties and facilities used in NL's former operations,
including divested primary and 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,
PRP, or both, pursuant to CERCLA, and similar state laws in approximately 60
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.
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.
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. See Note 18 to the Consolidated
Financial Statements. At December 31, 2004, NL had accrued $68 million for those
environmental matters which NL believes are reasonably estimable. NL believes it
is not possible to estimate the range of costs for certain sites. The upper end
of the range of reasonably possible costs to NL for sites for which NL believes
it is possible to estimate costs is approximately $93 million. NL's estimates of
such liabilities have not been discounted to present value.
At December 31, 2004, there are approximately 20 sites for which NL is
unable to estimate a range of costs. For these sites, generally the
investigation is in the early stages, and it is either unknown as to whether or
not NL actually had any association with the site, or if NL had association with
the site, the nature of its responsibility, if any, for the contamination at the
site and the extent of contamination. The timing on when information would
become available to NL to allow NL to estimate a range of loss is unknown and
dependent on events outside the control of NL, such as when the party alleging
liability provides information to NL.
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. NL and the U.S.
EPA entered into a court-approved consent decree settling NL's liability at the
site for $31.5 million, including $1 million in penalties. Pursuant to the
consent decree, in June 2003 NL paid $30.8 million to the United States, and NL
will pay up to an additional $700,000 upon completion of an EPA audit of certain
response costs.
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 substantially completed the clean-up work associated with the facility.
In January 2003, NL received a general notice of liability from the U.S.
EPA regarding the site of a formerly owned primary lead smelting facility
located in Collinsville, Illinois. The U.S. EPA alleges the site contains
elevated levels of lead. In July 2004, NL and the U.S. EPA entered into an
administrative order on consent to perform a removal action at the site.
In December 2003, NL was served with a complaint in The Quapaw Tribe of
Oklahoma et al. v. ASARCO Incorporated et al. (United States District Court,
Northern District of Oklahoma, Case No. 03-CII-846H(J). The complaint alleges
public nuisance, private nuisance, trespass, unjust enrichment, strict liability
and deceit by false representation against NL and six other mining companies
with respect to former operations in the Tar Creek mining district in Oklahoma.
The complaint seeks class action status for former and current owners, and
possessors of real property located within the Quapaw Reservation. Among other
things, the complaint seeks actual and punitive damages from the defendants. NL
has moved to dismiss the complaint and has denied all of plaintiffs'
allegations. In April 2004, plaintiffs filed an amended complaint adding claims
under the CERCLA and the RCRA, and NL moved to dismiss those claims. In June
2004, the court dismissed plaintiffs' claims for unjust enrichment and fraud as
well as one of the RCRA claims. In September 2004, the court stayed the case,
pending an appeal by the tribe related to sovereign immunity issues.
In February 2004, NL was served in Evans v. ASARCO (United States District
Court, Northern District of Oklahoma, Case No. 04-CV-94EA(M)), a purported class
action on behalf of two classes of persons living in the town of Quapaw,
Oklahoma: (1) a medical monitoring class of persons who have lived in the area
since 1994, and (2) a property owner class of residential, commercial and
government property owners. Four individuals are named as plaintiffs, together
with, the mayor of the town of Quapaw, Oklahoma, and the School Board of Quapaw,
Oklahoma. Plaintiffs allege causes of action in nuisance and seek a medical
monitoring program, a relocation program, property damages, and punitive
damages. NL answered the complaint and denied all of plaintiffs' allegations.
The trial court subsequently stayed all proceedings in this case pending the
outcome of a class certification decision in another case that had been pending
in the same U.S. District Court, a case from which NL has been dismissed with
prejudice.
See also Item 1 - "Business - Chemicals - Regulatory and environmental
matters."
Tremont. In July 2000 Tremont, entered into a voluntary settlement
agreement with the Arkansas Department of Environmental Quality and certain
other PRPs pursuant to which Tremont and the other PRPs will undertake certain
investigatory and interim remedial activities at a former mining site located in
Hot Springs County, Arkansas. Tremont currently believes that it has accrued
adequate amounts ($2.7 million at December 31, 2004) to cover its share of
probable and reasonably estimable environmental obligations for these
activities. Tremont currently expects that the nature and extent of any final
remediation measures that might be imposed with respect to this site will not be
known until 2007. Currently, no reasonable estimate can be made of the cost of
any such final remediation measures, and accordingly Tremont has accrued no
amounts at December 31, 2004 for any such cost. The amount accrued at December
31, 2004 represents Tremont's estimate of the costs to be incurred through 2007
with respect to the interim remediation measures.
Tremont records liabilities related to environmental remediation
obligations when estimated future expenditures are probable and reasonably
estimable. Such accruals are adjusted as further information becomes available
or circumstances change. Estimated future expenditures are not discounted to
their present value. It is not possible to estimate the range of costs for
certain sites, including the Hot Springs County, Arkansas site discussed above.
The imposition of more stringent standards or requirements under environmental
laws or regulations, the results of future testing and analysis undertaken by
Tremont at its former facilities, or a determination that Tremont is potentially
responsible for the release of hazardous substances at other sites, could result
in expenditures in excess of amounts currently estimated to be required for such
matters. No assurance can be given that actual costs will not exceed accrued
amounts or that costs will not be incurred with respect to sites as to which no
problem is currently known or where no estimate can presently be made. Further,
there can be no assurance that additional environmental matters will not arise
in the future. Environmental exposures are difficult to assess and estimate for
numerous reasons including the complexity and differing interpretations of
governmental regulations; the number of PRPs and the PRPs ability or willingness
to fund such allocation of costs, their financial capabilities, the allocation
of costs among PRPs; the multiplicity of possible solutions; and the years of
investigatory, remedial and monitoring activity required. It is possible that
future developments could adversely affect Tremont's business, results of
operations, financial condition or liquidity. There can be no assurances that
some, or all, of these risks would not result in liabilities that would be
material to Tremont's business, results of operations, financial position or
liquidity.
TIMET. TIMET and BMI entered into an agreement in 1999 providing that upon
BMI's payment to TIMET of the cost to design, purchase and install a new
wastewater neutralization facility necessary to allow TIMET to stop discharging
liquid and solid effluents and co-products into settling ponds located on
certain lands owned by TIMET adjacent to its Nevada facility (the "TIMET Pond
Property"), TIMET would convey the TIMET Pond Property to BMI, at no additional
cost. In November 2004, TIMET and BMI entered into several agreements which
superceded the 1999 agreement. Under these new agreements, TIMET conveyed the
TIMET Pond Property to BMI in exchange for (i) $12.0 million cash, (ii) BMI's
assumption of the liability for certain environmental issues associated with the
TIMET Pond Property, including certain possible groundwater issues and (iii)
other consideration, including TIMET's potential receipt of an additional $3.3
million from BMI in the event that BMI is unable to add TIMET to certain
insurance policies by a specified date. TIMET will continue to use certain of
the settling ponds located on the TIMET Pond Property pursuant to a lease until
a wastewater treatment facility is operational, construction of which TIMET
currently expects to be completed during the second quarter of 2005.
TIMET is also continuing assessment work with respect to its own active
plant site in Nevada. TIMET currently has $4.3 million accrued based on the
undiscounted cost estimates of the probable costs for remediation of these
sites, which TIMET expects will be paid over a period of up to thirty years.
At December 31, 2004, TIMET had accrued an aggregate of approximately $4.5
million for these environmental matters discussed above. The upper end of the
range of reasonably possible costs related to these matters is approximately
$7.0 million.
Other. In addition to amounts accrued by NL, Tremont and TIMET for
environmental matters, at December 31, 2004, the Company also had approximately
$6.3 million accrued for the estimated cost to complete environmental cleanup
matters at certain of its other former facilities.
Insurance coverage claims.
NL has settled insurance coverage claims concerning environmental claims
with certain of the defendants in the environmental coverage litigation,
including NL's principal former carriers. A portion of the proceeds from these
settlements were placed into special purpose trusts, as discussed below. See
Note 12 to the Consolidated Financial Statements. No further material
settlements relating to litigation concerning environmental remediation coverage
are expected.
At December 31, 2004, NL had $19 million in restricted cash, restricted
cash equivalents and restricted marketable debt securities held by special
purpose trusts, the assets of which can only be used to pay for certain of NL's
future environmental remediation and other environmental expenditures (2003 -
$24 million). Use of such restricted balances does not affect the Company's
consolidated net cash flows. Such restricted balances declined by approximately
$35 million during 2003 due primarily to a $30.8 million payment made by NL
related to the final settlement of the Granite City, Illinois site.
The issue of whether insurance coverage for defense costs or indemnity or
both will be found to exist for NL's 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 defense costs or environmental litigation in determining related
accruals.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Valhi security holders during the
quarter ended December 31, 2004.
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, 2005, there were approximately 4,100
holders of record of Valhi common stock. The following table sets forth the high
and low closing per share sales prices for Valhi common stock for the periods
indicated, according to Bloomberg, and dividends paid during such periods. On
February 28, 2005 the closing price of Valhi common stock according to Bloomberg
was $15.53.
Dividends
High Low paid
Year ended December 31, 2003
First Quarter $11.22 $ 7.50 $.06
Second Quarter 11.50 9.11 .06
Third Quarter 12.38 9.60 .06
Fourth Quarter 15.69 11.71 .06
Year ended December 31, 2004
First Quarter $15.71 $11.50 $.06
Second Quarter 14.10 10.12 .06
Third Quarter 15.03 11.10 .06
Fourth Quarter 16.31 14.99 .06
Valhi paid regular quarterly dividends of $.06 per share during each of
2003 and 2004. In February 2005, Valhi's board of directors increased Valhi's
regular quarterly dividend to $.10 per share, with the first such dividend to be
paid on March 31, 2005 to Valhi shareholders of record as of March 14, 2005.
However, declaration and payment of future dividends, and the amount thereof, is
discretionary and is 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. The amount and timing of past dividends is not necessarily indicative
of the amount or timing of any future dividends which might be paid. In this
regard, Valhi's revolving bank credit facility currently limits the amount of
Valhi's quarterly dividends to $.06 per share, plus an additional aggregate
amount of $125 million at December 31, 2004.
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,
2000 (2) 2001 (2) 2002 (2) 2003 (2) 2004 (2)
-------- -------- -------- -------- --------
(Restated) (Restated) (Restated) (Restated) (Restated)
(In millions, except per share data)
STATEMENTS OF OPERATIONS DATA:
Net sales:
Chemicals $ 922.3 $ 835.1 $ 875.2 $1,008.2 $1,128.6
Component products 217.5 179.6 166.7 173.9 182.6
Waste management 16.3 13.0 8.4 4.1 8.9
-------- -------- -------- -------- --------
$1,156.1 $1,027.7 $1,050.3 $1,186.2 $1,320.1
======== ======== ======== ======== ========
Operating income:
Chemicals $ 187.4 $ 143.5 $ 84.4 $ 122.3 $ 103.5
Component products 33.3 13.3 4.4 9.1 16.2
Waste management (7.2) (14.4) (7.0) (11.5) (10.2)
-------- -------- -------- -------- --------
$ 213.5 $ 142.4 $ 81.8 $ 119.9 $ 109.5
======== ======== ======== ======== ========
Equity in earnings (losses) of
TIMET $ (9.0) $ (9.2) $ (32.9) $ 1.9 $ 19.5
======== ======== ======== ======== ========
Income (loss) from continuing
operations (1) $ 75.8 $ 103.5 $ 2.9 $ (82.7) $ 224.2
Discontinued operations .6 (1.1) (.2) (2.9) 3.7
Cumulative effect of change in
accounting principle - - - .6 -
-------- -------- --------- -------- -----
Net income (loss) $ 76.4 $ 102.4 $ 2.7 $ (85.0) $ 227.9
======== ========= ======== ========= ========
DILUTED EARNINGS PER SHARE DATA:
Income (loss) from continuing
operations $ .65 $ .89 $ .02 $ (.69) $ 1.86
Net income (loss) $ .66 $ .88 $ .02 $ (.71) $ 1.89
Cash dividends $ .21 $ .24 $ .24 $ .24 $ .24
Weighted average common shares
outstanding 116.3 116.1 115.8 119.9 120.4
BALANCE SHEET DATA (at year end):
Total assets $2,336.8 $2,230.7 $2,155.8 $2,299.5 $2,679.6
Long-term debt 595.4 497.2 605.7 632.5 769.5
Stockholders' equity 683.6 687.2 680.8 624.0 867.6
(1) The Company's results of operations in 2000 and 2001 include the impact of
goodwill amortization of $13.3 million and $15.7 million, respectively, net
of income tax benefit and minority interest. Goodwill ceased to be
periodically amortized in 2002. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for a discussion of
unusual items occurring during 2002, 2003 and 2004.
(2) Income (loss) from continuing operations and net income (loss), and related
per share amounts, for the years ended December 31, 2000, 2001, 2000, 2003
and 2004, and total assets and stockholders' equity as of December 31,
2000, 2001, 2002, 2003 and 2004 have each been restated from amounts shown
in the Original Form 10-K. See Note 1 to the Consolidated Financial
Statements. Income (loss) from continuing operations and net income, and
the related per diluted share amounts, as presented above, differs from
amounts previously reported by $264,000 (nil per share) in 2000 and $9.2
million ($.08 per diluted share) in 2001. Total assets, as presented above,
differs from abouts previously reported by $80.0 million at each of
December 31, 2000 and 2001 and by $81.0 million at December 31, 2002.
Stockholders' equity, as presented above, differs from amounts previously
reported by $55.4 million at December 31, 2000, by $64.9 million at
December 21, 2001 and by $66.0 million at December 31, 2002.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Summary
The Company reported income from continuing operations of $224.2 million,
or $1.86 per diluted share, in 2004 compared to a loss of $82.7 million, or $.69
per diluted share, in 2003 and income of $2.9 million, or $.02 per diluted
share, in 2002. As discussed is Note 1 to the Consolidated Financial Statements,
the Company's consolidated financial statements have been restated.
The increase in the Company's diluted earnings per share from 2003 to 2004
is due primarily to the net effects of (i) lower chemicals operating income,
(ii) higher component products operating income, (iii) lower environmental
remediation and legal expenses of NL, (iv) higher equity in earnings of TIMET
and (v) certain income tax benefits. The increase in the Company's diluted
earnings per share from 2002 to 2003 is due primarily to the net effects of (i)
higher chemicals operating income, (ii) higher components products operating
income, (iii) a higher operating loss in the Company's waste management segment,
(iv) higher environmental remediation expenses of NL, (v) certain income tax
benefits and (vi) current and deferred provisions for income taxes related to
the Company's investment in Kronos.
Income from continuing operations in 2004 includes (i) a second quarter
income tax benefit related to the reversal of Kronos' deferred income tax asset
valuation allowance in Germany of $1.91 per diluted share, (ii) an income tax
benefit related to the reversal of the deferred income tax asset valuation
allowance related to EMS and the adjustment of estimated income taxes due upon
the IRS settlement related to EMS of $.34 per diluted share, (iii) income
related to Kronos' contract dispute settlement of $.03 per diluted share, (iv)
income related to NL's fourth quarter sales of Kronos common stock in market
transactions of $.01 per diluted share, (v) income related to the Company's
pro-rata share of TIMET's non-operating gain from TIMET's exchange of its
convertible preferred debt securities for a new issue of TIMET convertible
preferred stock of $.03 per diluted share and (vi) income related to the
Company's pro-rata share of TIMET's income tax benefit resulting from TIMET's
utilization of a capital loss carryforward, the benefit of which had not been
previously recognized by TIMET, of $.01 per diluted share.
Income from continuing operations in 2003 includes (i) an income tax
benefit relating to the refund of prior year German income taxes of $.17 per
diluted share and (ii) gains from the disposal of property and equipment
(principally related to certain real property of NL) aggregating $.05 per
diluted share.
Income from continuing operations in 2002 includes (i) income related to
certain settlements NL reached with certain of its former principal insurance
carriers of $.02 per diluted share, (ii) a loss related to the Company's
pro-rata share of TIMET's provision for an other than temporary decline in the
value of certain convertible preferred securities of Special Metals Corporation
held by TIMET of $.05 per diluted share, (iii) a loss related to an other than
temporary decline in the value of the Company's investment in TIMET of $.07 per
diluted share, (iv) net securities transactions gains of $.04 per diluted share
related to the disposition of shares of Halliburton Company common stock held by
the Company, (v) an income tax benefit related to the reduction in the Belgian
corporate income tax rate of $.02 per diluted share and (vi) income of $.04 per
diluted share related to Kronos' foreign currency transaction gain resulting
from the extinguishment of certain intercompany indebtedness of NL and Kronos.
Each of these items is more fully discussed below and/or in the notes to
the Consolidated Financial Statements.
The Company currently believes its income from continuing operations will
be lower in 2005 as compared to 2004 due primarily to the net effects of higher
expected chemicals operating income in 2005 and the income tax benefits
recognized in 2004.
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 amounts of revenues and expenses during the
reported period. On an on going basis, the Company evaluates its estimates,
including those related to bad debts, inventory reserves, impairments of
investments in marketable securities and investments accounted for by the equity
method, the recoverability of other long-lived assets (including goodwill and
other intangible assets), pension and other post-retirement benefit obligations
and the underlying actuarial assumptions related thereto, the realization of
deferred income tax assets and accruals for environmental remediation,
litigation, income tax and other contingencies. The Company bases its estimates
on historical experience and on various other assumptions that it believes to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the reported amounts of assets, liabilities, revenues and
expenses. Actual results may differ from previously-estimated amounts under
different assumptions or conditions.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
Consolidated Financial Statements:
o The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required
payments and other factors. The Company takes into consideration the
current financial condition of its customers, the age of the
outstanding balance and the current economic environment when
assessing the adequacy of the allowance. If the financial condition of
the Company's customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances
may be required. During 2002, 2003 and 2004, the net amount written
off against the allowance for doubtful accounts as a percentage of the
balance of the allowance for doubtful accounts as of the beginning of
the year ranged from 7% to 22%.
o The Company provides reserves for estimated obsolescence or
unmarketable inventories equal to the difference between the cost of
inventories 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 inventories reserves may be required. Kronos
provides reserves for tools and supplies inventory based generally on
both historical and expected future usage requirements.
o The Company owns investments in certain companies that are accounted
for either as marketable securities carried at fair value or accounted
for under the equity method. For all of such investments, the Company
records an impairment charge when it believes an investment has
experienced a decline in fair value below its cost basis (for
marketable securities) or below its carrying value (for equity method
investees) that is other than temporary. Future adverse changes in
market conditions or poor operating results of underlying investments
could result in losses or an inability to recover the carrying value
of the investments that may not be reflected in an investment's
current carrying value, thereby possibly requiring an impairment
charge in the future.
At December 31, 2004, the carrying value (which equals their fair
value) of all of the Company's marketable securities equaled or
exceeded the cost basis of each of such investments. With respect to
the Company's investment in The Amalgamated Sugar Company LLC, which
represents approximately 94% of the aggregate carrying value of all of
the Company's marketable securities at December 31, 2004, the $250
million carrying value of such investment is the same as its cost
basis. At December 31, 2004, the $24.14 per share quoted market price
of the Company's investment in TIMET (the only one of the Company's
equity method investees for which quoted market prices are available)
was more than three times the Company's per share net carrying value
of its investment in TIMET.
o The Company recognizes an impairment charge associated with its
long-lived assets, including property and equipment, goodwill and
other intangible assets, whenever it determines that recovery of such
long-lived asset is not probable. Such determination is made in
accordance with the applicable GAAP requirements associated with the
long-lived asset, and is based upon, among other things, estimates of
the amount of future net cash flows to be generated by the long-lived
asset and estimates of the current fair value of the asset. Adverse
changes in such estimates of future net cash flows or estimates of
fair value could result in an inability to recover the carrying value
of the long-lived asset, thereby possibly requiring an impairment
charge to be recognized in the future.
Under applicable GAAP (SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets), property and equipment is not assessed
for impairment unless certain impairment indicators, as defined, are
present. During 2004, impairment indicators were present only with
respect to the property and equipment associated with the Company's
waste management operating segment, which represented approximately 3%
of the Company's consolidated net property and equipment as of
December 31, 2004. Waste Control Specialists completed an impairment
review of its net property and equipment and related net assets as of
December 31, 2004. Such analysis indicated no impairment was present
as the estimated future undiscounted cash flows associated with such
operations exceeded the carrying value of such operation's net assets.
Significant judgment is required in estimating such undiscounted cash
flows. Such estimated cash flows are inherently uncertain, and there
can be no assurance that the future cash flows reflected in these
projections will be achieved.
Under applicable GAAP (SFAS No. 142, Goodwill and other Intangible
Assets), goodwill is required to be reviewed for impairment at least
on an annual basis. Goodwill will also be reviewed for impairment at
other times during each year when impairment indicators, as defined,
are present. As discussed in Notes 9 and 19 to the Consolidated
Financial Statements, the Company has assigned its goodwill to four
reporting units (as that term is defined in SFAS No. 142). Goodwill
attributable to the chemicals operating segment was assigned to the
reporting unit consisting of Kronos in total. Goodwill attributable to
the component products operating segment was assigned to three
reporting units within that operating segment, one consisting of
CompX's security products operations, one consisting of CompX's
European operations and one consisting of CompX's Canadian and
Taiwanese operations. No goodwill impairments were deemed to exist as
a result of the Company's annual impairment review completed during
the third quarter of 2004, as the estimated fair value of each such
reporting unit exceeded the net carrying value of the respective
reporting unit (Kronos reporting unit - 136%, CompX security products
reporting unit - 124%, CompX European operations reporting unit - 61%
and CompX Canadian and Taiwanese operations reporting unit - 395%).
The estimated fair values of the three CompX reporting units are
determined based on discounted cash flow projections, and the
estimated fair value of the Kronos reporting unit is based upon the
quoted market price for Kronos' common stock, as appropriately
adjusted for a control premium. Significant judgment is required in
estimating the discounted cash flows for the CompX reporting units.
Such estimated cash flows are inherently uncertain, and there can be
no assurance that CompX will achieve the future cash flows reflected
in its projections. The Company did, however, recognize a $6.5 million
impairment with respect to CompX's European operations in the fourth
quarter of 2004, following CompX's decision to dispose of those
assets. See Note 22 to the Consolidated Financial Statements.
o The Company maintains various defined benefit pension plans and
postretirement benefits other than pensions ("OPEB"). The amounts
recognized as defined benefit pension and OPEB expenses, and the
reported amounts of prepaid and accrued pension costs and accrued OPEB
costs, are actuarially determined based on several assumptions,
including discount rates, expected rates of returns on plan assets and
expected health care trend rates. Variances from these actuarially
assumed rates will result in increases or decreases, as applicable, in
the recognized pension and OPEB obligations, pension and OPEB expenses
and funding requirements. These assumptions are more fully described
below under "--Assumptions on defined benefit pension plans and OPEB
plans."
o The Company records a valuation allowance to reduce its deferred
income tax assets to the amount that is believed to be realized under
the "more-likely-than-not" recognition criteria. While the Company has
considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation allowance,
it is possible that in the future the Company may change its estimate
of the amount of the deferred income tax assets that would
"more-likely-than-not" be realized in the future, resulting in an
adjustment to the deferred income tax asset valuation allowance that
would either increase or decrease, as applicable, reported net income
in the period such change in estimate was made. For example, Kronos
has substantial net operating loss carryforwards in Germany (the
equivalent of $671 million for German corporate purposes and $232
million for German trade tax purposes at December 31, 2004). During
2004 the Company concluded that the more-likely-than-not recognition
criteria had been met with respect to the income tax benefit
associated with Kronos' German net operating loss carryforwards in
Germany. Prior to the complete utilization of such carryforwards, it
is possible that the Company might conclude in the future that the
benefit of such carryforwards would no longer meet the
more-likely-than-not recognition criteria, at which point the Company
would be required to recognize a valuation allowance against the
then-remaining tax benefit associated with the carryforwards.
o The Company records accruals for environmental, legal, income tax and
other contingencies and commitments when estimated future expenditures
associated with such contingencies become probable, and the amounts
can be reasonably estimated. However, new information may become
available, or circumstances (such as applicable laws and regulations)
may change, thereby resulting in an increase or decrease in the amount
required to be accrued for such matters (and therefore a decrease or
increase in reported net income in the period of such change).
Operating income for each of the Company's three operating segments are
impacted by certain of these significant judgments and estimates, as summarized
below:
o Chemicals - allowance for doubtful accounts, reserves for obsolete or
unmarketable inventories, impairment of equity method investees,
goodwill and other long-lived assets, defined benefit pension and OPEB
plans and loss accruals.
o Component products - allowance for doubtful accounts, reserves for
obsolete or unmarketable inventories, impairment of long-lived assets
and loss accruals.
o Waste management - allowance for doubtful accounts, impairment of
long-lived assets and loss accruals.
In addition, general corporate and other items are impacted by the significant
judgments and estimates for impairment of marketable securities and equity
method investees, defined benefit pension and OPEB plans, deferred income tax
asset valuation allowances and loss accruals.
Chemicals - Kronos
Relative changes in Kronos' TiO2 sales and operating income during the past
three years are primarily due to (i) relative changes in TiO2 sales and
production volumes, (ii) relative changes in TiO2 average selling prices and
(iii) relative changes in foreign currency exchange rates. Selling prices (in
billing currencies) for TiO2, Kronos' principal product, were generally:
decreasing during the first quarter of 2002, flat during the second quarter of
2002, increasing during the last half of 2002 and the first quarter of 2003,
flat during the second quarter of 2003, decreasing during the last half of 2003
and the first quarter of 2004, flat during the second quarter of 2004 and
increasing in the last half of 2004.
Years ended December 31, % Change
----------------------------- --------------
2002 2003 2004 2002-03 2003-04
---- ---- ---- ------- -------
(In $ millions, except selling price
data)
Net sales $875.2 $1,008.2 $1,128.6 +15% +12%
Operating income 84.4 122.3 103.5 +45% -15%
Operating income margin 10% 12% 9%
TiO2 operating
statistics:
Sales volumes* 455 462 500 +2% +8%
Production volumes* 442 476 484 +8% +2%
Production rate as
percent of capacity 96% Full Full
Average selling prices
index (1990=100) $ 81 $ 84 $ 82 +3% -2%
Percent change in Ti02 average selling prices:
Using actual foreign currency exchange rates +13% +4%
Impact of changes in foreign exchange rates -10% - 6%
--- ---
In billing currencies + 3% - 2%
=== ===
* Thousands of metric tons
Kronos' sales increased $120.4 million (12%) in 2004 as compared to 2003 as
the favorable effect of fluctuations in foreign currency exchange rates, which
increased chemicals sales by approximately $60 million as further discussed
below, and higher sales volumes more than offset the impact of lower average
TiO2 selling prices. 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 were 2% lower in 2004 as compared to 2003. When translated
from billing currencies into U.S. dollars using actual foreign currency exchange
rates prevailing during the respective periods, Kronos' average TiO2 selling
prices in 2004 increased 4% in 2004 as compared to 2003.
Kronos' sales increased $133.0 million (15%) in 2003 compared to 2002 due
primarily to higher average TiO2 selling prices, higher sales volumes and the
favorable effect of fluctuations in foreign currency exchange rates, which
increased sales by approximately $93 million as further discussed below.
Excluding the effect of fluctuations in the value of the U.S. dollar relative to
other currencies, Kronos' average TiO2 selling prices in billing currencies in
2003 were 3% higher than 2002, with the greatest improvement in European and
export markets. When translated from billing currencies to U.S. dollars using
actual foreign currency exchange rates prevailing during the respective periods,
Kronos' average TiO2 selling prices in 2003 increased 13% compared to 2002.
Kronos' sales are denominated in various currencies, including the U.S.
dollar, the euro, other major European currencies and the Canadian dollar. The
disclosure of the percentage change in Kronos' average TiO2 selling prices in
billing currencies (which excludes the effects of fluctuations in the value of
the U.S. dollar relative to other currencies) is considered a "non-GAAP"
financial measure under regulations of the SEC. The disclosure of the percentage
change in Kronos' average TiO2 selling prices using actual foreign currency
exchange rates prevailing during the respective periods is considered the most
directly comparable financial measure presented in accordance with GAAP ("GAAP
measure"). Kronos discloses percentage changes in its average TiO2 prices in
billing currencies because Kronos believes such disclosure provides useful
information to investors to allow them to analyze such changes without the
impact of changes in foreign currency exchange rates, thereby facilitating
period-to-period comparisons of the relative changes in average selling prices
in the actual various billing currencies. Generally, when the U.S. dollar either
strengthens or weakens against other currencies, the percentage change in
average selling prices in billing currencies will be higher or lower,
respectively, than such percentage changes would be using actual exchange rates
prevailing during the respective periods. The difference between the 13% and 4%
increases in Kronos' average TiO2 selling prices during 2003 and 2004,
respectively, as compared to the respective prior year using actual foreign
currency exchange rates prevailing during the respective periods (the GAAP
measure), and the 3% increase and 2% decrease in Kronos' average TiO2 selling
prices in billing currencies (the non-GAAP measure) during such periods is due
to the effect of changes in foreign currency exchange rates. The above table
presents in a tabular format (i) the percentage change in Kronos' average TiO2
selling prices using actual foreign currency exchange rates prevailing during
the respective periods (the GAAP measure), (ii) the percentage change in Kronos'
average TiO2 selling prices in billing currencies (the non-GAAP measure) and
(iii) the percentage change due to changes in foreign currency exchange rates
(or the reconciling item between the non-GAAP measure and the GAAP measure).
Chemicals operating income in 2004 includes $6.3 million of income related
to the settlement of a contract dispute with a customer. As part of the
settlement, the customer agreed to make payments to Kronos through 2007
aggregating $7.3 million. The $6.3 million gain recognized represents the
present value of the future payments to be paid by the customer to Kronos. The
dispute with the customer concerned the customer's alleged past failure to
purchase the required amount of TiO2 from Kronos under the terms of Kronos'
contract with the customer. Under the settlement, the customer agreed to pay an
aggregate of $7.3 million to Kronos through 2007 to resolve such dispute. See
Note 12 to the Consolidated Financial Statements.
Kronos' operating income decreased $18.8 million (15%) in 2004 as compared
to 2003, as the effect of lower average TiO2 selling prices and higher raw
material and maintenance costs more than offset the impact of higher sales and
production volumes and the income from the contract dispute settlement. Kronos'
operating income increased $37.9 million (45%) in 2003 compared to 2002 due
primarily to higher average TiO2 selling prices and higher TiO2 sales and
production volumes.
Kronos' TiO2 sales volumes in 2004 increased 8% compared to 2003, as higher
volumes in European and export markets more than offset lower volumes in Canada.
Approximately one-half of Kronos' 2004 TiO2 sales volumes were attributable to
markets in Europe, with 38% attributable to North America and the balance to
export markets. Demand for TiO2 has remained strong throughout 2004, and while
Kronos believes that the strong demand is largely attributable to the end-use
demand of its customers, it is possible that some portion of the strong demand
resulted from customers increasing their inventory levels of TiO2 in advance of
implementation of announced or anticipated price increases. Kronos' operating
income comparisons were also favorably impacted by higher production levels,
which increased 2%. Kronos' operating rates were near full capacity in both
periods, and Kronos' sales and production volumes in 2004 were both new records
for Kronos, setting new volume records for Kronos for the third consecutive
year.
Kronos' TiO2 sales volumes in 2003 increased 2% from 2002, with higher
volumes in European and North American markets more than offsetting lower
volumes in export markets. Kronos' TiO2 production volumes in 2003 were 8%
higher than 2002, with operating rates near full capacity in both years.
Kronos has substantial operations and assets located outside the United
States (primarily in Germany, Belgium, Norway and Canada). A significant amount
of Kronos' sales generated from its non-U.S. operations are denominated in
currencies other than the U.S. dollar, principally the euro, other major
European currencies and the Canadian dollar. A portion of Kronos' sales
generated from its non-U.S. operations are denominated in the U.S. dollar.
Certain raw materials, primarily titanium-containing feedstocks, are purchased
in U.S. dollars, while labor and other production costs are denominated
primarily in local currencies. Consequently, the translated U.S. dollar value of
Kronos' foreign sales and operating results are subject to currency exchange
rate fluctuations which may favorably or adversely impact reported earnings and
may affect the comparability of period-to-period operating results. Overall,
fluctuations in the value of the U.S. dollar relative to other currencies,
primarily the euro, increased TiO2 sales by a net $60 million in 2004 as
compared to 2003, and increased sales by a net $93 million in 2003 as compared
to 2002. Fluctuations in the value of the U.S. dollar relative to other
currencies similarly impacted Kronos' foreign currency-denominated operating
expenses. Kronos' operating costs that are not denominated in the U.S. dollar,
when translated into U.S. dollars, were higher in 2004 and 2003 compared to the
same periods of the respective prior years. Overall, currency exchange rate
fluctuations resulted in a net $6 million increase in Kronos' operating income
in 2004 as compared to 2003, and resulted in a net $6 million decrease in
Kronos' operating income in 2003 as compared to 2002.
Reflecting the impact of partial implementation of prior price increase
announcements, Kronos' average TiO2 selling prices in billing currencies in the
fourth quarter of 2004 were 2% higher than the third quarter of 2004. Kronos
expects its average selling prices will be higher in 2005 as compared to 2004,
reflecting the expected continued implementation of price increase
announcements, including Kronos' latest price increases announced in March 2005.
The extent to which all of such price increases, and any additional price
increases which may be announced subsequently in 2005, will be realized will
depend on, among other things, economic factors.
Kronos' efforts to debottleneck its production facilities to meet long-term
demand continue to prove successful. Kronos' production capacity has increased
by approximately 30% over the past ten years due to debottlenecking programs,
with only moderate capital investment. Kronos believes its annual attainable
production capacity for 2005 is approximately 500,000 metric tons, with some
slight additional capacity available in 2006 through Kronos' continued
debottlenecking efforts.
Kronos expects its TiO2 production volumes in 2005 will be slightly higher
than its 2004 volumes, with sales volumes comparable to slightly lower in 2005
as compared to 2004. Kronos' average TiO2 selling prices, which started to
increase during the second half of 2004, are expected to continue to increase
during 2005, and consequently Kronos currently expects its average TiO2 selling
prices, in billing currencies, will be higher in 2005 as compared to 2004.
Overall, Kronos expects it chemicals operating income in 2005 will be higher
than 2004, due primarily to higher expected selling prices. Kronos' expectations
as to the future prospects of Kronos and the TiO2 industry are based upon a
number of factors beyond Kronos' control, including worldwide growth of gross
domestic product, competition in the marketplace, unexpected or
earlier-than-expected capacity additions and technological advances. If actual
developments differ from Kronos' expectations, Kronos' results of operations
could be unfavorably affected.
Chemicals operating income, as presented above, is stated net of
amortization of Valhi's purchase accounting adjustments made in conjunction with
its acquisitions of its interest in NL and Kronos. Such adjustments result in
additional depreciation and amortization expense beyond amounts separately
reported by Kronos. Such additional non-cash expenses reduced chemicals
operating income, as reported by Valhi, by $12.2 million in 2002, $15.0 million
in 2003 and $16.2 million in 2004 as compared to amounts separately reported by
Kronos. Changes in the aggregate amount of purchase accounting adjustment
amortization during the past three years is due primarily to the effect of
relative changes in foreign currency exchange rates.
Component products - CompX
Years ended December 31, % Change
---------------------------- ------------
2002 2003 2004 2002-03 2003-04
---- ---- ---- ------- -------
(In millions)
Net sales $166.7 $173.9 $182.6 +4% +5%
Operating income 4.4 9.1 16.2 +105% +80%
Operating income margin 3% 5% 9%
Component products sales were higher in 2004 as compared to 2003 due in
part to the favorable effect of fluctuations in foreign currency exchange rates.
Fluctuations in the value of the U.S. dollar relative to other currencies, as
discussed below, increased component products sales by $2.5 million in 2004 as
compared to 2003. Component products sales comparisons were also impacted by
increases in product prices for precision slides and ergonomic products, which
were primarily a pass through of raw material steel cost increases to customers.
During 2004, sales of slide products increased 13% as compared to 2003,
while sales of security products decreased less than 1% and sales of ergonomic
products increased 1% during the same period. The percentage changes in both
slide and ergonomic products include the impact resulting from changes in
foreign currency exchange rates. Sales of security products are generally
denominated in U.S. dollars.
Component products operating income comparisons in 2004 were favorably
impacted by the effect of certain cost reduction initiatives undertaken in 2003.
Component products operating income comparisons were also impacted by the net
effects of increases in the cost of steel (the primary raw material for CompX's
products) and continued reductions in manufacturing, fixed overhead and other
overhead costs.
Component products sales were higher in 2003 as compared to 2002 due
primarily to the favorable effect of fluctuations in foreign currency exchange
rates. Fluctuations in the value of the U.S. dollar relative to other
currencies, as discussed below, increased net sales by $3.3 million in 2003 as
compared to 2002. In addition to the favorable impact of changes in foreign
currency exchange rates, component products sales increased in 2003 as compared
to 2002 due to the net effects of higher sales volumes of security products and
precision slide products in North American markets partially offset by lower
sales volumes of ergonomic products.
During 2003, sales of slide and security products increased 10% and 4%,
respectively, as compared to 2002, while sales of ergonomic products decreased
6%. The percentage changes in both slide and ergonomic products include the
impact resulting from changes in foreign currency exchange rates.
Component products operating income increased in 2003 as compared to 2002
due in part to the favorable effect of cost improvement initiatives, such as
consolidating CompX's two Canadian facilities into one facility. Component
products operating income comparisons were negatively affected by the expenses
associated with such facility consolidation (approximately $900,000) and
increases in the cost for steel. Fluctuations in the value of the U.S. dollar
relative to other currencies, as discussed below, decreased operating income by
$3.1 million in 2003 as compared to 2002. In addition, component products
operating income in 2002 includes charges aggregating $3.5 million related to
the re-tooling of one of CompX's manufacturing facilities and provisions for
changes in estimate with respect to obsolete and slow-moving inventories,
overhead absorption rates and other items.
CompX has substantial operations and assets located outside the United
States in Canada and Taiwan. A portion of CompX's sales generated from its
non-U.S. operations are denominated in currencies other than the U.S. dollar,
principally the Canadian dollar and the New Taiwan dollar. In addition, a
portion of CompX's sales generated from its non-U.S. operations (principally in
Canada) are denominated in the U.S. dollar. Most raw materials, labor and other
production costs for such non-U.S. operations are denominated primarily in local
currencies. Consequently, the translated U.S. dollar values of CompX's foreign
sales and operating results are subject to currency exchange rate fluctuations
which may favorably or unfavorably impact reported earnings and may affect
comparability of period-to-period operating results. During 2004, currency
exchange rate fluctuations positively impacted component products sales
comparisons with 2003, while currency exchange rate fluctuations did not
significantly impact component products operating income comparisons for the
same periods. During 2003, currency exchange rate fluctuations of the Canadian
dollar positively impacted component products sales comparisons with 2002
(principally with respect to slide products), but currency exchange rate
fluctuations of the Canadian dollar negatively impacted component products
operating income comparisons for the same periods.
While demand has stabilized in 2004 across most of CompX's product
segments, certain customers are seeking lower cost Asian sources as alternatives
to CompX's products. CompX believes the impact of this will be mitigated through
its ongoing initiatives to expand both new products and new market
opportunities. Asian-sourced competitive pricing pressures are expected to
continue to be a challenge as Asian manufacturers, particularly those located in
China, gain market share. CompX has responded to the competitive pricing
pressure in part by reducing production cost through product reengineering,
improvement in manufacturing processes or moving production to lower-cost
facilities including CompX's own Asian-based manufacturing facilities. CompX has
also emphasized and focused on opportunities where it can provide value-added
customer support services that Asian-based manufacturers are generally unable to
provide. CompX believes its combination of cost control initiatives together
with its value-added approach to development and marketing of products helps to
mitigate the impact of competitive pricing pressures.
Additionally, CompX's cost for steel continues to rise dramatically due to
the continued high demand and shortages worldwide. While CompX has thus far been
able to pass a majority of its higher raw material costs on to its customers
through price increases and surcharges, there is no assurance that it would be
able to continue to pass along any additional higher costs to its customers. The
price increases and surcharges may accelerate the efforts of some of CompX's
customers to find less expensive products from foreign manufacturers. CompX will
continue to focus on cost improvement initiatives, utilizing lean manufacturing
techniques and prudent balance sheet management in order to minimize the impact
of lower sales, particularly to the office furniture industry, and to develop
value-added customer relationships with an additional focus on sales of CompX's
higher-margin ergonomic computer support systems to improve operating results.
These actins, along with other activities to eliminate excess capacity, are
designed to position CompX to expand more effectively on both new product and
new market opportunities to improve CompX's profitability.
Waste management - Waste Control Specialists
Years ended December 31,
2002 2003 2004
---- ---- ----
(In millions)
Net sales $ 8.4 $ 4.1 $ 8.9
Operating loss (7.0) (11.5) (10.2)
Waste management sales increased, and its operating loss declined, in 2004
as compared to 2003 due to higher utilization of waste management services,
offset in part by higher expenses associated with the additional staffing and
consulting requirements related to licensing efforts to expand low-level and
mixed radioactive waste storage and disposal capabilities. Waste Control
Specialists also continues to explore opportunities to obtain certain types of
new business (including treatment and storage of certain types of waste) that,
if obtained, could help to further increase its sales, and decrease its
operating loss, in 2005.
Waste management sales decreased, and its operating loss increased, in 2003
compared to 2002 due to continued weak demand for waste management services as
well as costs incurred in 2003 related to certain licensing and permitting
activities. Waste Control Specialists' continued emphasis on cost control helped
to mitigate the effect of lower sales.
Waste Control Specialists currently has permits which allow it to treat,
store and dispose of a broad range of hazardous and toxic wastes, and to treat
and store a broad range of low-level and mixed low-level radioactive wastes.
Although sales improved in the third quarter, the waste management industry is
still experiencing a relative decline in the number of environmental remediation
projects generating wastes. In addition, efforts on the part of generators to
reduce the volume of waste and/or manage waste onsite at their facilities also
have resulted in weak demand for Waste Control Specialists' waste management
services. These factors have led to reduced demand and increased downward price
pressure for waste management services. While Waste Control Specialists believes
its broad range of authorizations for the treatment and storage of low-level and
mixed low-level radioactive waste streams provides certain competitive
advantages, a key element of Waste Control Specialists' long-term strategy to
provide "one-stop shopping" for hazardous, low-level and mixed low-level
radioactive wastes includes obtaining additional regulatory authorizations for
the disposal of low-level and mixed low-level radioactive wastes.
Prior to June 2003, the state law in Texas (where Waste Control
Specialists' disposal facility is located) prohibited the applicable Texas
regulatory agency from issuing a license for the disposal of a broad range of
low-level and mixed low-level radioactive waste to a private enterprise
operating a disposal facility in Texas. In June 2003, a new Texas state law was
enacted that allows TCEQ to issue a low-level radioactive waste disposal license
to a private entity, such as Waste Control Specialists. Waste Control
Specialists has applied for such a disposal license with TCEQ, and Waste Control
Specialists was the only entity to submit an application for such a disposal
license. The length of time that it will take to review and act upon the license
application is uncertain, although Waste Control Specialists does not currently
expect the agency would issue any final decision on the license application
before 2007. There can be no assurance that Waste Control Specialists will be
successful in obtaining any such license.
Waste Control Specialists applied to TDSHS for a license to dispose of by
product 11.e(2) waste material in June 2004. Waste Control Specialists can
currently treat and store byproduct material, but may not dispose of it. The
length of time that TDSHS will take to review and act upon the license
application is uncertain, but Waste Control Specialists expects the TDSHS will
issue a final decision on the license application by the end of 2005. There can
be no assurance that Waste Control Specialists will be successful in obtaining
any such license.
Waste Control Specialists is continuing its efforts to increase its sales
volumes from waste streams that conform to authorizations it currently has in
place. Waste Control Specialists is also continuing to identify certain waste
streams, and attempting to obtain modifications to its current permits, that
would allow for treatment, storage and disposal of additional types of wastes.
The ability of Waste Control Specialists to achieve increased sales volumes of
these waste streams, together with improved operating efficiencies through
further cost reductions and increased capacity utilization, are important
factors in Waste Control Specialists' ability to achieve improved cash flows.
The Company currently believes Waste Control Specialists can become a viable,
profitable operation, even if Waste Control Specialists is unsuccessful in
obtaining a license for the disposal of a broad range of low-level and mixed
low-level radioactive wastes. However, there can be no assurance that Waste
Control Specialists' efforts will prove successful in improving its cash flows.
Valhi has in the past, and may in the future, consider strategic alternatives
with respect to Waste Control Specialists. There can be no assurance that the
Company would not report a loss with respect to any such strategic transaction.
TIMET
Years ended December 31,
2002 2003 2004
---- ---- ----
(In millions)
TIMET historical:
Net sales $366.5 $385.3 $501.8
====== ====== ======
Operating income (loss):
Boeing take-or-pay income $ 23.4 $ 23.1 $ 22.1
Tungsten accrual adjustment .2 1.7 -
LIFO income (expense) (9.3) 11.4 (7.8)
Contract termination charge - (6.8) -
Other, net (35.1) (24.0) 21.0
------ ------ ------
(20.8) 5.4 35.3
Gain on exchange of convertible
preferred securities - - 15.5
Impairment of convertible
preferred securities (27.5) - -
Other general corporate, net (2.5) (.3) .7
Interest expense (17.1) (16.4) (12.5)
------ ------ ------
(67.9) (11.3) 39.0
Income tax benefit (expense) 2.0 (1.2) 2.1
Minority interest (1.3) (.4) (1.2)
Dividends on preferred stock - - (4.4)
------ ------ ------
Income (loss) before cumulative effect
of change in accounting principle
attributable to common stock $(67.2) $(12.9) $ 35.5
====== ====== ======
Equity in earnings (losses) of TIMET $(32.9) $ 1.9 $ 19.5
====== ====== ======
The Company accounts for its interest in TIMET by the equity method. The
Company's equity in earnings of TIMET differs from the amounts that would be
expected by applying Tremont's ownership percentage to TIMET's
separately-reported earnings because of the effect of amortization of purchase
accounting adjustments made by the Company in conjunction with the Company's
acquisitions of its interests in TIMET. Amortization of such basis differences
generally increases earnings (or reduces losses) attributable to TIMET as
reported by the Company, and aggregated $8.7 million in 2002 (exclusive of the
2002 provision for an other than temporary impairment of the Company's
investment in TIMET discussed below), $7.0 million in 2003 and $5.0 million in
2004.
In February 2003, TIMET completed a reverse stock split of its common stock
at a ratio of one share of post-split common stock for each outstanding ten
shares of pre-split common stock, and in August 2004 TIMET subsequently
completed a 5:1 split of its common stock. The per share disclosures related to
TIMET discussed herein have been adjusted to give effect to such splits.
Implementing such splits had no financial statement impact to the Company, and
the Company's ownership interest in TIMET did not change as a result thereof.
The Company periodically evaluates the net carrying value of its long-term
assets, including its investment in TIMET, to determine if there has been any
decline in value below its amortized cost basis that is other than temporary and
would, therefore, require a write-down which would be accounted for as a
realized loss. At September 30, 2002, after considering what it believed to be
all relevant factors, including, among other things, TIMET's then-recent NYSE
stock prices, and TIMET's operating results, financial position, estimated asset
values and prospects, the Company recorded a $15.7 million impairment provision
for an other than temporary decline in value of its investment in TIMET. Such
impairment provision is reported as part of the Company's equity in losses of
TIMET in 2002. In determining the amount of the impairment charge, Tremont
considered, among other things, then- recent ranges of TIMET's NYSE market price
and current estimates of TIMET's future operating losses that would further
reduce Tremont's carrying value of its investment in TIMET as it records
additional equity in losses of TIMET. While GAAP may require an investment in a
security accounted for by the equity method to be written down if the market
value of that security declines, they do not permit a writeup if the market
value subsequently recovers. At December 31, 2004, the Company's net carrying
value of its investment in TIMET was $6.86 per share compared to a NYSE market
price at that date of $24.14 per share.
TIMET reported higher sales in 2004 as compared to 2003, and operating
income improved from $5.4 million to $35.3 million, in part due to the net
effects of a 28% increase in sales volumes of mill products, a 13% increase in
sales volumes of melted products (ingot and slab) and an 11% increase in melted
product average selling prices. TIMET's mill product average selling prices were
positively affected by the weakening of the U.S. dollar compared to the British
pound sterling and the euro, and were negatively impacted by changes in customer
and product mix. The increase in sales volumes for mill and melted products is
principally the result of greater market demands and share gains. As discussed
above, a substantial portion of TIMET's business is derived from the commercial
aerospace industry, and sales of titanium to that market sector generally
precede aircraft deliveries by about one year. Therefore, TIMET's 2004 sales
benefited significantly from the increase in production of large commercial
aircraft scheduled for delivery in 2005.
TIMET's operating results in 2004 includes income in the first quarter of
$1.9 million related to a change in TIMET's vacation policy. TIMET's operating
results comparisons were also favorably impacted by improved plant operating
rates, which increased from 56% in 2003 to 73% in 2004, and TIMET's continued
cost management efforts. TIMET's operating results comparisons were negatively
impacted by relative changes in TIMET's LIFO inventory reserves, which reduced
TIMET's operating income in 2004 by $19.2 million as compared with 2003, as well
as higher costs for raw materials (scrap and alloys) and energy. TIMET's
operating results in 2003 include (i) a $6.8 million charge related to the
termination of TIMET's purchase and sale agreement with Wyman-Gordon and (ii) a
$1.7 million reduction in its accrual for a previously-reported product
liability matter. TIMET's operating results in 2004 were also negatively
affected by higher accruals for employee incentive compensation.
In August 2004, TIMET completed an exchange offer in which approximately
3.9 million shares of the outstanding convertible preferred debt securities
issued by TIMET Capital Trust I (a wholly-owned subsidiary of TIMET) were
exchanged for an aggregate of 3.9 million shares of a newly-created Series A
Preferred Stock of TIMET at the exchange rate of one share of Series A Preferred
Stock for each convertible preferred debt security. TIMET recognized a non-cash
pre-tax gain of $15.5 million related to such exchange. The exchange of the
convertible preferred debt securities for a new issue of TIMET preferred stock
will result in TIMET reporting lower interest expense going forward, although
the effect on TIMET's income attributable to common stock of lower interest
expense will be substantially offset by dividends accruing on the new preferred
stock.
TIMET reported higher sales in 2003 as compared to 2002, and TIMET improved
from a $20.8 million operating loss in 2002 to operating income of $5.4 million
in 2003. TIMET's net sales increased in 2003 due in part to a 97% increase in
sales volumes of melted products, changes in product mix and a weakening of the
U.S. dollar as compared to the British pound sterling and the euro. These
factors were partially offset by a 16% decrease in average selling prices for
melted products. The improvement in melted product sales volumes, and the
decrease in melted products selling prices, are due principally to new customer
relationships and a change in product mix. TIMET's results in 2003 also include
a (i) $6.8 million charge related to the termination of TIMET's purchase and
sales agreement with Wyman-Gordon Company and (ii) a $1.7 million reduction in
its accrual for a product liability matter.
TIMET reported a reduction in its LIFO inventory reserve at the end of 2003
as compared to the end of 2002, favorably impacting TIMET's operating results in
2003 by $11.4 million. This compared with an increase in TIMET's LIFO reserve
during 2002, which negatively impacted TIMET's operating results in 2002 by $9.3
million. TIMET's operating results in 2003 were also favorably impacted by the
effects of TIMET's continued cost reduction efforts and raw material mix.
Under TIMET's previously-reported amended long-term agreement with Boeing,
Boeing advanced TIMET $28.5 million for each of 2002, 2003, 2004 and 2005, and
Boeing is required to continue to advance TIMET $28.5 million annually during
2006 and 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, to the extent
that its orders for delivery for such calendar year are less than 7.5 million
pounds. TIMET can only be required, however, to deliver up to 3 million pounds
per quarter. Based on TIMET's actual deliveries to Boeing of approximately 1.3
million pounds during 2002, 1.4 million pounds during 2003 and 1.7 million
pounds during 2004, TIMET recognized income of $23.4 million in 2002, $23.1
million in 2003 and $22.1 million in 2004 related to the take-or-pay provisions
of the contract. These earnings related to the take-or-pay provisions distort
TIMET's operating income percentages as there is no corresponding amount
reported in TIMET's sales.
TIMET's results in 2002 also include a $27.5 million provision for an other
than temporary impairments of TIMET's investment in the convertible preferred
securities of Special Metals Corporation ("SMC"). The Company's equity in losses
of TIMET in 2002 includes (i) an impairment provision of $15.7 million ($8.0
million, or $.07 per diluted share, net of income tax benefit and minority
interest) related to an other than temporary decline in value of the Company's
investment in TIMET and (ii) a $10.6 million charge ($5.4 million, or $.05 per
diluted share, net of income tax benefit and minority interest) related to the
Company's pro-rata share of TIMET's impairment provision for an other than
temporary decline in value of the SMC securities.
TIMET's effective income tax rate in 2002, 2003 and 2004 varies from the
35% U.S. federal statutory income tax rate primarily because TIMET has concluded
it is not currently appropriate to recognize an income tax benefit related to
its U.S. and U.K. losses under the "more-likely-than-not" recognition criteria.
In addition, TIMET's provision for income taxes in 2004 includes a $4.2 million
income tax benefit ($1.1 million, or $.01 per diluted share, net of income
taxes) related to the utilization of a capital loss carryforward, the benefit of
which had not been previously recognized by TIMET.
See Note 18 to the Consolidated Financial Statements for information
concerning certain workers' compensation bonds issued on behalf of a former
subsidiary of TIMET.
Over the past several quarters, TIMET has seen the availability of raw
materials tighten, and, consequently, the prices for such raw materials
increase. TIMET currently expects that a shortage in raw materials is likely to
continue throughout 2005 and into 2006, which could limit TIMET's ability to
produce enough titanium products to fully meet customer demand. In addition,
TIMET has certain customer long-term agreements that limit TIMET's ability to
pass on all of its increased raw material costs.
TIMET currently expects its 2005 net sales revenue will range from $650
million to $680 million. TIMET's mill product sales volumes, which were 11,365
metric tons in 2004, are expected to range from 13,600 and 14,300 metric tons in
2005, while melted product sales volumes, which were 5,360 metric tons in 2004,
are expected to range from 5,400 and 5,700 metric tons in 2005. TIMET also
expects mill product average selling prices will increase by 10% to 15% in 2005
as compared to 2004, and melted product average selling prices are expected to
increase from 17% to 22% in 2005 as compared to 2004.
TIMET's cost of sales is affected by a number of factors including customer
and product mix, material yields, plant operating rates, raw material costs,
labor and energy costs. Raw material costs, which include sponge, scrap and
alloys, represent the largest portion of TIMET's manufacturing cost structure,
and, as previously discussed, continued cost increases are expected during 2005.
Scrap and certain alloy prices have more than doubled from year ago prices, and
increased energy costs also continue to have a negative impact on gross margin.
In addition, TIMET's cost of sales can be significantly affected by adjustments
to its LIFO inventory reserve, as was the case during 2004 and 2003.
TIMET currently expects its production volumes will continue to increase in
2005, with overall capacity utilization expected to approximate 75% to 80% in
2005 (as compared to 73% in 2004). However, practical capacity utilization
measures can vary significantly based on product mix.
TIMET anticipates that Boeing will purchase a significantly higher amount
of metal during 2005 as compared to 2004 and, therefore, expects the amount of
take-or-pay income recognized during 2005 to decrease to between $15 million and
$20 million. Overall, TIMET presently expects its operating income for 2005 will
be between $50 million to $65 million. Dividends on TIMET's Series A Preferred
Stock should approximate $13.2 million in 2005, with TIMET currently expecting
net income attributable to common stockholders to range from $35 million to $50
million.
TIMET's net income estimates include a net $12.6 million non-operating gain
currently expected to be recognized in the second quarter of 2005 related to the
sale of certain real property adjacent to TIMET's Nevada facility, which closed
in the fourth quarter of 2004. TIMET's net income estimates exclude an income
tax benefit of $35 million to $40 million that TIMET might recognize during 2005
if TIMET determines that reversal of a portion of TIMET's deferred tax asset
valuation allowance with respect to its U.S. and U.K. net operating loss
carryforwards is determined to be appropriate under the more-likely-than-not
recognition criteria.
General corporate and other items
General corporate interest and dividend income. General corporate interest
and dividend income in 2004 was comparable to 2003, while general corporate
interest and dividend income decreased $2.0 million in 2003 as compared to 2002
due to a lower average level of invested funds and lower average yields. A
significant portion of the Company's general corporate interest and dividend
income relates to distributions received from The Amalgamated Sugar Company LLC
and interest income on the Company's $80 million loan to Snake River Sugar
Company. See Notes 5, 8 and 12 to the Consolidated Financial Statements.
Aggregate general corporate interest and dividend income in 2005 is currently
expected to be comparable to 2004, with distributions from The Amalgamated Sugar
Company LLC in 2005 expected to be comparable to the aggregate amount received
in 2004.
Legal settlement gains. Net legal settlement gains of $5.2 million in 2002,
$823,000 in 2003 and $552,000 in 2004 relate to NL's settlements with certain of
its former insurance carriers. These settlements, as well as similar prior
settlements NL reached in 2000 and 2001, resolved court proceedings in which NL
had sought reimbursement from the carriers for legal defense costs and indemnity
coverage for certain of its environmental remediation expenditures. No further
material settlements relating to litigation concerning environmental remediation
coverages are expected. See Note 12 to the Consolidated Financial Statements.
Securities transactions. Net securities transactions gains in 2004 includes
a $2.2 million gain ($1.1 million, or $.01 per diluted share, net of income
taxes and minority interest) related to NL's sale of shares of Kronos common
stock in market transactions. See Note 3 to the Consolidated Financial
Statements. Securities transaction gains in 2003 relate principally to a first
quarter gain of $316,000 related to NL's receipt of shares of Valhi common stock
in exchange for shares of Tremont common stock held directly or indirectly by NL
(such gain being attributable to NL stockholders other than the Company). See
Notes 3 and 12 to the Consolidated Financial Statements.
Securities transaction gains in 2002 are comprised of (i) a $3.0 million
unrealized gain related to the reclassification of 621,000 shares of Halliburton
Company common stock from available-for-sale to trading securities and (ii) a
$3.4 million gain related to changes in the market value of the Halliburton
common stock classified as trading securities.
Other general corporate income items. The gain on disposal of fixed assets
in 2003 relates primarily to the sale of certain real property of NL not
associated with any operations. NL has certain other real property, including
some subject to environmental remediation, which could be sold in the future for
a profit. The gain on disposal of fixed assets in 2002 relates to the sale of
certain real estate held by Tremont. The $6.3 million foreign currency
transaction gain in 2002 relates to the extinguishment of certain intercompany
indebtedness of NL. See Note 12 to the Consolidated Financial Statements.
General corporate expenses. Net general corporate expenses in 2004 were
$36.0 million lower than 2003 due primarily to lower environmental remediation
and legal expenses of NL. Net general corporate expenses in 2003 were $18.8
million higher than 2002 due primarily to higher environmental remediation
expenses of NL (principally related to one formerly-owned site of NL for which
the remediation process is expected to occur over the next several years).
Environmental expenses are included in selling, general and administrative
expenses. In addition, NL's $20 million of proceeds from the disposal of its
specialty chemicals business unit in January 1998 related to its agreement not
to compete in the rheological products business was recognized as a component of
general corporate income (expense) ratably over the five-year non-compete period
ended in January 2003 ($4 million recognized in 2002 and $333,000 recognized in
2003). See Note 12 to the Consolidated Financial Statements.
Net general corporate expenses in calendar 2005 are currently expected to
be higher as compared to 2004, primarily due to higher expected litigation and
related expenses of NL. However, obligations for environmental remediation
obligations are difficult to assess and estimate, and no assurance can be given
that actual costs will not exceed accrued amounts or that costs will not be
incurred in the future with respect to sites for which no estimate of liability
can presently be made. See Note 18 to the Consolidated Financial Statements.
Interest expense. The Company has a significant amount of indebtedness
denominated in the euro, including KII's euro-denominated Senior Secured Notes.
Accordingly, the reported amount of interest expense will vary depending on
relative changes in foreign currency exchange rates. Interest expense in 2004
was higher than 2003 due primarily to relative changes in foreign currency
exchange rates, which increased the U.S. dollar equivalent of interest expense
on the euro 285 million principal amount of KII Senior Secured Notes outstanding
during both years by approximately $3 million as compared to the respective
prior year. In addition, KII issued an additional euro 90 million principal
amount of KII Senior Secured Notes in November 2004, and the interest expense
associated with these additional Senior Secured Notes was $1 million in 2004.
Interest expense declined $1.7 million in 2003 as compared to 2002 due
primarily to the net effects of lower average levels of indebtedness of Valhi
parent, higher average levels of indebtedness of Kronos and lower average
interest rates on Kronos indebtedness.
Assuming interest rates and foreign currency exchange rates do not increase
significantly from current levels, interest expense in 2005 is expected to be
higher than 2004 due primarily to the effect of the issuance of an additional
euro 90 million principal amount of KII Senior Secured Notes in November 2004.
At December 31, 2004, approximately $770 million of consolidated
indebtedness, principally KII's Senior Secured Notes and Valhi's loans from
Snake River Sugar Company, bears interest at fixed interest rates averaging 9.1%
(2003 - $607 million with a weighted average interest rate of 9.1%; 2002 - $552
million with a weighted average fixed interest rate of 9.1%). The weighted
average interest rate on $14 million of outstanding variable rate borrowings at
December 31, 2004 was 3.8% (2003 - 3.1%; 2002 - 4.4%). Relative changes in the
weighted average interest rate on outstanding variable rate borrowings at
December 31, 2002, 2003 and 2004 are due primarily to relative differences in
the mix of such borrowings, with higher relative outstanding borrowings at
December 31, 2002 and 2004 as compared to December 31, 2003 under the KII
European revolver, for which the interest rate is generally higher than the
interest rate on any outstanding U.S. variable borrowings.
As noted above, KII has a significant amount of indebtedness denominated in
currencies other than the U.S. dollar. See Item 7A, "Quantitative and
Qualitative Disclosures About Market Risk."
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 15 to the Consolidated Financial
Statements. As discussed in Note 1 to the Consolidated Financial Statements, the
Company's consolidated financial statements have been restated, including
significant changes in the Company's previously-reported provision for income
taxes.
At December 31, 2004, Kronos had the equivalent of $671 million and $232
million of income tax loss carryforwards for German corporate and trade tax
purposes, respectively, all of which have no expiration date. As more fully
described in Note 15 to the Consolidated Financial Statements, Kronos had
previously provided a deferred income tax asset valuation allowance against
substantially all of these tax loss carryforwards and other deductible temporary
differences in Germany because Kronos did not believe they met the
"more-likely-than-not" recognition criteria. During the first six months of
2004, Kronos reduced its deferred income tax asset valuation allowance by
approximately $8.7 million, primarily as a result of utilization of these German
net operating loss carryforwards, the benefit of which had not previously been
recognized. At June 30, 2004, after considering all available evidence, Kronos
concluded that these German tax loss carryforwards and other deductible
temporary differences now met the "more-likely-than-not" recognition criteria.
Under applicable GAAP related to accounting for income taxes at interim periods,
a change in estimate at an interim period resulting in a decrease in the
valuation allowance is segregated into two components, the portion related to
the remaining interim periods of the current year and the portion related to all
future years. The portion of the valuation allowance reversal related to the
former is recognized over the remaining interim periods of the current year, and
the portion of the valuation allowance related to the latter is recognized at
the time the change in estimate is made. Accordingly, as of June 30, 2004,
Kronos reversed $268.6 million of the valuation allowance (the portion related
to future years), and Kronos reversed the remaining $3.4 million during the last
six months of 2004. Because the benefit of such net operating loss carryforwards
and other deductible temporary differences in Germany has now been recognized,
the Company's effective income tax rate in 2005 is expected to be higher than
what it would have otherwise been, although its future cash income tax rate will
not be affected by the reversal of the valuation allowance. Prior to the
complete utilization of such carryforwards, it is possible that the Company
might conclude in the future that the benefit of such carryforwards would no
longer meet the more-likely-than-not recognition criteria, at which point the
Company would be required to recognize a valuation allowance against the
then-remaining tax benefit associated with the carryforwards.
Also during 2004, NL recognized a second quarter $48.5 million income tax
benefit related to income tax attributes of NL Environmental Management
Services, Inc. ("EMS"), a subsidiary of NL. This income tax benefit resulted
from a settlement agreement reached with the U.S. IRS concerning the IRS'
previously-reported examination of a certain restructuring transaction involving
EMS, and included (i) a $18.0 million tax benefit related to a reduction in the
amount of additional income taxes and interest which NL estimates it will be
required to pay related to this matter as a result of the settlement agreement
and (ii) a $31.1 million tax benefit related to the reversal of a deferred
income tax asset valuation allowance related to certain tax attributes of EMS
(including a U.S. net operating loss carryforward) which NL now believes meet
the "more-likely-than-not" recognition criteria.
In January 2004, the German federal government enacted new tax law
amendments that limit the annual utilization of income tax loss carryforwards
effective January 1, 2004 to 60% of taxable income after the first euro 1
million of taxable income. The new law will have a significant effect on Kronos'
cash tax payments in Germany going forward, the extent of which will be
dependent upon the level of taxable income earned in Germany.
During 2003, NL and Kronos reduced their deferred income tax asset
valuation allowance by an aggregate of approximately $7.2 million, primarily as
a result of utilization of certain income tax attributes for which the benefit
had not previously been recognized. In addition, Kronos recognized a $38.0
million income tax benefit related to the net refund of certain prior year
German income taxes.
During 2002, NL and Kronos reduced their deferred income tax asset
valuation allowance by an aggregate of approximately $3.4 million, primarily as
a result of utilization of certain income tax attributes for which the benefit
had not previously been recognized. During 2002, Tremont increased its deferred
income tax asset valuation allowance (at the Valhi consolidated level) by a net
$3.8 million primarily because Tremont concluded certain tax attributes do not
currently meet the "more-likely-than-not" recognition criteria. The provision
for income taxes in 2002 also includes a $2.7 million deferred income tax
benefit related to certain changes in the Belgian tax law.
As discussed in Note 1 to the Consolidated Financial Statements, the
Company commenced to recognize deferred income taxes with respect to the excess
of the financial reporting carrying amount over the income tax basis of Valhi's
investment in Kronos beginning in December 2003 following NL's pro-data
distribution of shares of Kronos common stock to NL's shareholders, including
Valhi. The aggregate amount of such deferred income taxes included in the
Company's provision for income taxes was $104.0 million in 2003 and $83.7
million in 2004. In addition, the Company's provision for income taxes in 2003
and 2004 includes an aggregate $22.5 million and $2.5 million, respectively, for
the current income tax effect related to NL's distribution of such shares of
Kronos common stock to NL's shareholders other than Valhi.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law contains several provisions that could impact the Company.
These provisions provide for, among other things, a special deduction from U.S.
taxable income equal to a stipulated percentage of qualified income from
domestic production activities (as defined) beginning in 2005, and a special 85%
dividends received deduction for certain dividends received from controlled
foreign corporations. Both of these provisions are complex and subject to
numerous limitations. See Note 15 to the Consolidated Financial Statements.
Minority interest. See Note 13 to the Consolidated Financial Statements.
Minority interest in NL's subsidiary relates to NL's majority-owned
environmental management subsidiary, NL Environmental Management Services, Inc.
("EMS"). EMS was established in 1998, at which time EMS contractually assumed
certain of NL's environmental liabilities. EMS' earnings are based, in part,
upon its ability to favorably resolve these liabilities on an aggregate basis.
The shareholders of EMS, other than NL, actively manage the environmental
liabilities and share in 39% of EMS' cumulative earnings. NL continues to
consolidate EMS and provides accruals for the reasonably estimable costs for the
settlement of EMS' environmental liabilities, as discussed below.
As previously reported, Waste Control Specialists was formed by Valhi and
another entity in 1995. Waste Control Specialists assumed certain liabilities of
the other owner and such liabilities exceeded the carrying value of the assets
contributed by the other owner. Since its inception in 1995, Waste Control
Specialists has reported aggregate net losses. Consequently, all of Waste
Control Specialists aggregate, inception-to-date net losses have accrued to the
Company for financial reporting purposes. Accordingly, no minority interest in
Waste Control Specialists has been recognized in the Company's consolidated
financial statements. Waste Control Specialists LLC became wholly owned by Valhi
during the second quarter of 2004. Following completion of the merger
transactions in which Tremont became wholly owned by Valhi in February 2003, the
Company no longer reports minority interest in Tremont's net assets or earnings.
The Company commenced recognizing minority interest in Kronos' net assets and
earnings in December 2003 following NL's distribution of a portion of the shares
of Kronos common stock to its shareholders. See Note 3 to the Consolidated
Financial Statements.
Discontinued operations. See Note 22 to the Consolidated Financial
Statements.
Accounting principles newly adopted in 2002, 2003 and 2004. See Note 19 to
the Consolidated Financial Statements.
Accounting principles not yet adopted. See Note 20 to the Consolidated
Financial Statements.
Related party transactions. The Company is a party to certain transactions
with related parties. See Note 17 to the Consolidated Financial Statements.
Assumptions on defined benefit pension plans and OPEB plans.
Defined benefit pension plans. The Company maintains various defined
benefit pension plans in the U.S., Europe and Canada. See Note 16 to the
Consolidated Financial Statements. At December 31, 2004, the projected benefit
obligations for all defined benefit plans was comprised of $100 million related
to U.S. plans and $355 million related to non-U.S. plans. All of such projected
benefit obligations attributable to non-U.S. plans related to plans maintained
by Kronos, and approximately 52%, 14% and 34% of the projected benefit
obligations attributable to U.S. plans related to plans maintained by NL, Kronos
and Medite Corporation, a former business unit of Valhi ("Medite plan").
The Company accounts for its defined benefit pension plans using SFAS No.
87, Employer's Accounting for Pensions. Under SFAS No. 87, defined benefit
pension plan expense and prepaid and accrued pension costs are each recognized
based on certain actuarial assumptions, principally the assumed discount rate,
the assumed long-term rate of return on plan assets and the assumed increase in
future compensation levels. The Company recognized consolidated defined benefit
pension plan expense of $6.8 million in 2002, $9.6 million in 2003 and $13.5
million in 2004. The amount of funding requirements for these defined benefit
pension plans is generally based upon applicable regulation (such as ERISA in
the U.S.), and will generally differ from pension expense recognized under SFAS
No. 87 for financial reporting purposes. Contributions to all defined benefit
pension plans aggregated $9.6 million in 2002, $14.8 million in 2003 and $17.8
million in 2004.
The discount rates the Company utilizes for determining defined benefit
pension expense and the related pension obligations are based on current
interest rates earned on long-term bonds that receive one of the two highest
ratings given by recognized rating agencies in the applicable country where the
defined benefit pension benefits are being paid. In addition, the Company
receives advice about appropriate discount rates from the Company's third-party
actuaries, who may in some cases utilize their own market indices. The discount
rates are adjusted as of each valuation date (September 30th for the Kronos and
NL plans and December 31st for the Medite plan) to reflect then-current interest
rates on such long-term bonds. Such discount rates are used to determine the
actuarial present value of the pension obligations as of December 31st of that
year, and such discount rates are also used to determine the interest component
of defined benefit pension expense for the following year.
Approximately 63%, 17%, 13% and 5% of the projected benefit obligations
attributable to plans maintained by Kronos at December 31, 2004 related to
Kronos plans in Germany, Norway, Canada and the U.S., respectively. The Medite
plan and NL's plans are all in the U.S. The Company uses several different
discount rate assumptions in determining its consolidated defined benefit
pension plan obligations and expense because the Company maintains defined
benefit pension plans in several different countries in North America and Europe
and the interest rate environment differs from country to country.
The Company used the following discount rates for its defined benefit
pension plans:
Discount rates used for:
------------------------------------------------------------------------------------------------
Obligations at Obligations at Obligations at
December 31, 2002 and expense December 31, 2003 and expense December 31, 2004 and
in 2003 in 2004 expense in 2005
------------------------------- -------------------------------- -----------------------------
Kronos and NL plans:
Germany 5.5% 5.3% 5.0%
Norway 6.0% 5.5% 5.0%
Canada 7.0% 6.3% 6.0%
U.S. 6.5% 5.9% 5.8%
Medite plan 6.5% 6.0% 5.7%
The assumed long-rate return on plan assets represents the estimated
average rate of earnings expected to be earned on the funds invested or to be
invested in the plans' assets provided to fund the benefit payments inherent in
the projected benefit obligations. Unlike the discount rate, which is adjusted
each year based on changes in current long-term interest rates, the assumed
long-term rate of return on plan assets will not necessarily change based upon
the actual, short-term performance of the plan assets in any given year. Defined
benefit pension expense each year is based upon the assumed long-term rate of
return on plan assets for each plan and the actual fair value of the plan assets
as of the beginning of the year. Differences between the expected return on plan
assets for a given year and the actual return are deferred and amortized over
future periods based either upon the expected average remaining service life of
the active plan participants (for plans for which benefits are still being
earned by active employees) or the average remaining life expectancy of the
inactive participants (for plans for which benefits are not still being earned
by active employees).
At December 31, 2004, the fair value of plan assets for all defined benefit
plans was comprised of $82 million related to U.S. plans and $230 million
related to non-U.S. plans. All of such plan assets attributable to non-U.S.
plans related to plans maintained by Kronos, and approximately 54%, 15% and 31%
of the plan assets attributable to U.S. plans related to plans maintained by NL
and Kronos and the Medite plan, respectively. Approximately 56%, 21%, 13% and 5%
of the plan assets attributable to plans maintained by Kronos at December 31,
2004 related to Kronos plans in Germany, Norway, Canada and the U.S.,
respectively. The Medite plan and NL's plans are all in the U.S. The Company
uses several different long-term rates of return on plan asset assumptions in
determining its consolidated defined benefit pension plan expense because the
Company maintains defined benefit pension plans in several different countries
in North America and Europe, the plan assets in different countries are invested
in a different mix of investments and the long-term rates of return for
different investments differs from country to country.
In determining the expected long-term rate of return on plan asset
assumptions, the Company considers the long-term asset mix (e.g. equity vs.
fixed income) for the assets for each of its plans and the expected long-term
rates of return for such asset components. In addition, the Company receives
advice about appropriate long-term rates of return from the Company's
third-party actuaries. Such assumed asset mixes are summarized below:
o During 2004, substantially all of the Kronos, NL and Medite plan
assets in the U.S. were invested in The Combined Master Retirement
Trust ("CMRT"), a collective investment trust established by Valhi to
permit the collective investment by certain master trusts which fund
certain employee benefits plans sponsored by Contran and certain of
its affiliates. Harold Simmons is the sole trustee of the CMRT. The
CMRT's long-term investment objective is to provide a rate of return
exceeding a composite of broad market equity and fixed income indices
(including the S&P 500 and certain Russell indices) utilizing both
third-party investment managers as well as investments directed by Mr.
Simmons. During the 17-year history of the CMRT, through December 31,
2004 the average annual rate of return has been approximately 13%.
o In Germany, the composition of Kronos' plan assets is established to
satisfy the requirements of the German insurance commissioner. The
current plan asset allocation at December 31, 2004 was 23% to equity
managers, 48% to fixed income managers and 29% to real estate.
o In Norway, Kronos currently has a plan asset target allocation of 14%
to equity managers, 62% to fixed income managers and the remainder
primarily to cash and liquid investments. The expected long-term rate
of return for such investments is approximately 8%, 4.5% to 6.5% and
2.5%, respectively. The plan asset allocation at December 31, 2004 was
16% to equity managers, 64% to fixed income managers and the remainder
primarily to cash and liquid investments.
o In Canada, Kronos currently has a plan asset target allocation of 65%
to equity managers and 35% to fixed income managers, with an expected
long-term rate of return for such investments to average approximately
125 basis points above the applicable equity or fixed income index.
The current plan asset allocation at December 31, 2004 was 60% to
equity managers and 40% to fixed income managers.
The Company regularly reviews its actual asset allocation for each of its plans,
and periodically rebalances the investments in each plan to more accurately
reflect the targeted allocation when considered appropriate.
The assumed long-term rates of return on plan assets used for purposes of
determining net period pension cost for 2002, 2003 and 2004 were as follows:
2002 2003 2004
-------- -------- ------
Kronos and NL plans:
Germany 6.8% 6.5% 6.0%
Norway 7.0% 6.0% 6.0%
Canada 7.0% 7.0% 7.0%
U.S. 8.5% 10.0% 10.0%
Medite plan 10.0% 10.0% 10.0%
The Company currently expects to utilize the same long-term rates of return
on plan asset assumptions in 2005 as it used in 2004 for purposes of determining
the 2005 defined benefit pension plan expense.
To the extent that a plan's particular pension benefit formula calculates
the pension benefit in whole or in part based upon future compensation levels,
the projected benefit obligations and the pension expense will be based in part
upon expected increases in future compensation levels. For all of the Company's
plans for which the benefit formula is so calculated, the Company generally
bases the assumed expected increase in future compensation levels based upon
average long-term inflation rates for the applicable country.
In addition to the actuarial assumptions discussed above, because Kronos
maintains defined benefit pension plans outside the U.S., the amount of
recognized defined benefit pension expense and the amount of prepaid and accrued
pension costs will vary based upon relative changes in foreign currency exchange
rates.
Based on the actuarial assumptions described above and Kronos' current
expectations for what actual average foreign currency exchange rates will be
during 2005, the Company currently expects aggregate defined benefit pension
expense will approximate $12.5 million in 2005. In comparison, the Company
currently expects to be required to make approximately $9.4 million of aggregate
contributions to such plans during 2005.
As noted above, defined benefit pension expense and the amounts recognized
as prepaid and accrued pension costs are based upon the actuarial assumptions
discussed above. The Company believes all of the actuarial assumptions used are
reasonable and appropriate. If Kronos and NL had lowered the assumed discount
rates by 25 basis points for all of their plans as of December 31, 2004, their
aggregate projected benefit obligations would have increased by approximately
$14.2 million at that date, and their aggregate defined benefit pension expense
would be expected to increase by approximately $1.7 million during 2005.
Similarly, if Kronos and NL lowered the assumed long-term rates of return on
plan assets by 25 basis points for all of their plans, their defined benefit
pension expense would be expected to increase by approximately $700,000 during
2005. Similar assumed changes with respect to the discount rate and expected
long-term rate of return on plan assets for the Medite plan would not be
significant.
OPEB plans. Certain subsidiaries of the Company currently provide certain
health care and life insurance benefits for eligible retired employees. See Note
16 to the Consolidated Financial Statements. At December 31, 2004, approximately
34% and 31% of the Company's aggregate accrued OPEB costs relate to NL and
Kronos, respectively, and substantially all of the remainder relates to Tremont.
Kronos provides such OPEB benefits to retirees in the U.S., and NL and Tremont
provide such OPEB benefits to retirees in the U.S. The Company accounts for such
OPEB costs under SFAS No. 106, Employers Accounting for Postretirement Benefits
other than Pensions. Under SFAS No. 106, OPEB expense and accrued OPEB costs are
based on certain actuarial assumptions, principally the assumed discount rate
and the assumed rate of increases in future health care costs. The Company
recognized consolidated OPEB expense of $555,000 in 2002, $935,000 in 2003 and
$2 million in 2004. Similar to defined benefit pension benefits, the amount of
funding will differ from the expense recognized for financial reporting
purposes, and contributions to the plans to cover benefit payments aggregated
$5.3 million in 2002, $5.2 million in 2003 and $5.7 million in 2004.
Substantially all of the Company's accrued OPEB costs relates to benefits being
paid to current retirees and their dependents, and no material amount of OPEB
benefits are being earned by current employees. As a result, the amount
recognized for OPEB expense for financial reporting purposes has been, and is
expected to continue to be, significantly less than the amount of OPEB benefit
payments made each year. Accordingly, the amount of accrued OPEB costs has been,
and is expected to continue to, decline gradually.
The assumed discount rates the Company utilizes for determining OPEB
expense and the related accrued OPEB obligations are generally based on the same
discount rates the Company utilizes for its U.S. and Canadian defined benefit
pension plans.
In estimating the health care cost trend rate, the Company considers its
actual health care cost experience, future benefit structures, industry trends
and advice from its third-party actuaries. In certain cases, NL has the right to
pass on to retirees all or a portion of any increases in health care costs.
During each of the past three years, the Company has assumed that the relative
increase in health care costs will generally trend downward over the next
several years, reflecting, among other things, assumed increases in efficiency
in the health care system and industry-wide cost containment initiatives. For
example, at December 31, 2004, the expected rate of increase in future health
care costs ranges from 8% to 9.3% in 2005, declining to rates of between 4% and
5.5% in 2010 and thereafter.
Based on the actuarial assumptions described above and Kronos' current
expectation for what actual average foreign currency exchange rates will be
during 2005, the Company expects its consolidated OPEB expense will approximate
$650,000 in 2005. In comparison, the Company expects to be required to make
approximately $4.5 million of contributions to such plans during 2005.
As noted above, OPEB expense and the amount recognized as accrued OPEB
costs are based upon the actuarial assumptions discussed above. The Company
believes all of the actuarial assumptions used are reasonable and appropriate.
If the Company had lowered the assumed discount rates by 25 basis points for all
of its OPEB plans as of December 31, 2004, the Company's aggregate projected
benefit obligations would have increased by approximately $1.5 million at that
date, and the Company's OPEB expense would be expected to increase by less than
$100,000 during 2005. Similarly, if the assumed future health care cost trend
rate had been increased by 100 basis points, the Company's accumulated OPEB
obligations would have increased by approximately $2.5 million at December 31,
2004, and OPEB expense would have increased by $200,000 in 2004.
Foreign operations
Kronos. Kronos has substantial operations located outside the United States
(principally Europe and Canada) for which the functional currency is not the
U.S. dollar. As a result, the reported amount of Kronos' assets and liabilities
related to its non-U.S. operations, and therefore the Company's consolidated net
assets, will fluctuate based upon changes in currency exchange rates. At
December 31, 2004, Kronos had substantial net assets denominated in the euro,
Canadian dollar, Norwegian kroner and British pound sterling.
CompX. CompX has substantial operations and assets located outside the
United States, principally slide and/or ergonomic product operations in Canada
and Taiwan.
TIMET. TIMET also has substantial operations and assets located in Europe,
principally in the United Kingdom, France and Italy. The United Kingdom has not
adopted the euro. Approximately 43% of TIMET's European sales are denominated in
currencies other than the U.S. dollar, principally the British pound and the
euro. Certain purchases of raw materials for TIMET's European operations,
principally titanium sponge and alloys, are denominated in U.S. dollars while
labor and other production costs are primarily denominated in local currencies.
The U.S. dollar value of TIMET's foreign sales and operating costs are subject
to currency exchange rate fluctuations that can impact reported earnings.
LIQUIDITY AND CAPITAL RESOURCES
Summary
The Company's primary source of liquidity on an ongoing basis is its cash
flows from operating activities, which is generally used to (i) fund capital
expenditures, (ii) repay short-term indebtedness incurred primarily for working
capital purposes and (iii) provide for the payment of dividends (including
dividends paid to Valhi by its subsidiaries). In addition, from time-to-time the
Company will incur indebtedness, generally to (i) fund short-term working
capital needs, (ii) refinance existing indebtedness, (iii) make investments in
marketable and other securities (including the acquisition of securities issued
by subsidiaries and affiliates of the Company) or (iv) fund major capital
expenditures or the acquisition of other assets outside the ordinary course of
business. Also, the Company will from time-to-time sell assets outside the
ordinary course of business, the proceeds of which are generally used to (i)
repay existing indebtedness (including indebtedness which may have been
collateralized by the assets sold), (ii) make investments in marketable and
other securities, (iii) fund major capital expenditures or the acquisition of
other assets outside the ordinary course of business or (iv) pay dividends.
At December 31, 2004, the Company's third-party indebtedness was
substantially comprised of (i) Valhi's $250 million of loans from Snake River
Sugar Company due in 2027, (ii) KII's euro-denominated Senior Secured Notes
(equivalent of $519 million principal amount outstanding) due in 2009 and (iii)
KII's European credit facility (the equivalent of $13.6 million outstanding) due
in June 2005. KII expects to seek a renewal of its European credit facility
during the first half of 2005. Accordingly, the Company does not currently
expect that a significant amount of its cash flows from operating activities
generated during 2005 will be required to be used to repay indebtedness during
2005.
Based upon the Company's expectations for the industries in which its
subsidiaries and affiliates operate, and the anticipated demands on the
Company's cash resources as discussed herein, the Company expects to have
sufficient liquidity to meet its obligations including operations, capital
expenditures, debt service and current dividend policy. To the extent that
actual developments differ from the Company's expectations, the Company's
liquidity could be adversely affected.
Consolidated cash flows
Operating activities. Trends in cash flows from operating activities
(excluding the impact of significant asset dispositions and relative changes in
assets and liabilities) are generally similar to trends in the Company's
earnings. However, certain items included in the determination of net income are
non-cash, and therefore such items have no impact on cash flows from operating
activities. Non-cash items included in the determination of net income include
depreciation and amortization expense, non-cash interest expense, asset
impairment charges and unrealized securities transactions gains and losses.
Non-cash interest expense relates principally to Valhi and Kronos and consists
of amortization of original issue discount or premium on certain indebtedness
and amortization of deferred financing costs.
Certain other items included in the determination of net income may have an
impact on cash flows from operating activities, but the impact of such items on
cash flows from operating activities will differ from their impact on net
income. For example, equity in earnings of affiliates will generally differ from
the amount of distributions received from such affiliates, and equity in losses
of affiliates does not necessarily result in current cash outlays paid to such
affiliates. The amount of periodic defined benefit pension plan expense and
periodic OPEB expense depends upon a number of factors, including certain
actuarial assumptions, and changes in such actuarial assumptions will result in
a change in the reported expense. In addition, the amount of such periodic
expense generally differs from the outflows of cash required to be currently
paid for such benefits. Also, proceeds from the disposal of marketable
securities classified as trading securities are reported as a component of cash
flows from operating activities, and such proceeds will generally differ from
the amount of the related gain or loss on disposal.
Certain other items included in the determination of net income have no
impact on cash flows from operating activities, but such items do impact cash
flows from investing activities (although their impact on such cash flows
differs from their impact on net income). For example, realized gains and losses
from the disposal of available-for-sale marketable securities and long-lived
assets are included in the determination of net income, although the proceeds
from any such disposal are shown as part of cash flows from investing
activities.
Changes in product pricing, production volumes and customer demand, among
other things, can significantly affect the liquidity of the Company. Relative
changes in assets and liabilities generally result from the timing of
production, sales, purchases and income tax payments. Such relative changes can
significantly impact the comparability of cash flow from operations from period
to period, as the income statement impact of such items may occur in a different
period from when the underlying cash transaction occurs. For example, raw
materials may be purchased in one period, but the payment for such raw materials
may occur in a subsequent period. Similarly, inventory may be sold in one
period, but the cash collection of the receivable may occur in a subsequent
period. Relative changes in accounts receivable are affected by, among other
things, the timing of sales and the collection of the resulting receivable.
Relative changes in inventories, accounts payable and accrued liabilities are
affected by, among other things, the timing of raw material purchases and the
payment for such purchases and the relative difference between production
volumes and sales volumes. Relative changes in accrued environmental costs are
affected by, among other things, the period in which recognition of the
environmental accrual is recognized and the period in which the remediation
expenditure is actually made.
Cash flows provided from operating activities increased from $108.5 million
in 2003 to $142.1 million in 2004. This $33.6 million increase was due primarily
to the net effect of (i) higher net income of $312.9 million, (ii) goodwill
impairment in 2004 of $6.5 million, (iii) lower net gains from the disposal of
property and equipment of $10.7 million, (iv) a larger deferred income tax
benefit of $366.5 million, (v) higher depreciation and amortization expense of
$5.4 million, (vi) higher distributions from Kronos' TiO2 manufacturing joint
venture of $7.7 million, (vii) a $17.6 million improvement in equity in earnings
(losses) of TIMET, (viii) higher minority interest of $51.5 million, (ix) a
higher amount of net cash used to fund changes in the Company's inventories,
receivables, payables, accruals and accounts with affiliates of $34.3 million
and (x) higher cash received for income taxes of $16.3 million.
Cash flows from operating activities increased from $106.8 million in 2002
to $108.5 million in 2003. This $1.7 million increase was due primarily to the
net effect of (i) lower net income of $87.6 million, (ii) higher depreciation
expense of $11.2 million, (iii) lower proceeds from the disposal of marketable
securities (trading) of $18.1 million, (iv) higher gains on disposal of property
and equipment of $9.9 million, (v) higher provision for deferred income taxes of
$161.4 million, (vi) lower minority interest in earnings of $11.2 million, (vii)
lower distributions from NL's TiO2 manufacturing joint venture of $7.1 million,
(viii) lower equity in losses of TIMET of $34.8 million, (ix) a higher amount of
net cash used to fund changes in the Company's inventories, receivables,
payables, accruals and accounts with affiliates of $9.8 million, (x) lower cash
paid for income taxes of $19.0 million and (xi) a higher amount of net cash
provided to fund relative changes in other assets and liabilities (primarily
noncurrent accruals) of $31.0 million.
Valhi does not have complete access to the cash flows of its subsidiaries
and affiliates, in part due to limitations contained in certain credit
agreements as well as the fact that such subsidiaries and affiliates are not
100% owned by Valhi. A detail of Valhi's consolidated cash flows from operating
activities is presented in the table below. Eliminations consist of intercompany
dividends (most of which are paid to Valhi Parent, NL Parent and Tremont).
Years ended December 31,
2002 2003 2004
---- ---- ----
(In millions)
Cash provided (used) by operating activities:
Kronos $ 111.1 $107.7 $151.0
NL Parent 98.1 (10.2) 8.8
CompX 16.9 24.4 30.2
Waste Control Specialists (5.7) (6.6) (7.4)
Tremont 24.6 7.2 2.0
Valhi Parent 113.3 30.6 24.8
Other 4.0 (2.7) (.3)
Eliminations (255.5) (41.9) (67.0)
------- ------ ------
$ 106.8 $108.5 $142.1
======= ====== ======
Investing activities. Capital expenditures are disclosed by business
segment in Note 2 to the Consolidated Financial Statements.
At December 31, 2004, the estimated cost to complete capital projects in
process approximated $10.0 million, of which $6.7 million relates to Kronos'
Ti02 facilities and the remainder relates to CompX's facilities. Aggregate
capital expenditures for 2005 are expected to approximate $60 million ($41
million for Kronos, $13 million for CompX and $6 million for Waste Control
Specialists). Capital expenditures in 2005 are expected to be financed primarily
from operations or existing cash resources and credit facilities.
In January 2005, CompX received a net $18.4 million from the sale of its
Thomas Regout operations. See Note 22 to the Consolidated Financial Statements.
During 2004, (i) Valhi purchased shares of Kronos common stock in market
transactions for $17.1 million, (ii) NL collected $4 million on its loan to one
of the Contran family trusts described in Note 1 to the Consolidated Financial
Statements, (iii) Valhi loaned a net $4.9 million to Contran and (iv) NL sold
shares of Kronos common stock in market transactions for net proceeds of $2.7
million.
During 2003, (i) Valhi purchased shares of Kronos common stock in market
transactions in December 2003 for $6.4 million, (ii) the Company purchased
additional shares of TIMET common stock for $976,000, and the Company purchased
a nominal number of shares of convertible preferred securities issued by a
wholly-owned subsidiary of TIMET for $238,000 and (iii) NL collected $4 million
of its loan to one of the Contran family trusts. In addition, the Company
generated approximately $13.5 million from the sale of property and equipment,
including the real property of NL discussed above.
During 2002, (i) NL purchased $21.3 million of its common stock in market
transactions, (ii) NL purchased the EWI insurance brokerage services operations
for $9 million and (iii) NL collected $2 million from its loan to one of the
Contran family trusts. See Notes 3 and 17 to the Consolidated Financial
Statements.
Financing activities. During 2004, (i) Valhi repaid a net $7.3 million of
its short-term demand loans from Contran and repaid a net $5 million under its
revolving bank credit facility, (ii) CompX repaid a net $26.0 million under its
revolving bank credit facility, (iii) KII issued an additional euro 90 million
principal amount of it Senior Secured Notes at 107% of par (equivalent to $130
million when issued) and (iv) Kronos borrowed an aggregate of euro 90 million
($112 million when borrowed) of borrowings under its European revolving bank
credit facility, of which euro 80 million ($100 million) were subsequently
repaid. In addition, Valhi paid cash dividends of $.06 per share per quarter, or
an aggregate of $29.8 million for 2004. Distributions to minority interest in
2004 are primarily comprised of Kronos cash dividends paid to shareholders other
than Valhi, Tremont and NL and CompX dividends paid to shareholders other than
NL. Other cash flows from financing activities relate primarily to proceeds from
the issuance of NL common stock issued upon exercise of stock options.
During 2003, (i) Valhi borrowed a net $5 million under its revolving bank
credit facility and repaid a net $3.8 million of its short-term demand loans
from Contran, (ii) CompX repaid a net $5 million under its revolving bank credit
facility and (iii) KII borrowed an aggregate of euro 15 million ($16 million
when borrowed) of borrowings under its European revolving bank credit facility
and repaid kroner 80 million ($11 million) and euro 30 million ($34 million)
under such facility. In addition, Valhi paid cash dividends of $.06 per share
per quarter, or an aggregate of $29.8 million for 2003. Distributions to
minority interest in 2003 are primarily comprised of NL cash dividends paid to
NL shareholders other than Valhi and Tremont. Other cash flows from financing
activities relate primarily to proceeds from the sale of Valhi and NL common
stock issued upon exercise of stock options.
During 2002, (i) Valhi repaid a net $35 million under its revolving bank
credit facility and repaid a net $13.4 million of its short-term demand loans
from Contran, (ii) CompX repaid a net $18 million of its revolving bank credit
facility, (iii) Kronos repaid all of its existing short-term notes payable
denominated in euros and Norwegian kroner ($53 million when repaid) using
primarily proceeds from borrowings ($39 million) under KII's new revolving bank
credit facility, (iv) NL redeemed $194 million principal amount of its Senior
Secured Notes, primarily using the proceeds from the new euro 285 million ($280
million when issued) borrowing of KII and (v) Kronos repaid an aggregate of euro
14 million ($14 million when repaid) of borrowings under KII's revolving bank
credit facility. In addition, Valhi redeemed the remaining $43.1 million
principal amount at maturity of its LYONs debt obligations ($27.4 million
accreted value) for cash. Valhi paid cash dividends of $.06 per share per
quarter, or an aggregate of $27.9 million for 2002. Distributions to minority
interest in 2002 are attributable to NL ($24.8 million), CompX ($2.4 million)
and Tremont ($647,000). Other cash flows from financing activities relate
primarily to proceeds from the sale of Valhi and NL common stock issued upon
exercise of stock options.
At December 31, 2004, unused credit available under existing credit
facilities approximated $282.4 million, which was comprised of: CompX - $47.5
million under its revolving credit facility; Kronos - $92.6 million under its
European credit facility, $8 million under its Canadian credit facility, $38.0
million under its U.S. credit facility and $.4 million under other non-U.S.
facilities; and Valhi - $95.9 million under its revolving bank credit facility.
See Note 10 to the Consolidated Financial Statements.
Provisions contained in certain of the Company's credit agreements could
result in the acceleration of the applicable indebtedness prior to its stated
maturity for reasons other than defaults from failing to comply with typical
financial covenants. For example, certain credit agreements allow the lender to
accelerate the maturity of the indebtedness upon a change of control (as
defined) of the borrower. The terms of Valhi's revolving bank credit facility
could require Valhi to either reduce outstanding borrowings or pledge additional
collateral in the event the fair value of the existing pledged collateral falls
below specified levels. In addition, certain credit agreements could result in
the acceleration of all or a portion of the indebtedness following a sale of
assets outside the ordinary course of business. See Note 10 to the Consolidated
Financial Statements. Other than operating leases discussed in Note 18 to the
Consolidated Financial Statements, neither Valhi nor any of its subsidiaries or
affiliates are parties to any off-balance sheet financing arrangements.
In February 2005, Valhi's board of directors increased Valhi's regular
quarterly dividend from its previous $.06 per share to $.10 per share, with the
first such dividend to be paid on March 31, 2005 to Valhi shareholders of record
as of March 14, 2005. However, the declaration and payment of future dividends,
and the amount thereof, is discretionary and dependent upon several factors. See
Item 5 - "Market for Registrant's Common Equity and Related Stockholder
Matters."
Chemicals - Kronos
At December 31, 2004, Kronos had cash, cash equivalents and marketable debt
securities of $65.2 million, including restricted balances of $4.4 million, and
Kronos had approximately $139 million available for borrowing under its U.S.,
Canadian and European credit facilities. Based upon Kronos' expectations for the
TiO2 industry and anticipated demands on Kronos' cash resources as discussed
herein, Kronos expects to have sufficient liquidity to meet its future
obligations including operations, capital expenditures, debt service and current
dividend policy. To the extent that actual developments differ from Kronos'
expectations, Kronos' liquidity could be adversely affected.
At December 31, 2004, Kronos' outstanding debt was comprised of (i) $519.2
million related to KII's Senior Secured Notes, (ii) $13.6 million related to
KII's European revolving bank credit facility and (iii) approximately $348,000
of other indebtedness. Prior to December 31, 2004, Kronos had $200 million of
long-term notes payable to affiliates, which Kronos prepaid in the fourth
quarter of 2004. Prior to such prepayment, such notes payable to affiliates were
eliminated in the Company's Consolidated Financial Statements.
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions significantly impact Kronos' earnings and operating cash
flows. Cash flows from operations is considered the primary source of liquidity
for Kronos. Changes in TiO2 pricing, production volumes and customer demand,
among other things, could significantly affect the liquidity of Kronos.
Kronos' capital expenditures during the past three years aggregated $107.1
million, including $18 million ($7 million in 2004) for Kronos' ongoing
environmental protection and compliance programs. Kronos' estimated 2005 capital
expenditures are $41 million, including $7 million in the area of environmental
protection and compliance.
See Note 15 to the Consolidated Financial Statements for certain income tax
examinations currently underway with respect to certain of Kronos' income tax
returns in various U.S. and non-U.S. jurisdictions, and see Note 18 to the
Consolidated Financial Statements with respect to certain legal proceedings with
respect to Kronos.
Kronos periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and availability of resources in view of, among other
things, its dividend policy, its debt service and capital expenditure
requirements and estimated future operating cash flows. As a result of this
process, Kronos has in the past and may in the future seek to reduce, refinance,
repurchase or restructure indebtedness, raise additional capital, repurchase
shares of its common stock, modify its dividend policy, restructure ownership
interests, sell interests in subsidiaries or other assets, or take a combination
of such steps or other steps to manage its liquidity and capital resources. In
the normal course of its business, Kronos may review opportunities for the
acquisition, divestiture, joint venture or other business combinations in the
chemicals or other industries, as well as the acquisition of interests in, and
loans to, related entities. In the event of any such transaction, Kronos may
consider using available cash, issuing equity securities or increasing
indebtedness to the extent permitted by the agreements governing Kronos'
existing debt.
Kronos has substantial operations located outside the United States for
which the functional currency is not the U.S. dollar. As a result, the reported
amounts of Kronos' assets and liabilities related to its non-U.S. operations,
and therefore Kronos' net assets, will fluctuate based upon changes in currency
exchange rates.
NL Industries
At December 31, 2004, NL (exclusive of Kronos and CompX) had cash, cash
equivalents and marketable debt securities of $99.3 million, including
restricted balances of $21.1 million. Of such restricted balances, $19 million
was held by special purpose trusts, the assets of which can only be used to pay
for certain of NL's future environmental remediation and other environmental
expenditures. See Note 18 to the Consolidated Financial Statements.
See Note 15 to the Consolidated Financial Statements for certain income tax
examinations currently underway with respect to certain of NL's income tax
returns, and see Note 18 to the Consolidated Financial Statements and Part II,
Item 1, "Legal Proceedings" with respect to certain legal proceedings and
environmental matters with respect to NL.
In addition to those legal proceedings described in Note 18 to the
Consolidated Financial Statements, various legislation and administrative
regulations have, from time to time, been proposed that seek to (i) impose
various obligations on present and former manufacturers of lead pigment and
lead-based paint with respect to asserted health concerns associated with the
use of such products and (ii) effectively overturn court decisions in which NL
and other pigment manufacturers have been successful. Examples of such proposed
legislation include bills which would permit civil liability for damages on the
basis of market share, rather than requiring plaintiffs to prove that the
defendant's product caused the alleged damage, and bills which would revive
actions barred by the statute of limitations. While no legislation or
regulations have been enacted to date that are expected to have a material
adverse effect on NL's consolidated financial position, results of operations or
liquidity, imposition of market share liability or other legislation could have
such an effect.
In December 2003, NL completed the distribution of approximately 48.8% of
Kronos' outstanding common stock to its shareholders under which NL shareholders
received one share of Kronos' common stock for every two shares of NL common
stock held. Approximately 23.9 million shares of Kronos common stock were
distributed. Immediately prior to the distribution of shares of Kronos common
stock, Kronos distributed a $200 million promissory note payable by Kronos to NL
(of which NL transferred an aggregate of $168.6 million to Valhi and Valcor in
connection with NL's acquisition of the shares of CompX common stock previously
held by Valhi and Valcor, as discussed in Note 3 to the Consolidated Financial
Statements). During 2004, NL paid each of its $.20 per share regular quarterly
dividends in the form of shares of Kronos common stock in which an aggregate of
approximately 2.5% of Kronos' outstanding common stock were distributed to NL
shareholders (including Valhi and Tremont) in the form of pro-rata dividends.
Completion of these distributions had no impact on the Company's consolidated
financial position, results of operations or cash flows other than as discussed
in Note 3 to the Consolidated Financial Statements. During the fourth quarter of
2004, NL transferred approximately 5.5 million shares of Kronos common stock to
Valhi in satisfaction of a tax liability and the tax liability generated from
the use of such Kronos shares to settle such tax liability. The transfer of such
5.5 million shares of Kronos common stock, accounted for under GAAP as a
transfer of net assets among entities under common control at carryover basis,
had no effect on the Company's consolidated financial statements. See Note 3 to
the Consolidated Financial Statements. In the fourth quarter of 2004, NL also
sold 64,500 shares of Kronos common stock in market transactions for an
aggregate of approximately $2.7 million.
Following the second of such quarterly dividends in 2004, NL no longer
owned a majority of Kronos' outstanding common stock, and accordingly NL ceased
to consolidate Kronos as of July 1, 2004. However, the Company continues to
consolidate Kronos since the Company continues to own a majority of Kronos,
either directly or indirectly through NL and Tremont.
Prior to September 24, 2004, the Company's ownership of Compx was owned by
Valhi and Valcor (a wholly-owned subsidiary of Valhi). On September 24, 2004, NL
completed the acquisition the Compx shares previously held by Valhi and Valcor
at a purchase price of $16.25 per share, or an aggregate of approximately $168.6
million. The purchase price was paid by NL's transfer to Valhi and Valcor of
$168.6 million of NL's $200 million long-term note receivable from Kronos (which
long-term note is eliminated in the preparation of the Company's Consolidated
Financial Statements). See Note 3 to the Consolidated Financial Statements. NL's
acquisition was accounted for under GAAP as a transfer of net assets among
entities under common control, and such transaction had no effect on the
Company's consolidated financial statements. After such acquisition, NL retained
a $31.4 million note receivable from Kronos, which note receivable Kronos
prepaid in November 2004 using funds from KII's November 2004 issuance of euro
90 million principal amount of KII Senior Secured Notes.
NL periodically evaluates its liquidity requirements, alternative uses of
capital, capital needs and availability of resources in view of, among other
things, its dividend policy, 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, repurchase
shares of its common stock, modify its dividend policy, restructure ownership
interests, sell interests in subsidiaries or other assets, or take a combination
of such steps or other steps to manage its liquidity and capital resources. In
the normal course of its business, NL may review opportunities for the
acquisition, divestiture, joint venture or other business combinations in the
chemicals or other industries, as well as the acquisition of interests in, and
loans to, related entities. In the event of any such transaction, NL may
consider using its available cash, issuing its equity securities or increasing
its indebtedness to the extent permitted by the agreements governing NL's
existing debt.
Component products - CompX International
CompX's capital expenditures during the past three years aggregated $27.0
million. Such capital expenditures included manufacturing equipment that
emphasizes improved production efficiency.
CompX received approximately $18.4 million cash (net of expenses) in
January 2005 upon the sale of its Thomas Regout operations in The Netherlands.
See Note 22 to the Consolidated Financial Statements. CompX believes that its
cash on hand, together with cash generated from operations and borrowing
availability under its bank credit facility, will be sufficient to meet CompX's
liquidity needs for working capital, capital expenditures, debt service and
dividends. To the extent that CompX's actual operating results or developments
differ from CompX's expectations, CompX's liquidity could be adversely affected.
CompX, which had suspended its regular quarterly dividend of $.125 per share in
the second quarter of 2003, reinstated its regular quarterly dividend at the
$.125 per share rate in the fourth quarter of 2004.
CompX periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements, dividend policy and estimated
future operating cash flows. As a result of this process, CompX has in the past
and may in the future seek to raise additional capital, refinance or restructure
indebtedness, issue additional securities, modify its dividend policy,
repurchase shares of its common stock or take a combination of such steps or
other steps to manage its liquidity and capital resources. In the normal course
of business, CompX may review opportunities for acquisitions, divestitures,
joint ventures or other business combinations in the component products
industry. In the event of any such transaction, CompX may consider using cash,
issuing additional equity securities or increasing the indebtedness of CompX or
its subsidiaries.
Waste management - Waste Control Specialists
At December 31, 2004, Waste Control Specialists' indebtedness consisted
principally of $4.6 million of borrowings owed to a wholly-owned subsidiary of
Valhi (December 31, 2003 intercompany indebtedness - $30.9 million). During
2004, the Company loaned an additional net of $17.5 million to Waste Control
Specialists, and Valhi subsequently contributed an aggregate of $47.5 million of
loans and related accrued interest to Waste Control Specialists' equity. The
additional borrowings during 2004 were used by Waste Control Specialists
primarily to fund its operating loss and its capital expenditures. Such
indebtedness is eliminated in the Company's Consolidated Financial Statements.
Waste Control Specialists will likely borrow additional amounts during 2005 from
such Valhi subsidiary under the terms of a $15 million revolving credit facility
that matures in March 2006.
Waste Control Specialists capital expenditures and capitalized permit costs
during the past three years aggregated $11.6 million. Such expenditures were
funded primarily from certain debt financing provided to Waste Control
Specialists by the wholly-owned subsidiary of Valhi.
TIMET
At December 31, 2004, TIMET had $109 million of borrowing availability
under its various U.S. and European credit agreements. During the first quarter
of 2004, TIMET amended its U.S. credit facility to remove the equipment
component from the determination of TIMET's borrowing availability in order to
avoid the cost of an appraisal. This amendment effectively reduced TIMET's
current borrowing availability in the U.S. by $12 million. However, TIMET can
regain this availability, upon request, by completing an updated equipment
appraisal. TIMET presently expects to generate cash flows from operating
activities of $50 million to $60 million in 2005. TIMET received the 2005
advance of $27.9 million from Boeing in January 2005.
TIMET's capital expenditures during the past three years aggregated $43.8
million. TIMET's capital expenditures during 2005 are currently expected to be
about $42 million, including $13 million related to completion of the
construction of a wastewater treatment facility to be used at TIMET's Nevada
facility as well as additional capacity improvements as TIMET continues to
prepare for increased demand by certain customers under long-term agreements.
See Note 18 to the Consolidated Financial Statements for certain legal
proceedings, environmental matters and other contingencies associated with
TIMET. While TIMET currently believes that the outcome of these matters,
individually and in the aggregate, will not have a material adverse effect on
TIMET's consolidated financial position, liquidity or overall trends in results
of operations, all such matters are subject to inherent uncertainties. Were an
unfavorable outcome to occur in any given period, it is possible that it could
have a material adverse impact on TIMET's consolidated results of operations or
cash flows in a particular period.
In August 2004, TIMET effected a 5:1 split of its common stock. Such stock
split had no financial statement impact to the Company, and the Company's
ownership interest in TIMET did not change as a result of the split.
Prior to August 2004, a wholly-owned subsidiary of TIMET had issued
4,024,820 shares outstanding of its 6.625% convertible preferred debt
securities, representing an aggregate $201.2 million liquidation amount, that
mature in 2026. Each security is convertible into shares of TIMET common stock
at a conversion rate of .1339 shares of TIMET common stock per convertible
preferred security. Such convertible preferred debt securities do not require
principal amortization, and TIMET has the right to defer distributions on the
convertible preferred securities for one or more quarters of up to 20
consecutive quarters, provided that such deferral period may not extend past the
2026 maturity date. TIMET is prohibited from, among other things, paying
dividends or reacquiring its capital stock while distributions are being
deferred on the convertible preferred securities. In October 2002, TIMET elected
to exercise its right to defer future distributions on its convertible preferred
securities for a period of up to 20 consecutive quarters. Distributions
continued to accrue at the coupon rate on the liquidation amount and unpaid
distributions. This deferral was effective starting with TIMET's December 1,
2002 scheduled payment. In April 2004, TIMET paid all previously-deferred
distributions with respect to the convertible preferred debt securities and paid
the next scheduled distribution in June 2004.
In August 2004, TIMET completed an exchange offer in which approximately
3.9 million shares of the outstanding convertible preferred debt securities
issued by TIMET Capital Trust I were exchanged for an aggregate of 3.9 million
shares of a newly-created Series A Preferred Stock of TIMET at the exchange rate
of one share of Series A Preferred Stock for each convertible preferred debt
security. Dividends on the Series A shares accumulate at the rate of 6 3/4% of
their liquidation value of $50 per share, and are convertible into shares of
TIMET common stock at the rate of one and two-thirds of a share of TIMET common
stock per Series A share. The Series A shares are not mandatorily redeemable,
but are redeemable at the option of TIMET in certain circumstances.
TIMET periodically evaluates its liquidity requirements, capital needs and
availability of resources in view of, among other things, its alternative uses
of capital, debt service requirements, the cost of debt and equity capital, and
estimated future operating cash flows. As a result of this process, TIMET has in
the past, or in light of its current outlook, may in the future seek to raise
additional capital, modify its common and preferred dividend policies,
restructure ownership interests, incur, refinance or restructure indebtedness,
repurchase shares of capital stock or debt securities, sell assets, or take a
combination of such steps or other steps to increase or manage its liquidity and
capital resources. In the normal course of business, TIMET investigates,
evaluates, discusses and engages in acquisition, joint venture, strategic
relationship and other business combination opportunities in the titanium,
specialty metal and other industries. In the event of any future acquisition or
joint venture opportunities, TIMET may consider using then-available liquidity,
issuing equity securities or incurring additional indebtedness.
Tremont LLC
See Note 18 to the Consolidated Financial Statements for certain legal
proceedings and environmental matters with respect to Tremont.
General corporate - Valhi
Because Valhi's operations are conducted primarily through its subsidiaries
and affiliates, Valhi's long-term ability to meet its parent company level
corporate obligations is dependent in large measure on the receipt of dividends
or other distributions from its subsidiaries and affiliates. In February 2004,
Kronos announced it would pay its first regular quarterly cash dividend of $.25
per share. At that rate, and based on the 27.6 million shares of Kronos held by
Valhi and Tremont at December 31, 2004 (22.2 million shares held by Valhi and
5.4 million shares held by Tremont, a wholly-owned subsidiary of Valhi), Valhi
would receive aggregate annual dividends from Kronos of $27.6 million. NL, which
paid regular quarterly cash dividends of $.20 per share in 2003, has paid its
2004 regular quarterly dividends of $.20 per share in the form of shares of
Kronos common stock. NL increased its regular quarterly dividend in the first
quarter of 2005 to $.25 per share. The Company does not currently expect to
receive any distributions from Waste Control Specialists during 2005. CompX
dividends, which resumed in the fourth quarter of 2004, are paid to NL.
Various credit agreements to which certain subsidiaries or affiliates are
parties contain customary limitations on the payment of dividends, typically a
percentage of net income or cash flow; however, such restrictions in the past
have not significantly impacted Valhi's ability to service its parent company
level obligations. Valhi generally does not guarantee any indebtedness or other
obligations of its subsidiaries or affiliates. To the extent that one or more of
Valhi's subsidiaries were to become unable to maintain its current level of
dividends, either due to restrictions contained in the applicable subsidiary's
credit agreements or otherwise, Valhi parent company's liquidity could become
adversely impacted. In such an event, Valhi might consider reducing or
eliminating its dividends or selling interests in subsidiaries or other assets.
At December 31, 2004, Valhi had $94.3 million of parent level cash and cash
equivalents and had no amounts outstanding under its revolving bank credit
agreement. In addition, Valhi had $95.9 million of borrowing availability under
its revolving bank credit facility, and Valhi had $4.9 million in short-term
demand loans to Contran.
As noted above, in September 2004 NL completed the acquisition of the
shares of CompX common stock previously held by Valhi and Valcor. The purchase
price for these shares was paid by NL's transfer to Valhi and Valcor of an
aggregate $168.6 million of NL's note receivable from Kronos ($162.5 million to
Valcor and $6.1 million to Valhi). In October 2004, Valcor distributed to Valhi
its $162.5 million note receivable from Kronos, and subsequently in the fourth
quarter of 2004 Kronos prepaid the $168.5 million note payable to Valhi using
cash on hand and funds from KII's November 2004 issuance of euro 90 million
principal amount of its Senior Secured Notes. Valhi used $58 million of the
proceeds from the repayment of its note receivable from Kronos to repay the
outstanding balance under its revolving bank credit facility. The remainder of
such funds are available for Valhi's general corporate purposes.
The terms of The Amalgamated Sugar Company LLC Company Agreement provide
for annual "base level" of cash dividend distributions (sometimes referred to as
distributable cash) by the LLC of $26.7 million, from which the Company is
entitled to a 95% preferential share. Distributions from the LLC are dependent,
in part, upon the operations of the LLC. The Company records dividend
distributions from the LLC as income upon receipt, which occurs in the same
month in which they are declared by the LLC. To the extent the LLC's
distributable cash is below this base level in any given year, the Company is
entitled to an additional 95% preferential share of any future annual LLC
distributable cash in excess of the base level until such shortfall is
recovered. Based on the LLC's current projections for 2005, Valhi currently
expects that distributions received from the LLC in 2005 will approximate its
debt service requirements under its $250 million loans from Snake River Sugar
Company.
Certain covenants contained in Snake River's third-party senior debt allow
Snake River to pay periodic installments of debt service payments (principal and
interest) under Valhi's $80 million loan to Snake River prior to its current
scheduled maturity in 2007, and such loan is subordinated to Snake River's
third-party senior debt. At December 31, 2004, the accrued and unpaid interest
on the $80 million loan to Snake River aggregated $38.3 million and is
classified as a noncurrent asset. The Company currently believes it will
ultimately realize both the $80 million principal amount and the accrued and
unpaid interest, whether through cash generated from the future operations of
Snake River and the LLC or otherwise (including any liquidation of Snake River
or the LLC). Following the currently scheduled complete repayment of Snake
River's third-party senior debt in April 2007, Valhi believes it will receive
significant debt service payments on its loan to Snake River as the cash flows
that Snake River previously would have been using to fund debt service on its
third-party senior debt ($10.0 million of scheduled payments in 2005), plus
other cash resources at Snake River would then become available, and would be
required, to be used to fund debt service payments on its loan from Valhi. Prior
to the repayment of the third-party senior debt, Snake River might also make
debt service payments to Valhi, if permitted by the terms of the senior debt, or
if Snake River would refinance with a third party all or a portion of the
amounts it owes to Valhi under such $80 million loan.
The Company may, at its option, require the LLC to redeem the Company's
interest in the LLC beginning in 2010, and the LLC has the right to redeem the
Company's interest in the LLC beginning in 2027. The redemption price is
generally $250 million plus the amount of certain undistributed income allocable
to the Company. In the event the Company requires the LLC to redeem the
Company's interest in the LLC, Snake River has the right to accelerate the
maturity of and call Valhi's $250 million loans from Snake River. Redemption of
the Company's interest in the LLC would result in the Company reporting income
related to the disposition of its LLC interest for income tax purposes, although
the Company would not be expected to report a gain in earnings for financial
reporting purposes at the time its LLC interest is redeemed (as discussed in
Note 1 to the Consolidated Financial Statements). However, because of Snake
River's ability to call its $250 million loans to Valhi upon redemption of the
Company's interest in the LLC, the net cash proceeds (after repayment of the
debt) generated by redemption of the Company's interest in the LLC could be less
than the income taxes that would become payable as a result of the disposition.
The Company routinely compares its liquidity requirements and alternative
uses of capital against the estimated future cash flows to be received from its
subsidiaries, and the estimated sales value of those units. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify its dividend policies, consider
the sale of interests in subsidiaries, affiliates, business units, marketable
securities or other assets, or take a combination of such steps or other steps,
to increase liquidity, reduce indebtedness and fund future activities. Such
activities have in the past and may in the future involve related companies.
The Company and related entities routinely evaluate acquisitions of
interests in, or combinations with, companies, including related companies,
perceived by management to be undervalued in the marketplace. These companies
may or may not be engaged in businesses related to the Company's current
businesses. The Company intends to consider such acquisition activities in the
future and, in connection with this activity, may consider issuing additional
equity securities and increasing the indebtedness of the Company, its
subsidiaries and related companies. From time to time, the Company and related
entities also evaluate the restructuring of ownership interests among their
respective subsidiaries and related companies.
Non-GAAP financial measures
In an effort to provide investors with additional information regarding the
Company's results of operations as determined by GAAP, the Company has disclosed
certain non-GAAP information which the Company believes provides useful
information to investors:
o The Company discloses percentage changes in Kronos' average TiO2
selling prices in billing currencies, which excludes the effects of
foreign currency translation. The Company believes disclosure of such
percentage changes allows investors to analyze such changes without
the impact of changes in foreign currency exchange rates, thereby
facilitating period-to-period comparisons of the relative changes in
average selling prices in the actual various billing currencies.
Generally, when the U.S. dollar either strengthens or weakens against
other currencies, the percentage change in average selling prices in
billing currencies will be higher or lower, respectively, than such
percentage changes would be using actual exchange rates prevailing
during the respective periods.
Summary of debt and other contractual commitments
As more fully described in the notes to the Consolidated Financial
Statements, the Company is a party to various debt, lease and other agreements
which contractually and unconditionally commit the Company to pay certain
amounts in the future. See Notes 10 and 18 to the Consolidated Financial
Statements. The Company's obligations related to the long-term supply contract
for the purchase of Ti02 feedstock is more fully described in Note 18 to the
Consolidated Financial Statements and above in "Business - Chemicals - Kronos
Worldwide, Inc., - manufacturing process, properties and raw materials." The
following table summarizes such contractual commitments of the Company and its
consolidated subsidiaries as of December 31, 2004 by the type and date of
payment.
Payment due date
2010 and
Contractual commitment 2005 2006/2007 2008/2009 after Total
---------------------- ---- --------- --------- ------- -----
(In millions)
Third-party indebtedness:
Principal $ 14.4 $ .3 $519.2 $250.0 $ 783.9
Interest 68.5 136.4 91.7 399.5 696.1
Operating leases 5.7 7.4 4.8 21.6 39.5
Kronos' long-term supply
contract for the purchase
of TiO2 feedstock 165.7 349.2 10.5 - 525.4
CompX raw material and
other purchase commitments 12.6 - - - 12.6
Fixed asset acquisitions 10.0 - - - 10.0
Income taxes 21.2 - - - 21.2
----- --- --- --- -----
$298.1 $493.3 $626.2 $671.1 $2,088.7
====== ====== ====== ====== ========
The timing and amount shown for the Company's commitments related to
indebtedness (principal and interest), operating leases and fixed asset
acquisitions are based upon the contractual payment amount and the contractual
payment date for such commitments. With respect to indebtedness involving
revolving credit facilities, the amount shown for indebtedness is based upon the
actual amount outstanding at December 31, 2004, and the amount shown for
interest for any outstanding variable-rate indebtedness is based upon the
December 31, 2004 interest rate and assumes that such variable-rate indebtedness
remains outstanding until the maturity of the facility. The amount shown for
income taxes is the consolidated amount of income taxes payable at December 31,
2004, which is assumed to be paid during 2005. A significant portion of the
amount shown for indebtedness relates to KII's Senior Secured Notes ($519.2
million at December 31, 2004). Such indebtedness is denominated in euro. See
Item 7A - "Quantative and Qualitative Disclosures About Market Risk" and Note 10
to the Consolidated Financial Statements.
Kronos' contracts for the purchase of TiO2 feedstock contain fixed
quantities that Kronos is required to purchase, although certain of these
contracts allow for an upward or downward adjustment in the quantity purchased,
generally no more than 10%, based on Kronos' feedstock requirements. The pricing
under these agreements is generally based on a fixed price with price escalation
clauses primarily based on consumer price indices, as defined in the respective
contracts. The timing and amount shown for Kronos' commitments related to the
long-term supply contracts for TiO2 feedstock is based upon Kronos' current
estimate of the quantity of material that will be purchased in each time period
shown, and the payment that would be due based upon such estimated purchased
quantity and an estimate of the effect of the price escalation clause. The
actual amount of material purchased, and the actual amount that would be payable
by Kronos, may vary from such estimated amounts.
The above table of contractual commitments does not include any amounts
under Kronos' obligation under the Louisiana Pigment Company, L.P. joint
venture, as the timing and amount of such purchases are unknown and dependent
on, among other things, the amount of TiO2 produced by the joint venture in the
future, and the joint venture's future cost of producing such TiO2. However, the
table of contractual commitments does include amounts related to Kronos' share
of the joint venture's ore requirements necessary to produce TiO2 for Kronos.
See Notes 7 and 17 to the Consolidated Financial Statements and "Business -
Chemicals - Kronos Worldwide, Inc. - TiO2 manufacturing joint venture."
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 18 to the Consolidated Financial Statements, are described below.
The Company has not included any amounts for these conditional commitments in
the above table because the Company currently believes it is not probable that
the Company will be required to pay any amounts pursuant to these agreements.
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.
The above table does not reflect any amounts that the Company might pay to
fund its defined benefit pension plans and OPEB plans, as the timing and amount
of any such future fundings are unknown and dependent on, among other things,
the future performance of defined benefit pension plan assets, interest rate
assumptions and actual future retiree medical costs. Such defined benefit
pension plans and OPEB plans are discussed above in greater detail. The above
table also does not reflect any amounts that the Company might pay related to
its asset retirement obligation, as the timing and amounts of such future
fundings are unknown. See Notes 16 and 19 to the Consolidated Financial
Statements.
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,
2003 and 2004. See Notes 1 and 21 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, 2003 and 2004.
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, 2004, the Company's aggregate indebtedness was split
between 98% of fixed-rate instruments and 2% of variable-rate borrowings (2003 -
95% of fixed-rate instruments and 5% 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, 2004. Information shown below
for such foreign currency denominated indebtedness is presented in its U.S.
dollar equivalent at December 31, 2004 using exchange rates of 1.36 U.S. dollars
per euro.
Amount
Carrying Fair Interest Maturity
Indebtedness* value value rate date
------------ --------- --------- -------- ------
(In millions)
Fixed-rate indebtedness:
Euro-denominated KII
Senior Secured Notes $519.2 $549.1 8.9% 2009
Valhi loans from Snake River 250.0 250.0 9.4% 2027
Other .6 .6 8.2% various
------ ------ ---
769.8 799.7 9.1%
------ ------ ---
Variable-rate indebtedness -
KII euro-denominated
European revolver 13.6 13.6 3.9% 2005
------ ------ ---
$783.4 $813.3 9.0%
====== ====== ===
* Denominated in U.S. dollars, except as otherwise indicated.
At December 31, 2003, fixed rate indebtedness aggregated $606.3 million
(fair value - $606.3 million) with a weighted-average interest rate of 9.1%;
variable rate indebtedness at such date aggregated $31.0 million, which
approximates fair value, with a weighted-average interest rate of 3.1%. Such
fixed rate indebtedness was denominated in the euro (59% of the total) or the
U.S. dollars (41%). At December 31, 2003, all outstanding fixed-rate
indebtedness was denominated in U.S. dollars or the euro, and the outstanding
variable rate borrowings were denominated in U.S. dollars.
The Company has an $80 million loan to Snake River Sugar Company at
December 31, 2003 and 2004. Such loan bears interest at a fixed interest rate of
6.49% at such dates, the estimated fair value of such loan aggregated $111.5
million and $96.3 million at December 31, 2003 and 2004, 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, 2004 (2003 - $6.7 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 British pound sterling.
As described above, at December 31, 2004, Kronos had the equivalent of
$532.8 million of outstanding euro-denominated indebtedness (2003- the
equivalent of $356.1 million of euro-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 $52.4 million at December 31, 2004 (2003 - $35.6
million).
Certain of CompX's sales generated by its Canadian operations are
denominated in U.S. dollars. To manage a portion of the foreign exchange rate
market risk associated with such receivables or similar exchange rate risk
associated with future sales, at December 31, 2004 CompX had entered into a
series of short-term forward exchange contracts maturing through March 2005 to
exchange an aggregate of $7.2 million for an equivalent amount of Canadian
dollars at an exchange rates of Cdn. $1.19 to Cdn. $1.23 per U.S. dollar (2003 -
contracts to exchange an aggregate of $4.2 million for an equivalent amount of
Canadian dollars maturing through February 2004). The estimated fair value of
such forward exchange contracts at December 31, 2004 and 2004 is not material.
At December 31, 2003, Kronos also had entered into a short-term currency
forward contract maturing on January 2, 2004 to exchange an aggregate of euro 40
million into U.S. dollars at an exchange rate of U.S. $1.25 per euro. Such
contract was entered into in conjunction with the January 2004 payment of an
intercompany dividend from one of Kronos' European subsidiaries. At December 31,
2003, the actual exchange rate was U.S. $1.25 per euro. The estimated fair value
of such foreign currency forward contract was not material at December 31, 2003.
Kronos was not a party to such a contract at December 31, 2004.
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, 2003
and 2004 was $263.1 million and $266.2 million, respectively. The potential
change in the aggregate fair value of these investments, assuming a 10% change
in prices, would be $26.3 million at December 31, 2003 and $26.6 million at
December 31, 2004.
Other. The Company believes there may be a certain amount of incompleteness
in the sensitivity analyses presented above. 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 comparable 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.
ITEM 9A. CONTROLS AND PROCEDURES
Restatement. As disclosed in Note 1 to the Consolidated Financial
Statements, the Company and its audit committee concluded to restate the
Company's consolidated financial statements as of December 31, 2003 and 2004,
and for each of the three years in the period ended December 31, 2004.
Management's Consideration of the Restatement. Management also considered
the restatement discussed in Note 1 to the Consolidated Financial Statements
related to the Company's accounting for its investment in The Amalgamated Sugar
Company LLC and the guidance contained in the SEC's Staff Accounting Bulletin
("SAB") No. 99, Materiality, paragraphs 36 and 37 of Accounting Principles Board
Opinion ("APBO") No. 20 and paragraph 29 of APBO No. 28. The Company also
considered, by analogy, the guidance contained in the SEC's SAB Topic 5-F,
Accounting Changes Not Retroactively Applied Due to Immateriality. Because (i)
the restatement adjustments did not have a material impact to the financial
statements of prior annual periods presented in the Original Form 10-K, taken as
a whole, (ii) the impact of the restatement adjustments did not have a material
impact on the Company's consolidated stockholders' equity as of any prior annual
period presented in the Original Form 10-K and (iii) the Company decided to
restate its previously-issued consolidated financial statements in part because
the impact of the adjustment which the Company concluded should have been
reported as part of 1997's net income, if recorded in net income in the period
in which the adjustment became known, would have been material to such interim
period's reported net income, management of the Company concluded that this
control deficiency, individually or in the aggregate when considered with other
control deficiencies, does not constitute a material weakness in internal
control over financial reporting.
Evaluation of Disclosure Controls and Procedures. The Company maintains a
system of disclosure controls and procedures. The term "disclosure controls and
procedures," as defined by regulations of the SEC, means controls and other
procedures that are designed to ensure that information required to be disclosed
in the reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits to the SEC under the Act is
accumulated and communicated to the Company's management, including its
principal executive officer and its principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions to be
made regarding required disclosure. Each of Steven L. Watson, the Company's
President and Chief Executive Officer, and Bobby D. O'Brien, the Company's Vice
President and Chief Financial Officer, have evaluated the design and operating
effectiveness of the Company's disclosure controls and procedures as of December
31, 2004. Based upon their evaluation, and as a result of the material weakness
discussed below, these executive officers have concluded that the Company's
disclosure controls and procedures are not effective as of the date of such
evaluation.
Scope of Management's Report on Internal Control Over Financial Reporting.
The Company also maintains internal control over financial reporting. The term
"internal control over financial reporting," as defined by regulations of the
SEC, means a process designed by, or under the supervision of, the Company's
principal executive and principal financial officers, or persons performing
similar functions, and effected by the Company's board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, and
includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets of the
Company,
o Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and
that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company,
and
o Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the Company's Consolidated Financial
Statements.
Section 404 of the Sarbanes-Oxley Act of 2002 requires the Company to
annually include a management report on internal control over financial
reporting starting in the Company's Annual Report on Form 10-K for the year
ended December 31, 2004. The Company's independent registered public accounting
firm is also required to annually audit the Company's internal control over
financial reporting.
As permitted by the SEC, the Company's assessment of internal control over
financial reporting excludes (i) internal control over financial reporting of
its equity method investees and (ii) internal control over the preparation of
the Company's financial statement schedules required by Article 12 of Regulation
S-X. However, our assessment of internal control over financial reporting with
respect to the Company's equity method investees did include our controls over
the recording of amounts related to our investment that are recorded in our
consolidated financial statements, including controls over the selection of
accounting methods for our investments, the recognition of equity method
earnings and losses and the determination, valuation and recording of our
investment account balances.
Management's Report on Internal Control Over Financial Reporting
(Restated). The Company's management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rule 13a-15(f). The Company's evaluation of the
effectiveness of its internal control over financial reporting is based upon the
framework established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
A material weakness is a control deficiency, or a combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.
As of December 31, 2004, the Company did not maintain effective controls
over the accounting for income taxes, including the determination and reporting
of income taxes payable to affiliates, deferred income tax assets and
liabilities, deferred income tax asset valuation allowance, and the provision
for income taxes. Specifically, the Company did not have adequate personnel with
sufficient knowledge of income tax accounting and reporting. Additionally, the
Company did not maintain effective controls over the review and monitoring of
the accuracy, completeness and valuation of the components of the income tax
provision and related deferred income taxes as well as the income taxes payable
to affiliates resulting in errors in (i) the accounting for the income tax
effect of the difference between book and income tax basis of the Company's
investment in Kronos Worldwide, Inc., a majority-owned subsidiary of the
Company, (ii) current income taxes related to distributions or transfer of
Kronos common stock made by NL Industries, Inc., a majority-owned subsidiary of
the Company, to NL's stockholders and (iii) current and deferred income taxes
related to other items, that were not prevented or detected. This control
deficiency resulted in the restatement of the Company's 2002, 2003 and 2004
consolidated financial statements and the Company's interim consolidated
financial statements or interim financial information for the interim periods
ended September 30, 2003, December 31, 2003, March 31, 2004, June 30, 2004,
September 30, 2004 and December 31, 2004. Additionally, this control deficiency
could result in a misstatement of the aforementioned accounts that would result
in a material misstatement to the Company's annual or interim consolidated
financial statements that would not be prevented or detected. Accordingly,
management of the Company determined that this control deficiency constitutes a
material weakness.
In the Original Form 10-K, management concluded that the Company's internal
control over financial reporting was effective as of December 31, 2004. However,
the material weakness described above existed as of December 31, 2004. As a
result, management of the Company has concluded that the Company did not
maintain effective internal control over financial reporting at December 31,
2004, based on the criteria in the COSO framework. Accordingly, management has
restated this Report on Internal Control Over Financial Reporting.
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which is included in this Annual Report on Form 10-K/A.
Remediation. In order to remediate this material weakness, the Company
intends to increase its financial reporting staff, with particular emphasis on
obtaining additional personnel with a background in the financial reporting
requirements for the determination of the provision for income taxes in
accordance with SFAS No. 109 and related GAAP. Such additional staff could be
employees of the Company and/or independent contractors hired by the Company
with qualifications in the required area. As of December 23, 2005, two such
persons have been hired. Management believes that the addition of such staff
will help ensure that GAAP has been appropriately and consistently applied with
respect to the calculation and classification within the consolidated financial
statements of income tax provisions and related current and deferred income tax
accounts.
Changes in Internal Control Over Financial Reporting. There has been no
change to the Company's internal control over financial reporting during the
quarter ended December 31, 2004 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
Certifications. The Company's chief executive officer is required to
annually file a certification with the New York Stock Exchange ("NYSE"),
certifying the Company's compliance with the corporate governance listing
standards of the NYSE. During 2004, the Company's chief executive officer filed
such annual certification with the NYSE, indicating that he was not aware of any
violations by the Company of the NYSE corporate governance listing standards.
The Company's chief executive officer and chief financial officer are also
required to, among other things, quarterly file certifications with the SEC
regarding the quality of the Company's public disclosures, as required by
Section 302 of the Sarbanes-Oxley Act of 2002. The certifications for the
quarter ended December 31, 2004 have been filed as exhibits 31.1 and 31.2 to
this Annual Report on Form 10-K/A.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
Valhi's definitive Proxy Statement to be filed with the SEC pursuant to
Regulation 14A within 120 days after the end of the fiscal year covered by this
report (the "Valhi Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Valhi Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Valhi Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Valhi Proxy Statement. See also Note 17 to the Consolidated Financial
Statements.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated by reference to the
Valhi Proxy Statement. PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Schedules
The Registrant
The Consolidated Financial Statements and schedules of the Registrant
listed on the accompanying Index of Financial Statements and Schedules (see
page F-1) are filed as part of this Annual Report.
50%-or-less owned persons
The consolidated financial statements of TIMET (41%-owned at December 31,
2004) are filed as Exhibit 99.1 of this Annual Report pursuant to Rule 3-09
of Regulation S-X. Management's Report on Internal Control Over Financial
Reporting of TIMET is not included as part of Exhibit 99.1. The Registrant
is not required to provide any other consolidated financial statements
pursuant to Rule 3-09 of Regulation S-X.
(b) Reports on Form 8-K
Reports on Form 8-K filed for the quarter ended December 31, 2004:
October 28, 2004 - Reported Items 7.01 and 9.01.
November 8, 2004 - Reported Items 2.02, 7.01 and 9.01.
November 18, 2004 - Reported Items 1.01, 1.02 and 9.01.
November 24, 2004 - Reported Items 1.01, 2.03 and 9.01.
December 29, 2004 - Reported Items 2.05 and 2.06.
(c) Exhibits
Included as exhibits are the items listed in the Exhibit Index. The Company
has retained a signed original of any of these exhibits that contain
signatures, and the Company will provide such exhibit to the Commission or
its staff upon request. Valhi will furnish a copy of any of the exhibits
listed below upon request and payment of $4.00 per exhibit to cover the
costs to Valhi of furnishing the exhibits. Valhi will also furnish, without
charge, a copy of its Code of Business Conduct and Ethics, its Audit
Committee Charter and its Corporate Governance Guidelines, each as adopted
by the Company's board of directors, upon request. Such requests should be
directed to the attention of Valhi's Corporate Secretary at Valhi's
corporate offices located at 5430 LBJ Freeway, Suite 1700, Dallas, Texas
75240. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, any instrument
defining the rights of holders of long-term debt issues and other
agreements related to indebtedness which do not exceed 10% of consolidated
total assets as of December 31, 2004 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 June 30, 2002.
4.1 Indenture dated June 28, 2002 between Kronos International, Inc. and
The Bank of New York, as Trustee, governing Kronos International's
8.875% Senior Secured Notes due 2009 - incorporated by reference to
Exhibit 4.1 to NL Industries, Inc.'s Quarterly Report on Form 10-Q
(File No. 1-640) for the quarter ended June 30, 2002.
9.1 Shareholders' Agreement dated February 15, 1996 among TIMET, Tremont,
IMI plc, IMI Kynoch Ltd. and IMI Americas, Inc. - incorporated by
reference to Exhibit 2.2 to Tremont's Current Report on Form 8-K (File
No. 1-10126) dated March 1, 1996.
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, 2004 - incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2004.
10.2 Intercorporate Services Agreement between Contran Corporation and NL
effective as of January 1, 2004 - 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, 2004.
Item No. Exhibit Item
10.3 Intercorporate Services Agreement between Contran Corporation, Tremont
LLC and TIMET effective as of January 1, 2004 - incorporated by
reference to Exhibit 10.14 to TIMET's Annual Report on Form 10-K (File
No. 0-28538) for the year ended December 31, 2003.
10.4 Intercompany Services Agreement between Contran Corporation and CompX
effective January 1, 2004 - incorporated by reference to Exhibit 10.2
to CompX's Annual Report on Form 10-K (File No. 1-13905) for the year
ended December 31, 2003.
10.5 Intercorporate Services Agreement between Contran Corporation and
Kronos Worldwide, Inc. effective January 1, 2004 - incorporated by
reference to Exhibit No. 10.1 to Kronos' Quarterly Report on Form 10-Q
(File No. 1-31763) for the quarter ended March 31, 2004.
10.6 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.
10.7 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.
10.8* Valhi, Inc. 1987 Stock Option - Stock Appreciation Rights Plan, as
amended - incorporated by reference to Exhibit 10.4 to the
Registrant's Annual Report on Form 10-K (File No. 1-5467) for the year
ended December 31, 1994.
10.9* Valhi, Inc. 1997 Long-Term Incentive Plan - incorporated by reference
to Exhibit 10.12 to the Registrant's Annual Report on Form 10-K (File
No. 1-5467) for the year ended December 31, 1996.
10.10* CompX International Inc. 1997 Long-Term Incentive Plan - incorporated
by reference to Exhibit 10.2 to CompX's Registration Statement on Form
S-1 (File No. 333-42643).
10.11* NL Industries, Inc. 1998 Long-Term Incentive Plan - incorporated by
reference to Appendix A to NL's Proxy Statement on Schedule 14A (File
No. 1-640) for the annual meeting of shareholders held on May 9, 1998.
10.12* Kronos Worldwide, Inc. 2003 Long-Term Incentive Plan - incorporated by
reference to Exhibit 10.4 to Kronos' Registration Statement on Form 10
(File No. 001-31763).
10.13 Agreement Regarding Shared Insurance dated as of October 30, 2003 by
and between CompX International Inc., Contran Corporation, Keystone
Consolidated Industries, Inc., Kronos Worldwide, Inc., NL Industries,
Inc., Titanium Metals Corporation and Valhi, Inc. - incorporated by
reference to Exhibit 10.32 to Kronos' Annual Report on Form 10-K (File
No. 1-31763) for the year ended December 31, 2003.
10.14 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.
Item No. Exhibit Item
10.15 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.
10.16 Company Agreement of The Amalgamated Sugar Company LLC dated January
3, 1997 (to be effective December 31, 1996) - incorporated by
reference to Exhibit 10.20 to the Registrant's Annual Report on Form
10-K (File No. 1-5467) for the year ended December 31, 1996.
10.17 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.
10.18 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.
10.19 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.
10.20 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.
10.21 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.
10.22 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.
10.23 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.
10.24 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.
10.25 Fourth Amendment to the Subordinated Loan Agreement between Snake
River Sugar Company and Valhi, Inc. dated March 31, 2003 -
incorporated by reference to Exhibit No. 10.1 to the Registrant's
Quarterly Report on Form 10-Q (file No. 1-5467) for the quarter ended
March 31, 2003.
Item No. Exhibit Item
10.26 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.
10.27 Contingent Subordinate Security Agreement between Snake River Sugar
Company and Valhi, Inc., as acknowledged by First Security Bank
National Association as Collateral Agent, dated October 19, 2000 -
incorporated by reference to Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-Q (File No. 1-5467) for the quarter ended
September 30, 2000.
10.28 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.
10.29 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.
10.30 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.
10.31 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.
10.32 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.
10.33 Collateral Deposit Agreement among Snake River Sugar Company, Valhi,
Inc. and First Security Bank, National Association dated May 14, 1997
- incorporated by reference to Exhibit 10.6 to the Registrant's
Quarterly Report on Form 10-Q (File No. 1-5467) for the quarter ended
June 30, 1997.
10.34 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.
10.35 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.
Item No. Exhibit Item
10.36 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.
10.37 Subordination Agreement between Valhi, Inc. and Snake River Sugar
Company dated May 14, 1997 - incorporated by reference to Exhibit
10.10 to the Registrant's Quarterly Report on Form 10-Q (File No.
1-5467) for the quarter ended June 30, 1997.
10.38 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.
10.39 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.
10.40 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.
10.41 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.
10.42 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.
10.43 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.
10.44 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.
10.45 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.
Item No. Exhibit Item
10.46 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.
10.47 Lease Contract dated June 21, 1952, between Farbenfabrieken Bayer
Aktiengesellschaft and Titangesellschaft mit beschrankter Haftung
(German language version and English translation thereof) -
incorporated by reference to Exhibit 10.14 of NL's Annual Report on
Form 10-K (File No. 1-640) for the year ended December 31, 1985.
10.48 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.
10.49 Amendment dated August 11, 2003 to the Contract on Supplies and
Services among Bayer AG, Kronos Titan-GmbH & Co. OHG and Kronos
International (English translation of German language document) -
incorporated by reference to Exhibit No. 10.32 to the Kronos
Worldwide, Inc. Registration Statement on Form 10 (File No.
001-31763).
10.50 Form of Lease Agreement, dated November 12, 2004, between The
Prudential Assurance Company Limited and TIMET UK Ltd. related to the
premises known as TIMET Number 2 Plant, The Hub, Birmingham, England -
incorporated by reference to Exhibit 10.1 to TIMET's Current Report on
Form 8-K (File No. 1 -10126) filed with the SEC on November 17, 2004.
10.51** 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.
10.52** 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.
10.53** Amendment to Richards Bay Slag Sales Agreement dated June 1, 2001
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc.- incorporated by reference to Exhibit No. 10.5 to NL's
Annual Report on Form 10-K (File No. 1-640) for the year ended
December 31, 2001.
10.54** Amendment to Richards Bay Slag Sales Agreement dated December 20, 2002
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc.- incorporated by reference to Exhibit No. 10.7 to NL's
Annual Report on Form 10-K (File No. 1-640) for the year ended
December 31, 2002.
10.55** Amendment to Richards Bay Slag Sales Agreement dated October 31, 2003
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit No. 10.17 to
Kronos' Annual Report on Form 10-K (File No. 1-31763) for the year
ended December 31, 2003.
Item No. Exhibit Item
10.56 Agreement between Sachtleben Chemie GmbH and Kronos Titan GmbH
effective as of December 30, 1988 - Incorporated by reference to
Exhibit No. 10.1 to Kronos International Inc.'s Quarterly Report on
Form 10-Q (File No. 333-100047) for the quarter ended September 30,
2002.
10.57 Supplementary Agreement dated as of May 3, 1996 to the Agreement
effective as of December 30, 1986 between Sachtleben Chemie GmbH and
Kronos Titan GmbH - incorporated by reference to Exhibit No. 10.2 to
Kronos International Inc.'s Quarterly Report on Form 10-Q (File No.
333-100047) for the quarter ended September 30, 2002.
10.58 Second Supplementary Agreement dated as of January 8, 2002 to the
Agreement effective as of December 30, 1986 between Sachtleben Chemie
GmbH and Kronos Titan GmbH - incorporated by reference to Exhibit No.
10.3 to Kronos International Inc.'s Quarterly Report on Form 10-Q
(File No. 333-100047) for the quarter ended September 30, 2002.
10.59 Purchase and Sale Agreement (for titanium products) between The Boeing
Company, acting through its division, Boeing Commercial Airplanes, and
Titanium Metals Corporation (as amended and restated effective April
19, 2001) - incorporated by reference to Exhibit No. 10.2 to Titanium
Metals Corporation's Quarterly Report on Form 10-Q (File No. 0-28538)
for the quarter ended June 30, 2002.
10.60 Purchase and Sale Agreement between Rolls Royce plc and Titanium
Metals Corporation dated December 22, 1998 - incorporated by reference
to Exhibit No. 10.3 to Titanium Metals Corporation's Quarterly Report
on Form 10-Q (File No. 0-28538) for the quarter ended June 30, 2002.
10.61** First Amendment to Purchase and Sale Agreement between Rolls-Royce plc
and TIMET - incorporated by reference to Exhibit No. 10.1 to TIMET's
Quarterly Report on Form 10-Q (File No. 0-28538) for the quarter ended
June 30, 2004.
10.62** Second Amendment to Purchase and Sale Agreement between Rolls-Royce
plc and TIMET - incorporated by reference to Exhibit No. 10.2 to
TIMET's Quarterly Report on Form 10-Q (File No. 0-28538) for the
quarter ended June 30, 2004.
10.63** Termination Agreement by and between Wyman-Gordon Company and Titanium
Metals Corporation effective as of September 28, 2003 - incorporated
by reference to Exhibit No. 10.3 to TIMET's Quarterly Report on Form
10-Q (File No. 0-28538) for the quarter ended June 30, 2004.
10.64 Insurance Sharing Agreement, effective January 1, 1990, by and between
NL, Tall Pines Insurance Company, Ltd. and Baroid Corporation -
incorporated by reference to Exhibit 10.20 to NL's Annual Report on
Form 10-K (File No. 1-640) for the year ended December 31, 1991.
10.65 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.
Item No. Exhibit Item
10.66 Administrative Settlement for Interim Remedial Measures, Site
Investigation and Feasibility Study dated July 7, 2000 between the
Arkansas Department of Environmental Quality, Halliburton Energy
Services, Inc., M I, LLC and TRE Management Company - incorporated by
reference to Exhibit 10.1 to Tremont Corporation's Quarterly Report on
Form 10-Q (File No. 1-10126) for the quarter ended June 30, 2002.
10.67 Settlement Agreement and Release of Claims dated April 19, 2001
between Titanium Metals Corporation and the Boeing Company -
incorporated by reference to Exhibit 10.1 to TIMET's Quarterly Report
on Form 10-Q (File No. 0-28538) for the quarter ended March 31, 2001.
21.1*** Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP with respect to Valhi's
consolidated financial statements
23.2*** Consent of PricewaterhouseCoopers LLP with respect to TIMET's
consolidated financial statements
31.1 Certification
31.2 Certification
32.1 Certification
99.1*** Consolidated financial statements of Titanium Metals Corporation -
incorporated by reference to TIMET's Annual Report on Form 10-K (File
No. 0-28538) for the year ended December 31, 2004.
* Management contract, compensatory plan or agreement.
** Portions of the exhibit have been omitted pursuant to a request for
confidential treatment.
*** Previously filed.
- 102 -
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, December 23, 2005
(President and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Harold C. Simmons /s/ Steven L. Watson
--------------------------------------- ------------------------------------
Harold C. Simmons, December 23, 2005 Steven L. Watson, December 23, 2005
(Chairman of the Board) (President, Chief Executive Officer
and Director)
/s/ Thomas E. Barry /s/ Glenn R. Simmons
--------------------------------------- ------------------------------------
Thomas E. Barry, December 23, 2005 Glenn R. Simmons, December 23, 2005
(Director) (Vice Chairman of the Board)
/s/ Norman S. Edelcup /s/ Bobby D. O'Brien
-------------------------------------- -----------------------------------
Norman S. Edelcup, December 23, 2005 Bobby D. O'Brien, December 23, 2005
(Director) (Vice President and Chief Financial
Officer, Principal Financial Officer)
/s/ W. Hayden McIlroy /s/ Gregory M. Swalwell
-------------------------------------- ------------------------------------
W. Hayden McIlroy, December 23, 2005 Gregory M. Swalwell, December 23, 2005
(Director) (Vice President and Controller,
Principal Accounting Officer)
/s/ J. Walter Tucker, Jr.
--------------------------------------
J. Walter Tucker, Jr. December 23, 2005
(Director)
Annual Report on Form 10-K
Items 8, 15(a) and 15(d)
Index of Financial Statements and Schedules
Financial Statements
Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets - December 31, 2003 and 2004 (Restated) F-4
Consolidated Statements of Operations - Years ended
December 31, 2002, 2003 and 2004 (Restated) F-6
Consolidated Statements of Comprehensive Income (Loss) -
Years ended December 31, 2002, 2003 and 2004 (Restated) F-8
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 2002, 2003 and 2004 (Restated) F-9
Consolidated Statements of Cash Flows - Years ended
December 31, 2002, 2003 and 2004 (Restated) F-10
Notes to Consolidated Financial Statements F-13
Financial Statement Schedules
Schedule I - Condensed Financial Information of Registrant
(Restated) S-2
Schedule II - Valuation and Qualifying Accounts S-11
Schedules III and IV are omitted because they are not applicable.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Valhi, Inc.:
We have completed an integrated audit of Valhi, Inc.'s 2004 consolidated
financial statements and of its internal control over financial reporting as of
December 31, 2004 and audits of its 2002 and 2003 consolidated financial
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our audits, are
presented below.
Consolidated financial statements
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Valhi, Inc and its subsidiaries at December 31, 2003 and 2004, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2004 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 statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit of
financial statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the
Company has restated its 2002, 2003 and 2004 consolidated financial statements.
As discussed in Note 19 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 143 on January
1, 2003.
Internal control over financial reporting
Also, we have audited management's assessment, included in Management's
Report on Internal Control Over Financial Reporting appearing under Item 9A,
that the Company did not maintain effective internal control over financial
reporting as of December 31, 2004 because the Company did not maintain effective
controls over the accounting for income taxes, including the determination and
reporting of income taxes payable to affiliates, deferred income tax assets and
liabilities, deferred income tax asset valuation allowance, and the provision
for income taxes, and did not have adequate personnel with sufficient knowledge
of income tax accounting and reporting based on the criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of Treadway Commission(COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express opinions on management's assessment
and on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding of
internal control over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company, (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or a combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. As of December 31, 2004, the following material weakness has been
identified and included in management's assessment: As of December 31, 2004 the
Company did not maintain effective controls over the accounting for income
taxes, including the determination and reporting of income taxes payable to
affiliates, deferred income tax assets and liabilities, deferred income tax
asset valuation allowance, and the provision for income taxes. Specifically, the
Company did not have adequate personnel with sufficient knowledge of income tax
accounting and reporting. Additionally, the Company did not maintain effective
controls over the review and monitoring of the accuracy, completeness and
valuation of the components of the income tax provision and related deferred
income taxes as well as income taxes payable to affiliates resulting in errors
in (i) the accounting for the income tax effect of the difference between book
and income tax basis of the Company's investment in Kronos Worldwide, Inc., a
majority-owned subsidiary of the Company, (ii) current income taxes related to
distributions or transfer of Kronos common stock made by NL Industries, Inc., a
majority-owned subsidiary of the Company, to NL's stockholders and (iii) current
and deferred income taxes related to other items, that were not prevented or
detected. This control deficiency resulted in the restatement of the Company's
2002, 2003, and 2004 consolidated financial statements and the Company's interim
consolidated financial statements or interim financial information for the
interim periods ended September 30, 2003, December 31, 2003, March 31, 2004,
June 30, 2004, September 30, 2004 and December 31, 2004. Additionally, this
control deficiency could result in a misstatement of the aforementioned accounts
that would result in a material misstatement to the Company's annual or interim
consolidated financial statements that would not be prevented or detected.
Accordingly, management of the Company determined that the control deficiency
consittutes a material weakness.
This material weakness was considered in evaluating the nature, timing and
extent of audit tests applied to our audit of the 2004 consolidated financial
statements, and our opinion regarding the effectiveness of the Company's
internal control over financial reporting does not affect our opinion on those
consolidated financial statements.
Management of the Company and we previously concluded that the Company
maintained effective internal control over financial reporting as of December
31, 2004. However, management of the Company has determined that the material
weakness discussed above existed as of December 31, 2004. Accordingly,
Management's Report on Internal Control Over Financial Reporting has been
restated and our opinion on internal control over financial reporting, as
presented herein, is different from that expressed in our previous report.
In our opinion, management's assessment that Valhi, Inc. did not maintain
effective internal control over financial reporting as of December 31, 2004 is
fairly stated, in all material respects, based on criteria established in
Internal Control - Integrated Framework issued by the COSO. Also, in our
opinion, because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, the Company did not
maintain effective internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control - Integrated Framework
issued by the COSO.
PricewaterhouseCoopers LLP
Dallas, Texas
March 30, 2005, except for the restatement discussed in Note 1 to the
consolidated financial statements and the matter discussed in the penultimate
paragraph of Management's Report On Internal Control Over Financial Reporting,
as to which the date is December 23, 2005
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2004
(In thousands, except per share data)
ASSETS
2003 2004
---- ----
(Restated) (Restated)
Current assets:
Cash and cash equivalents $ 103,394 $ 267,829
Restricted cash equivalents 19,348 9,609
Marketable securities 6,147 9,446
Accounts and other receivables 184,633 217,931
Refundable income taxes 37,712 3,330
Receivable from affiliates 317 5,531
Inventories 293,113 263,414
Prepaid expenses 11,747 12,342
Deferred income taxes 14,435 9,705
---------- ----------
Total current assets 670,846 799,137
---------- ----------
Other assets:
Marketable securities 256,941 256,770
Investment in affiliates 161,818 178,815
Receivable from affiliate 14,000 10,000
Loans and other receivables 116,566 119,452
Unrecognized net pension obligations 13,747 13,518
Goodwill 377,591 354,051
Other intangible assets 3,805 3,189
Deferred income taxes 7,033 239,521
Other assets 39,621 52,326
---------- ----------
Total other assets 991,122 1,227,642
---------- ----------
Property and equipment:
Land 35,557 38,493
Buildings 217,744 234,152
Equipment 805,081 894,023
Mining properties 14,848 20,277
Construction in progress 10,625 21,557
---------- ----------
1,083,855 1,208,502
Less accumulated depreciation 446,369 555,707
---------- ----------
Net property and equipment 637,486 652,795
---------- ----------
$2,299,454 $2,679,574
========== ==========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2003 and 2004
(In thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
2003 2004
---- ----
(Restated) (Restated)
Current liabilities:
Current maturities of long-term debt $ 5,392 $ 14,412
Accounts payable 118,781 109,158
Accrued liabilities 130,091 131,119
Payable to affiliates 19,744 11,607
Income taxes 13,105 21,196
Deferred income taxes 3,941 24,170
---------- ----------
Total current liabilities 291,054 311,662
---------- ----------
Noncurrent liabilities:
Long-term debt 632,533 769,525
Accrued pension costs 90,517 77,360
Accrued OPEB costs 37,410 34,988
Accrued environmental costs 61,725 55,450
Deferred income taxes 430,059 382,235
Other 43,334 41,061
---------- ----------
Total noncurrent liabilities 1,295,578 1,360,619
---------- ----------
Minority interest 88,808 139,710
---------- ----------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares
authorized; none issued - -
Common stock, $.01 par value; 150,000 shares
authorized; 134,027 and 124,195 shares issued 1,340 1,242
Additional paid-in capital 118,067 110,978
Retained earnings 664,493 805,392
Accumulated other comprehensive income:
Marketable securities 2,206 5,449
Currency translation (3,792) 36,380
Pension liabilities (55,786) (53,916)
Treasury stock, at cost - 13,841 and 3,984 shares (102,514) (37,942)
---------- ----------
Total stockholders' equity 624,014 867,583
---------- ---------
$2,299,454 $2,679,574
========== ==========
Commitments and contingencies (Notes 5, 8, 10, 15, 17 and 18)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2002, 2003 and 2004
(In thousands, except per share data)
2002 2003 2004
---- ---- ----
(Restated) (Restated) (Restated)
Revenues and other income:
Net sales $1,050,287 $1,186,185 $1,320,128
Other, net 60,896 41,427 44,244
---------- ---------- ----------
1,111,183 1,227,612 1,364,372
---------- ---------- ----------
Cost and expenses:
Cost of sales 831,846 905,658 1,036,950
Selling, general and administrative 187,593 220,753 208,101
Interest 60,155 58,524 62,901
---------- ---------- ----------
1,079,594 1,184,935 1,307,952
---------- ---------- ----------
31,589 42,677 56,420
Equity in earnings of:
Titanium Metals Corporation ("TIMET") (32,873) 1,910 19,503
Other 566 771 2,175
---------- ---------- ----------
Income (loss) before taxes (718) 45,358 78,098
Provision for income taxes (benefit) (7,633) 133,884 (194,446)
Minority interest in after-tax
---
Earnings (losses) 4,035 (5,863) 48,343
---------- -------- ---------
Income (loss) from continuing
operations 2,880 (82,663) 224,201
Discontinued operations (206) (2,874) 3,732
Cumulative effect of change in accounting
Principle - 586 -
---------- ---------- -------
Net income (loss) $ 2,674 $ (84,951) $ 227,933
========== ============ ==========
Pro forma income (loss) from continuing
operations* $ 2,932 $ (82,663) $ 224,201
========== ============ ==========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
Years ended December 31, 2002, 2003 and 2004
(In thousands, except per share data)
2002 2003 2004
---- ---- ----
(Restated) (Restated) (Restated)
Basic earnings per share:
Income from continuing operations $ .02 $ (.69) $ 1.87
Discontinued operations - (.03) .03
Cumulative effect of change in
accounting principle - .01 -
-------- -------- -----
Net income $ .02 $ (.71) $ 1.90
======== ========== ========
Diluted earnings per share:
Income from continuing operations $ .02 $ (.69) $ 1.86
Discontinued operations - (.03) .03
Cumulative effect of change in
accounting principle - .01 -
-------- -------- -----
Net income $ .02 $ (.71) $ 1.89
======== ========== ========
Pro forma income from continuing operations per share:*
Basic $ .02 $ (.69) $ 1.87
Diluted .02 $ (.69) $ 1.86
Cash dividends per share $ .24 $ .24 $ .24
Shares used in the calculation of per share amounts:
Basic earnings per share 115,419 119,696 120,197
Diluted impact of stock options 416 213 243
-------- -------- --------
Diluted earnings per share 115,835 119,909 120,440
======== ======== ========
*Assumes SFAS No. 143 had been adopted as of January 1, 2002. See Note 19.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
(Restated) (Restated) (Restated)
Net income (loss) $ 2,674 $ (84,951) $227,933
-------- ---------- --------
Other comprehensive income (loss), net of tax: Marketable securities
adjustment:
Unrealized net gains arising during
the year 1,779 860 3,243
Reclassification for realized net gains
included in net income (4,169) - -
-------- -------- -----
(2,390) 860 3,243
Currency translation adjustment 43,814 31,798 40,172
Pension liabilities adjustment (25,379) (18,275) 1,870
-------- -------- --------
Total other comprehensive income, net 16,045 14,383 45,285
-------- -------- --------
Comprehensive income (loss) $ 18,719 $ (70,568) $273,218
======== ========== ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2002, 2003 and 2004
(In thousands)
Accumulated other comprehensive income
Additional -------------------------------------- Total
Common paid-in Retained Marketable Currency Pension Treasury stockholders'
stock capital earnings securities Translation liabilities stock equity
------- --------- -------- ---------- ----------- ----------- --------- --------
(Restated) (Restated) (Restated) (Restated) (Restated) (Restated)
Balance at December 31, 2001:
As originally reported $1,258 $44,982 $656,408 $86,654 $(79,404) $(11,921) $(75,649) $622,328
Prior period adjustments - - 148,030 (82,918) - (211) - 64,901
------ ------- --------- --------- -------- --------- -------- ---------
Balance, as restated 1,258 44,982 804,438 3,736 (79,404) (12,132) (75,649) 687,229
Net income (restated) - - 2,674 - - - - 2,674
Cash dividends - - (27,872) - - - - (27,872)
Other comprehensive income
(loss), net (restated) - - - (2,390) 43,814 (25,379) - 16,045
Other, net 4 2,675 - - - - - 2,679
------ -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2002
(restated)
1,262 47,657 779,240 1,346 (35,590) (37,511) (75,649) 680,755
Net loss (restated)_ - - (84,951) - - - - (84,951)
Cash dividends - - (29,796) - - - - (29,796)
Other comprehensive income
(loss), net (restated) - - - 860 31,798 (18,275) - 14,383
Merger transactions - Valhi shares
issued to acquire Tremont shares
attributable to:
Tremont minority interest 48 50,926 - - - - - 50,974
NL's holdings on Tremont 30 19,219 - - - - (19,249) -
Adjust treasury stock for Valhi
shares held by NL - - - - - - (7,616) (7,616)
Other, net - 265 - - - - - 265
------ -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2003
(restated)
1,340 118,067 664,493 2,206 (3,792) (55,786) (102,514) 624,014
Net income (restated) - - 227,933 - - - - 227,933
Cash dividends - - (29,804) - - - - (29,804)
Other comprehensive income, net
(restated) - - - 3,243 40,172 1,870 - 45,285
Retirement of treasury stock (99) (7,243) (57,230) - - - 64,572 -
Other, net (restated) 1 154 - - - - - 155
------ -------- ------- -------- -------- -------- -------- --------
Balance at December 31, 2004
(restated)
$1,242 $ 110,978 $805,392 $ 5,449 $ 36,380 $(53,916) $ (37,942) $867,583
====== ========= ======== ======= ======== ======== ========= ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
(Restated) (Restated) (Restated)
Cash flows from operating activities:
Net income (loss) $ 2,674 $ (84,951) $ 227,933
Depreciation and amortization 61,776 72,969 78,352
Goodwill impairment - - 6,500
Securities transactions gains, net (6,413) (487) (2,113)
Proceeds from disposal of marketable
securities (trading) 18,136 50 -
Loss (gain) on disposal of property and
equipment 261 (9,845) 855
Noncash:
Interest expense 3,911 2,366 2,543
Defined benefit pension expense (2,324) (5,478) (2,977)
Other postretirement benefit expense (4,692) (4,078) (2,839)
Deferred income taxes:
Continuing operations (11,065) 152,735 (212,939)
Discontinued operations (222) (2,590) (3,508)
Minority interest:
Continuing operations 4,035 (5,863) 48,343
Discontinued operations (101) (1,414) (4,124)
Equity in:
TIMET 32,873 (1,910) (19,503)
Other (566) (771) (2,175)
Cumulative effect of change in accounting
principle - (586) -
Distributions from:
Manufacturing joint venture 7,950 875 8,600
Other 361 1,205 494
Other, net (2,222) (1,195) 4,391
Change in assets and liabilities:
Accounts and other receivables 2,395 3,795 (25,148)
Inventories 45,301 (20,938) 46,937
Accounts payable and accrued liabilities (35,615) (8,948) (10,116)
Income taxes (475) (26,646) 30,759
Accounts with affiliates (4,293) 24,077 (10,060)
Other noncurrent assets 4,149 (1,812) (812)
Other noncurrent liabilities (5,187) 21,115 (17,764)
Other, net (3,818) 6,871 500
-------- -------- ---------
Net cash provided by operating activities 106,829 108,546 142,129
-------- -------- ---------
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
(Restated) (Restated) (Restated)
Cash flows from investing activities:
Capital expenditures $ (45,995) $ (44,659) $ (48,521)
Purchases of:
Kronos common stock - (6,428) (17,057)
TIMET common stock (534) (976) -
TIMET debt securities - (238) -
NL common stock (21,254) - -
Other subsidiary - - (575)
Business unit (9,149) - -
Capitalized permit costs - (672) (6,274)
Proceeds from disposal of:
Property and equipment 2,957 13,472 2,964
Kronos common stock - - 2,745
Change in restricted cash equivalents, net 2,539 (248) 10,068
Loans to affiliates
Loans - - (12,929)
Collections 2,000 4,000 12,000
Other, net 2,294 1,984 (508)
--------- --------- ---------
Net cash used by investing activities (67,142) (33,765) (58,087)
--------- --------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings 364,068 27,106 297,439
Principal payments (390,761) (59,782) (186,274)
Deferred financing costs paid (10,706) (426) (2,017)
Loans from affiliates:
Loans 13,421 16,354 26,117
Repayments (26,825) (20,193) (33,449)
Valhi dividends paid (27,872) (29,796) (29,804)
Distributions to minority interest (27,846) (6,509) (3,577)
NL common stock issued 454 1,738 9,201
Other, net 2,800 264 802
--------- --------- ---------
Net cash provided (used) by financing
activities (103,267) (71,244) 78,438
--------- --------- ---------
Net increase (decrease) $ (63,580) $ 3,537 $ 162,480
========= ======== =========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
(Restated) (Restated) (Restated)
Cash and cash equivalents - net change from:
Operating, investing and financing
activities $(63,580) $ 3,537 $162,480
Currency translation 3,650 5,178 1,955
Business unit acquired 196 - -
-------- -------- -----
(59,734) 8,715 164,435
Balance at beginning of year 154,413 94,679 103,394
-------- -------- --------
Balance at end of year $ 94,679 $103,394 $267,829
======== ======== ========
Supplemental disclosures - cash paid (received) for:
Interest, net of amounts capitalized $ 61,016 $ 53,990 $ 59,446
Income taxes, net 14,734 (4,237) (20,583)
Business unit acquired - net assets consolidated:
Cash and cash equivalents $ 196 $ - $ -
Restricted cash equivalents 2,685 - -
Goodwill and other intangible assets 9,007 - -
Other non-cash assets 1,259 - -
Liabilities (3,998) - -
-------- -------- -----
Cash paid $ 9,149 $ - $ -
======== ======== =====
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Restatement and Summary of significant accounting policies:
Restatement of financial statements
On December 21, 2005, the Company and its audit committee concluded that
the Company would file this Annual Report on Form 10-K/A for the year ended
December 31, 2004 to restate the Company's consolidated balance sheet as of
December 31, 2003 and 2004, and the Company's consolidated statements of income,
comprehensive income, cash flows and stockholders' equity for each of the three
years in the period ended December 31, 2004.
As previously disclosed, in January 1997 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 subsequently repaid in 1997 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 have remained outstanding since
June 30, 1997 through December 31, 2004.
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. The Company
may, at its option, require the LLC to redeem the Company's interest in the LLC
beginning in 2012, 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 Company reports the cash distributions received from the LLC as
dividend income. 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 a debt security at its estimated fair value.
In 1997 when the Company obtained its interest in the LLC, the Company
concluded that the earnings process with respect to the refined sugar operations
contributed by the Company to the LLC was not complete. Accordingly, the Company
did not recognize any gain in earnings. The Company did treat its investment in
the LLC as equivalent to a SFAS No. 115 debt security. Thus, the excess of the
fair value of the Company's investment in the LLC over the $34 million cost
basis of such investment was recognized as a component of other comprehensive
income, net of applicable deferred income taxes. In estimating the fair value of
the Company's interest in the LLC, the Company considered, 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, with the result
that the estimated fair value of the Company's LLC investment was deemed to be
$170 million ever since June 30, 1997. Under this accounting, the Company would
have reported a gain in earnings for financial reporting purposes at the time
its LLC interest was redeemed, with a corresponding reduction in accumulated
other income.
In connection with finalizing the preparation of the Company's consolidated
financial statements for the quarter ended September 30, 2005, the Company
re-evaluated its original conclusions regarding how it accounts for its
investment in the LLC. As a result, the Company has now concluded that a proper
application of accounting principles generally accepted in the United States of
America ("GAAP") would have been to recognize a gain in earnings in 1997 equal
to the difference between $250 million (the fair value of the Company's interest
in the LLC) and the $34 million cost basis of the net assets contributed to the
LLC, net of applicable deferred income taxes. This correction constitutes a
prior period adjustment under GAAP. Accordingly, the Company has retroactively
restated its consolidated balance sheet at December 31, 2004, as contained in
this Form 10-K, to reflect this correction. The effect of this correction on the
Company's December 31, 2004 consolidated balance sheet is to (i) increase the
carrying value of the Company's investment in the LLC (included as part of
noncurrent marketable securities) by $80 million, (ii) increase noncurrent
deferred income tax liabilities by $31.2 million and (iii) increase total
stockholders' equity by $48.8 million (with retained earnings increasing by
$131.7 million and accumulated other comprehensive income related to marketable
securities decreasing by $82.9 million). A similar balance sheet adjustment
would be applicable to Valhi's previously-reported consolidated balance sheet at
December 31, 2003, and each consolidated balance sheet prior thereto until June
30, 1997. Under this revised accounting, the Company would not be expected to
report a gain in earnings for financial reporting purposes at the time its LLC
interest is redeemed, as the redemption price of $250 million is expected to
equal the carrying value of its investment in the LLC at the time of redemption.
As discussed below in Notes 1 and 3, prior to December 2003 Kronos
Worldwide, Inc. was a wholly-owned subsidiary of NL Industries, Inc., a
majority-owned subsidiary of the Company. In December 2003, NL completed the
distribution of approximately 48.8% of Kronos' common stock on a pro-rata basis
to its shareholders, including Valhi, and during 2004 NL paid each of its four
$.20 per share regular quarterly dividends in the form of shares of Kronos
common stock. In its previously-issued consolidated financial statements, the
Company accounted for its pro-rata share of any current income tax resulting
from the distribution of shares of Kronos common stock to NL's stockholders as a
direct charge to equity. In addition, the Company has never recognized deferred
income taxes with respect to the excess of the GAAP book basis of its investment
in Kronos over the income tax basis of such shares. The Company has now
concluded, among other things, that (i) a portion of the current income taxes
resulting from the distribution of shares of Kronos common stock to NL's
shareholders should be included in the Company's provision for income taxes
included in the determination of net income and (ii) the Company should have
commenced to recognize deferred income taxes with respect to the excess of the
GAAP book basis of its investment in Kronos over the income tax basis of such
shares starting in December 2003, concurrent with NL's December 2003
distribution of 48.8% of Kronos' common stock (the first time in which the
Company owned shares of Kronos directly), including recognition of such deferred
income taxes with respect to the excess of the GAAP book basis of its investment
in Kronos over the income tax basis of such shares that existed as of the date
of such December 2003 distribution.
Accordingly, during the Company's close process for its fiscal quarter
ended September 30, 2005, the Company concluded that:
o its provision for income taxes included in the determination of income
from continuing operations was misstated by an aggregate of $1.7
million ($1.4 million, or $.01 per diluted share, net of minority
interest) in 2002, by $142.4 million ($124.4 million, or $1.04 per
diluted share, net of minority interest) in 2003 and by $93.6 million
($84.5 million, or $.70 per diluted share, net of minority interest)
in 2004;
o its provision for deferred income taxes included in the determination
of total other comprehensive income related to foreign currency
translation and pension liabilities, net of minority interest, was
misstated by an aggregate of $339,000 in 2002, by $3.7 million in 2003
and by $8.5 million in 2004;
o its provision for income taxes accounted for as a direct reduction to
stockholders' equity was misstated, net of minority interest, by $19.0
million in 2003 and by $6.8 million in 2004; and
o with respect to its statement of changes in stockholders' equity, and
in addition to the effect of the items noted above, total
stockholders' equity was misstated by $16.1 million as of December 31,
2001,
in each case as they related to the appropriate provision for income taxes and
related items which should have been recognized in accordance with accounting
principles generally accepted in the United States of America ("GAAP") as
provided by the guidance contained in Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, net of applicable minority
interest in certain circumstances, principally with respect to the following
items:
o Deferred income taxes with respect to the income tax effect of the
excess of the GAAP book basis over the income tax basis of the
Registrant's investment in Kronos Worldwide, Inc., a majority-owned
subsidiary of the Company;
o Current income taxes related to distributions of shares of Kronos
common stock made by NL Industries, Inc., the Company's majority-owned
subsidiary, to NL's stockholders; and
o Current and deferred income tax provisions related to other items.
On December 22, 2005, the Company and its audit committee concluded that
the Company had failed to properly apply the guidance contained in SFAS No. 109
in so far as it related to these items.
This amendment was required to correct for the aggregate effect of these
misstatements. While the effect of these misstatements have no effect on the
Company's previously-reported total cash flows from operating, investing and
financing activities, these misstatements do have a significant effect on the
Company's provision for income taxes, related income tax accounts (principally
deferred income taxes) and stockholders' equity.
The following tables show (i) selected consolidated balance sheet data as
of December 31, 2003 and 2004, and selected consolidated statements of income,
comprehensive income, stockholders' equity and cash flow data for each of the
three years in the period ended December 31, 2004, in each case as previously
reported, (ii) adjustments to such consolidated financial statement data to
reflect the aggregate effect of this restatement and (iii) such consolidated
financial statement data, as restated to reflect the aggregate effect of this
restatement.
Valhi, Inc. and Subsidiaries
Selected Consolidated Balance Sheet Data
December 31, 2003
(In thousands)
December 31, 2003
-------------------------------------------------
Previously
reported Adjustments As restated
---------- ----------- -----------
(In thousands)
Selected balance sheet items:
Noncurrent marketable securities $ 176,941 $ 80,000 $ 256,941
========== ======== ==========
Total other noncurrent assets $911,122 $ 80,000 $ 991,122
======== ======== ==========
Current payable to affiliates $ 21,454 $ (1,710) $ 19,744
========= ========= =========
Total current liabilities $ 292,764 $ (1,710) $ 291,054
========= ========= =========
Noncurrent deferred income tax liabilities $ 301,648 $ 128,411 $ 430,059
========== ========= ==========
Total noncurrent liabilities $ 1,167,167 $ 128,411 $1,295,578
=========== ========= ==========
Minority interest $ 99,789 $ (10,981) $88,808
======== ========== =======
Stockholders' equity:
Common stock $ 1,340 $ - $ 1,340
Additional paid-in capital 99,048 19,019 118,067
Retained earnings 639,463 25,030 664,493
Accumulated other comprehensive
income (loss)
Marketable securities 85,124 (82,918) 2,206
Currency translation (3,573) (219) (3,792)
Pension liabilities (59,154) 3,368 (55,786)
Treasury stock (102,514) - (102,514)
---------- --------- ----------
Total stockholders' equity $ 659,734 $ (35,720) $ 624,014
========= =========== =========
Valhi, Inc. and Subsidiaries
Selected Consolidated Balance Sheet Data
December 31, 2004
(In thousands)
December 31, 2004
Previously
reported Adjustments As restated
(In thousands)
Selected balance sheet items:
Noncurrent marketable securities $ 176,770 $ 80,000 $ 256,770
========== ======== ==========
Total other noncurrent assets $ 1,147,642 $ 80,000 $1,227,642
============ ======== ==========
Current receivable from affiliates $ 5,484 $ 47 $ 5,531
======== ==== ========
Total current assets $ 799,090 $ 47 $ 799,137
========= ==== =========
Noncurrent deferred income tax liabilities $ 161,758 $ 220,477 $ 382,235
========== ========= ==========
Total noncurrent liabilities $ 1,140,142 $ 220,477 $1,360,619
=========== ========= ==========
Minority interest $ 158,240 $ (18,530) $139,710
========= ========== ========
Stockholders' equity:
Common stock $ 1,242 $ - $ 1,242
Additional paid-in capital 85,213 25,765 110,978
Retained earnings 864,821 (59,429) 805,392
Accumulated other comprehensive
income (loss)
Marketable securities 88,367 (82,918) 5,449
Currency translation 45,561 (9,181) 36,380
Pension liabilities (57,779) 3,863 (53,916)
Treasury stock (37,942) - (37,942)
--------- --------- ---------
Total stockholders' equity $ 989,483 $ (121,900) $ 867,583
========= ============ =========
Valhi, Inc. and Subsidiaries
Selected Consolidated Statement of Operations Data
(In thousands)
Year ended Year ended
December 31, 2002 December 31, 2003
-------------------------------------- --------------------------
Previously Previously
reported Adjustments As restated reported Adjustments As restated
-------------------------------------------------------------------------------------------
(In thousands, except per share data)
Income (loss) from continuing
operations before income tax and
minority interest $ (718) $ - $ (718) $ 45,358 $ - $ 45,358
Provision for income taxes
(benefit) (5,904) (1,729) (7,633) (8,496) 142,380 133,884
Minority interest in after tax earnings 3,743 292 4,035 12,080 (17,943) (5,863)
----------- ---------- ------------- -------------------------- ----------
Income (loss) from
continuing operations 1,443 1,437 2,880 41,774 (124,437) (82,663)
Discontinued operations
and other (206) - (206) (2,288) - (2,288)
------------- --------- ------------ ------------ --------- ----------
Net income (loss) $ 1,237 $ 1,437 $ 2,674 $ 39,486 $(124,437) $ (84,951)
========= ========= ======= ========= ========== ==========
Earnings (loss) per share:
Basic net income per share $ .01 $ .01 $ .02 $ .33 $ (1.04) $ (.71)
========= ========= ========= ========= =========== ==========
Diluted net income per share $ .01 $ .01 $ .02 $ .33 $ (1.04) $ (.71)
========= ========= ========= ========= =========== ==========
Weighted average shares used:
Basic 115,419 115,419 119,696 119,696
Diluted 115,835 115,835 119,909 119,909
Valhi, Inc. and Subsidiaries
Selected Consolidated Statement of Income Data
(In thousands)
Year ended
December 31, 2004
Previously
reported Adjustments As restated
-----------------------------------------------
(In thousands, except per share data)
Income from continuing operations
before income tax and minority
interest $ 78,098 $ - $ 78,098
Provision for income taxes
(benefit) (288,055) 93,609 (194,446)
Minority interest in after tax earnings 57,493 (9,150) 48,343
----------- ---------------------
Income from continuing operations 308,660 (84,459) 224,201
Discontinued operations 3,732 - 3,732
------------- --------- ---------
Net income $ 312,392 $ (84,459) $ 227,933
=========== ========== =========
Earnings per share:
Basic net income per share $ 2.60 $ (.70) $ 1.90
========== ========= =========
Diluted net income per share $ 2.59 $ (.70) $ 1.89
========== ========= =========
Weighted average shares used:
Basic 120,197 120,197
Diluted 120,440 120,440
Valhi, Inc. and Subsidiaries
Selected Consolidated Statement of Comprehensive Income Data
(In thousands)
Year ended December 31, 2002
Previously
reported Adjustments As restated
(In thousands)
Consolidated other comprehensive income:
Net income $ 1,237 $ 1,437 $ 2,674
======== ======== ========
Other comprehensive income, net of tax:
Marketable securities adjustment (2,390) - (2,390)
Pension liabilities (25,040) (339) (25,379)
Currency translation adjustment 43,814 - 43,814
---------- -------- ---------
Total other comprehensive income 16,384 (339) 16,045
---------- --------- ---------
Comprehensive income $ 17,621 $ 1,098 $ 18,719
========= ======== =========
Year ended December 31, 2003
Previously
reported Adjustments As restated
(In thousands)
Consolidated other comprehensive income:
Net income (loss) $ 39,486 $ (124,437) $ (84,951)
========= =========== ===========
Other comprehensive income, net of tax:
Marketable securities adjustment 860 - 860
Pension liabilities (22,193) 3,918 (18,275)
Currency translation adjustment 32,017 (219) 31,798
---------- ----------- ---------
Total other comprehensive income 10,684 3,699 14,383
---------- --------- ---------
Comprehensive income $ 50,170 $ (120,738) $ (70,568)
========= ============ ===========
Valhi, Inc. and Subsidiaries
Selected Consolidated Statement of Comprehensive Income Data
(In thousands)
Year ended December 31, 2004
Previously
reported Adjustments As restated
(In thousands)
Consolidated other comprehensive income:
Net income (loss) $ 312,392 $ (84,459) $ 227,933
========== =========== ==========
Other comprehensive income, net of tax:
Marketable securities adjustment 3,243 - 3,243
Pension liabilities 1,375 495 1,870
Currency translation adjustment 49,134 (8,962) 40,172
---------- ----------- ---------
Total other comprehensive income 53,752 (8,467) 45,285
---------- ----------- ---------
Comprehensive income $ 366,144 $ (92,926) $ 273,218
========== =========== ==========
Valhi, Inc. and Subsidiaries
Selected Consolidated Statement of Stockholders' Equity Data
(In thousands)
Total stockholders equity -
year ended December 31, 2002
Previously
Reported Adjustments As restated
Balance at December 31, 2001 $ 622,328 $64,901 $ 687,229
Net income 1,237 1,437 2,674
Other comprehensive income, net 16,384 (339) 16,045
Other, net (25,193) - (25,193)
------------ --------- -----------
Balance at December 31, 2002 $ 614,756 $ 65,999 $ 680,755
========= ========= =========
Total stockholders equity -
year ended December 31, 2003
Previously
Reported Adjustments As restated
Balance at December 31, 2002 $ 614,756 $65,999 $ 680,755
Net income (loss) 39,486 (124,437) (84,951)
Other comprehensive income, net 10,684 3,699 14,383
Income tax on distribution (19,019) 19,019 -
Other, net 13,827 - 13,827
---------- --------- ---------
Balance at December 31, 2003 $ 659,734 $ (35,720) $ 624,014
========= =========== =========
Valhi, Inc. and Subsidiaries
Selected Consolidated Statement of Stockholders' Equity Data
(In thousands)
Total stockholders equity -
year ended December 31, 2004
Previously
Reported Adjustments As restated
Balance at December 31, 2003 $ 659,734 $(35,720) $ 624,014
Net income (loss) 312,392 (84,459) 227,933
Other comprehensive income, net 53,752 (8,467) 45,285
Income tax on distribution (6,816) 6,816 -
Other, net (29,579) (70) (29,649)
------------ ------- -----------
Balance at December 31, 2004 $ 989,483 $ (121,900) $ 867,583
========= ============ =========
Valhi, Inc. and Subsidiaries
Selected Consolidated Statement of Cash Flow Data
(In thousands)
Year ended December 31, 2002
Previously
reported Adjustments As restated
Items comprising cash flow from operating activities:
Net income $ 1,237 $ 1,437 $ 2,674
======== ========= ========
Deferred income taxes from continuing operations $ (9,430) $ (1,635) $ (11,065)
========= ========= =========
Minority interest from continuing
operations $ 3,743 $ 292 $ 4,035
======= ====== =======
Accounts with affiliates $ (4,199) $ (94) $ (4,293)
========== =========== ==========
Total cash flow from operating
activities $ 106,829 $ - $ 106,829
========== ========= ==========
Year ended December 31, 2003
Previously
reported Adjustments As restated
Items comprising cash flow from operating activities:
Net income (loss) $ 39,486 $ (124,437) $ (84,951)
========= ============ ===========
Deferred income taxes from continuing operations $ 32,139 $ 120,596 $ 152,735
========= ============= =========
Minority interest from continuing
operations $ 12,080 $(17,943) $(5,863)
======== ========= ========
Accounts with affiliates $ 2,293 $ 21,784 $ 24,077
======== ============ =========
Total cash flow from operating
activities $ 108,546 $ - $ 108,546
========== ========= ==========
Year ended December 31, 2004
Previously
reported Adjustments As restated
Items comprising cash flow from operating activities:
Net income $ 312,392 $ (84,459) $ 227,933
========== ============ ==========
Deferred income taxes from continuing operations $ (296,716) $ 83,777 $ (212,939)
============ ============= ============
Minority interest from continuing
operations $ 57,493 $(9,150) $48,343
======== ======== =======
Accounts with affiliates $ (19,892) $ 9,832 $ (10,060)
=========== =========== ===========
Total cash flow from operating
activities $ 142,129 $ - $ 142,129
========== ========= ==========
Summary of significant accounting policies
Organization and basis of presentation. Valhi, Inc. (NYSE: VHI) is a
subsidiary of Contran Corporation. At December 31, 2004, Contran held, directly
or through subsidiaries, approximately 91% 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, or is held by Mr. Simmons or
persons or other entities related to Mr. Simmons. Consequently, Mr. Simmons may
be deemed to control such companies. Certain prior year amounts have been
reclassified to conform to the current year presentation, including presenting
the results of operations of CompX International Inc.'s operations in The
Netherlands as discontinued operations. See Note 22.
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 disclosures of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from previously-estimated amounts under different
assumptions or conditions.
Principles of consolidation. The consolidated financial statements include
the accounts of Valhi and its majority-owned subsidiaries (collectively, the
"Company"). All material intercompany accounts and balances have been
eliminated.
Increases in the Company's ownership interest of its consolidated
subsidiaries, either through the Company's purchase of additional shares of the
subsidiary's common stock or the subsidiary's purchase of its own shares of
common stock, are accounted for by the purchase method (step acquisition).
Unless otherwise noted, such purchase accounting generally results in an
adjustment to the carrying amount of goodwill. The effect of decreases in the
Company's ownership interest of its consolidated subsidiaries through the
Company's or the subsidiary's sale of the subsidiary's common stock to third
parties are reflected in net income, with a gain or loss recognized equal to the
difference between the proceeds from such sale and the carrying value of the
shares sold. The effect of other decreases in the Company's ownership interest
of its consolidated subsidiaries, which usually result from the exercise of
options granted by such subsidiaries to purchase their shares of common stock to
employees, is generally not material.
Translation of foreign currencies. Assets and liabilities of subsidiaries
and affiliates 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.
Derivatives and hedging activities. Derivatives are recognized as either
assets or liabilities and measured at fair value in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. 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, 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.
Cash and cash equivalents. 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 marketable debt securities. Restricted cash
equivalents and marketable debt securities, primarily invested in U.S.
government and money market funds that invest primarily in U.S. government
securities, includes $19 million at December 31, 2004 held by special purpose
trusts (2003 - $24 million) formed by NL Industries, the assets of which can
only be used to pay for certain of NL's future environmental remediation and
other environmental expenditures. Such restricted amounts are generally
classified as either a current or noncurrent asset depending on the
classification of the liability to which the restricted amount relates.
Additionally, the restricted debt securities are generally classified as either
a current or noncurrent asset depending upon the maturity date of each such debt
security. See Notes 5, 8 and 12.
Marketable securities; securities transactions. Marketable debt and equity
securities are carried at fair value based upon quoted market prices or as
otherwise disclosed. Unrealized and realized gains and losses on trading
securities are recognized in income currently. Unrealized gains and losses on
available-for-sale securities are accumulated in stockholders' equity as part of
accumulated other comprehensive income, net of related deferred income taxes and
minority interest. Realized gains and losses are based upon the specific
identification of the securities sold.
Accounts receivable. The Company provides an allowance for doubtful
accounts for known and estimated potential losses arising from sales to
customers based on a periodic review of these accounts.
Inventories and cost of sales. Inventories are stated at the lower of cost
or market, net of allowance for obsolete and slow-moving inventories. Inventory
costs are generally based on average cost or the first-in, first-out method.
Cost of sales includes costs for materials, packing and finishing, utilities,
salary and benefits, maintenance and depreciation.
Investment in affiliates and joint ventures. Investments in more than
20%-owned but less than majority-owned companies are accounted for by the equity
method. See Note 7. Differences between the cost of each investment and the
Company's pro rata share of the entity's separately-reported net assets, if any,
are allocated among the assets and liabilities of the entity based upon
estimated relative fair values. Such differences approximate a $41 million
credit at December 31, 2004, 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; amortization expense. Goodwill
represents the excess of cost over fair value of individual net assets acquired
in business combinations accounted for by the purchase method. Goodwill is not
subject to periodic amortization. Other intangible assets are amortized by the
straight-line method over their estimated lives. Other intangible assets are
stated net of accumulated amortization, and goodwill and other intangible assets
are assessed for impairment in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets. See Notes 9 and 19.
Capitalized operating permits. Direct costs related to the acquisition or
renewal of operating permits related to the Company's waste management
operations are capitalized and are amortized by the straight-line method over
the term of the applicable permit. Amortization of capitalized operating permit
costs was $357,000 in each of 2002 and 2003 and $623,000 in 2004. At December
31, 2004, net operating permit costs include (i) $1.1 million related to costs
to renew certain permits for which the renewal application is pending with the
applicable regulatory agency and (ii) $5.8 million related to costs to apply for
certain new permits which have not yet been issued by the applicable regulatory
authority. Renewal of the permits for which the application is still pending is
currently expected to occur in the ordinary course of business, and costs
related to such renewals are being amortized from the date the prior permit
expired. Costs related to the new permits which have not yet been issued will
either be (i) amortized from the date the permit is issued or (ii) written off
to expense at the earlier of (a) the date the applicable regulatory authority
rejects the permit application or (b) the date the Company determines that
issuance of the permit to the Company is not probable of occurring. All
operating permits are generally subject to renewal at the option of the issuing
governmental agency.
Property and equipment; depreciation expense. Property and equipment are
stated at cost. The Company has a governmental concession with an unlimited term
to operate an ilmenite mine in Norway. Mining properties consist of buildings
and equipment used in the Company's Norwegian ilmenite mining operations. The
Company does not own the ilmenite reserves associated with the mine.
Depreciation of property and equipment for financial reporting purposes
(including mining properties) 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. Accelerated depreciation 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 performs
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. At December 31, 2004,
accrued repair and maintenance costs, included in other current liabilities and
consisting primarily of materials and supplies, were $5.4 million (2003 - $6.3
million).
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
2002, 2003 or 2004.
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. Effective January 1, 2002, the Company commenced assessing impairment
of property and equipment in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which among other things provided
certain implementation guidance in relation to prior GAAP. See Note 19.
Long-term debt. Long-term debt is stated net of any unamortized original
issue premium or discount. Amortization of deferred financing costs and any
premium or discount associated with the issuance of indebtedness, all included
in interest expense, is computed by the interest method over the term of the
applicable issue.
Employee benefit plans. Accounting and funding policies for retirement
plans are described in Note 16.
Income taxes. Valhi and its qualifying subsidiaries are members of
Contran's consolidated U.S federal income tax group (the "Contran Tax Group"),
and Valhi and certain of its qualifying subsidiaries also file consolidated
income tax returns with Contran in various U.S. state jurisdictions. As a member
of the Contran Tax Group, the Company is jointly and severally liable for the
federal income tax liability of Contran and the other companies included in the
Contran Tax Group for all periods in which the Company is included in the
Contran Tax Group. See Note 18. Contran's policy for intercompany allocation of
income taxes provides that subsidiaries included in the Contran Tax Group
compute their provision for income taxes on a separate company basis. Generally,
subsidiaries make payments to or receive payments from Contran in the amounts
they would have paid to or received from the Internal Revenue Service or the
applicable state tax authority 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. The Company made net cash payments to Contran for
income taxes of nil in 2002, $1.5 million in 2003 and nil in 2004.
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, undistributed earnings of foreign subsidiaries which are
not deemed to be permanently reinvested. In addition, the Company commenced
recognizing deferred income taxes with respect to the excess of the financial
reporting carrying amount over the income tax basis of Valhi's investment in
Kronos Worldwide, Inc. common stock beginning in December 2003 following NL's
pro-rata distribution of shares of Kronos' common stock to NL's shareholders,
including Valhi, because as of such date the Company could not avail itself of
the exemption otherwise available under GAAP to avoid recognition of such
deferred income taxes. See Note 3. Earnings of foreign subsidiaries deemed
permanently reinvested aggregated $662 million at December 31, 2004 (2003 - $654
million). 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.
NL and Kronos are members of the Contran Tax Group. CompX, previously a
separate U.S. federal income taxpayer, became a member of the Contran Tax Group
for federal income tax purposes in October 2004 with the formation of CompX
Group, Inc. See Note 3. Most members of the Contran Tax Group also file
consolidated unitary state income tax returns in qualifying U.S. jurisdictions.
NL, Kronos and CompX are each a party to a tax sharing agreement with Valhi and
Contran pursuant to which they generally compute their provision for income
taxes on a separate-company basis, and make payments to or receive payments from
Valhi in amounts that it would have paid to or received from the U.S. Internal
Revenue Service or the applicable state tax authority had they not been a member
of the Contran Tax Group. Tremont and Waste Control Specialists are also members
of the Contran Tax Group. The Amalgamated Sugar Company LLC is treated as a
partnership for income tax purposes.
Environmental remediation 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, 2003 and 2004, no receivables
for recoveries have been recognized.
Closure and post closure costs. Through December 31, 2002, the Company
provided for the estimated closure and post-closure monitoring costs for its
waste disposal site over the operating life of the facility as airspace was
consumed. Effective January 1, 2003, the Company adopted SFAS No. 143,
Accounting for Asset Retirement Obligations, and commenced accounting for such
costs in accordance with SFAS No. 143. See Note 19. Refundable insurance
deposits (see Note 8) collateralize certain of the Company's closure and
post-closure obligations and will be refunded to the Company when the related
policy terminates or expires if the insurance company suffers no losses under
the policy.
Net sales. Sales are recorded when products are shipped and title and other
risks and rewards of ownership have passed to the customer, or when services are
performed. Shipping terms of products shipped in both the Company's chemicals
and components products segments are generally FOB shipping point, although in
some instances shipping terms are FOB destination point (for which sales are not
recognized until the product is received by the customer). Amounts charged to
customers for shipping and handling are included in net sales. Sales are stated
net of price, early payment and distributor discounts and volume rebates.
Selling, general and administrative expenses; shipping and handling costs.
Selling, general and administrative expenses include costs related to marketing,
sales, distribution, shipping and handling, research and development, legal,
environmental remediation and administrative functions such as accounting,
treasury and finance, and includes costs for salaries and benefits, travel and
entertainment, promotional materials and professional fees. Shipping and
handling costs of the Company's chemicals segment were approximately $51 million
in 2002, $63 million in 2003 and $70 million in 2004. Shipping and handling
costs of the Company's component products and waste management segments are not
material. Advertising costs related to continuing operations, expensed as
incurred, were approximately $2 million in each of 2002, 2003 and 2004. Research
and development costs related to continuing operations, expensed as incurred,
were approximately $7 million in each of 2002 and 2003 and $8 million in 2004.
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
184,000 in 2002, 410,000 in 2003 and 62,000 in 2004.
Stock options. The Company currently accounts for stock-based employee
compensation in accordance with Accounting Principles Board Opinion ("APBO") No.
25, Accounting for Stock Issued to Employees, and its various interpretations.
See Note 20. 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. During 2002, and following the cash settlement
of certain stock options held by employees of NL, NL and the Company commenced
accounting for its remaining stock options using the variable accounting method
because NL could not overcome the presumption that it would not similarly cash
settle its remaining stock options. Under the variable accounting method, the
intrinsic value of all unexercised stock options (including those with an
exercise price at least equal to the market price on the date of grant) are
accrued as an expense over their vesting period, with subsequent increases
(decreases) in the market price of the underlying common stock resulting in
additional compensation expense (income). Compensation cost related to stock
options recognized by the Company in accordance with APBO No. 25 was
approximately $3.3 million in 2002, $1.9 million in 2003 and $3.4 million in
2004.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in 2002, 2003 and 2004 if Valhi
and its subsidiaries and affiliates had each elected to account for their
respective stock-based employee compensation related to stock options in
accordance with the fair value-based recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, for all awards granted subsequent to
January 1, 1995.
Years ended December 31,
(Restated) (Restated) (Restated)
2002 2003 2004
---- ---- ----
(In millions, except
Per share amounts)
Net income as reported $ 2.7 $(85.0) $227.9
Adjustments, net of applicable income tax effects and minority interest:
Stock-based employee compensation expense
determined under APBO No. 25 1.7 .9 1.7
Stock-based employee compensation expense
determined under SFAS No. 123 (2.6) (1.4) (.7)
----- ----- ------
Pro forma net income $ 1.8 $(85.5) $228.9
====== ======= ======
Basic earnings per share:
As reported $ .02 $ (.71) $ 1.90
Pro forma .02 (.71) 1.90
Diluted earnings per share:
As reported $ .02 $ (.71) $ 1.89
Pro forma .02 (.71) 1.90
Note 2 - Business and geographic segments:
% owned at
Business segment Entity December 31, 2004
Chemicals Kronos Worldwide, Inc. 94%
Component products CompX International Inc. 68%
Waste management Waste Control Specialists LLC 100%
Titanium metals TIMET 41%
The Company's ownership of Kronos includes 46% held directly by Valhi, 37%
held directly by NL Industries, Inc., a majority-owned subsidiary of Valhi, and
11% owned by Tremont LLC, a wholly-owned subsidiary of Valhi. Valhi owns 62% of
NL directly, and Tremont owns an additional 21% of NL. Tremont distributed its
shares of Kronos and NL to Valhi in January 2005.
The Company's ownership of CompX is held directly by CompX Group, Inc, a
majority-owned subsidiary of NL. NL owns 82.4% of CompX Group, and TIMET owns
the remaining 17.6% of CompX Group. CompX Group's sole asset consists of shares
of CompX common stock representing approximately 83% of the total number of
CompX shares outstanding, and the percentage ownership of CompX shown above
represents NL's ownership interest in CompX Group multiplied by CompX Group's
ownership interest in CompX. See Note 3.
The company's ownership of TIMET includes 40% owned directly by Tremont and
1% owned directly by Valhi. In addition, the Combined Master Retirement Trust
("CMRT"), a collective investment trust established by Valhi to permit the
collective investment by certain master trusts which fund certain employee
benefits plans sponsored by Contran and certain of its affiliates, owned an
additional 12% of TIMET's outstanding common stock at December 31, 2004. See
Note 16.
TIMET owns an additional 2% of CompX, .5% of NL and less than .1% of
Kronos, and TIMET accounts for such CompX, NL and Kronos shares, as well as its
shares of CompX Group, as available-for-sale marketable securities carried at
fair value (with the fair value of TIMET's shares of CompX Group determined
based on the fair value of the underlying CompX shares held by CompX Group).
Because the Company does not consolidate TIMET, the shares of CompX Group,
CompX, NL and Kronos owned by TIMET are not considered as part of the Company's
consolidated investment in such companies.
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 Kronos, the component products business conducted by CompX
and the waste management business conducted by Waste Control Specialists.
Kronos manufactures and sells titanium dioxide pigments ("TiO2"). 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 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 at its facility
in West Texas.
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
income includes the effect of amortization of any intangible assets attributable
to the segment. Chemicals operating income, as presented below, differs from
amounts separately reported by Kronos due to amortization of purchase accounting
basis adjustments recorded by the Company. Similarly, the Company's equity in
earnings of TIMET differs from the Company's pro-rata share of TIMET's
separately-reported results. Component products operating income, as presented
below, may differ from amounts separately reported by CompX because the Company
defines operating income differently than CompX.
Interest income included in the calculation of segment operating income is
not material in 2002, 2003 or 2004. Capital expenditures include additions to
property and equipment but exclude amounts paid for business units acquired in
business combinations accounted for by the purchase method. See Note 3.
Depreciation and amortization related to each reportable operating segment
includes amortization of any intangible assets attributable to the segment.
Amortization of deferred financing costs and any premium or discount associated
with the issuance of indebtedness 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, 2004, approximately 23% of corporate assets were held by NL
(2003 - 16%), 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 are attributed to their physical
location. At December 31, 2004, the net assets of non-U.S. subsidiaries included
in consolidated net assets approximated $653 million (2003 - $570 million).
Years ended December 31,
2002 2003 2004
---- ---- ----
(In millions)
Net sales:
Chemicals $ 875.2 $1,008.2 $1,128.6
Component products 166.7 173.9 182.6
Waste management 8.4 4.1 8.9
-------- -------- --------
Total net sales $1,050.3 1,186.2 1,320.1
======== ======== ========
Operating income:
Chemicals $ 84.4 $ 122.3 $ 103.5
Component products 4.4 9.1 16.2
Waste management (7.0) (11.5) (10.2)
-------- -------- --------
Total operating income 81.8 119.9 109.5
General corporate items:
Interest and dividend income 35.7 33.7 34.6
Securities transaction gains, net 6.4 .5 2.1
Gain on disposal of fixed assets 1.6 10.3 .6
Legal settlement gains, net 5.2 .8 .5
Foreign currency transaction gain 6.3 - -
General expenses, net (45.2) (64.0) (28.0)
Interest expense (60.2) (58.5) (62.9)
-------- -------- --------
31.6 42.7 56.4
Equity in:
TIMET (32.9) 1.9 19.5
Other .6 .8 2.2
-------- -------- --------
Income (loss) before income taxes $ (.7) $ 45.4 $ 78.1
======== ======== ========
Net sales - point of origin:
United States $ 387.0 $ 409.0 $ 558.1
Germany 404.3 510.1 576.1
Belgium 123.8 150.7 186.4
Norway 111.8 131.5 144.5
Other Europe 89.6 110.4 124.8
Canada 229.2 249.6 244.4
Taiwan 14.7 13.4 15.8
Eliminations (310.1) (388.5) (530.0)
-------- -------- --------
$1,050.3 $1,186.2 $1,320.1
======== ======== ========
Net sales - point of destination:
United States $ 406.5 $ 427.7 $ 462.9
Europe 463.3 574.5 671.8
Canada 82.8 85.5 80.8
Asia and other 97.7 98.5 104.6
-------- -------- --------
$1,050.3 $1,186.2 $1,320.1
======== ======== ========
Years ended December 31,
2002 2003 2004
---- ---- ----
(In millions)
Depreciation and amortization:
Chemicals $ 44.3 $ 54.5 $ 60.2
Component products 13.0 14.8 14.2
Waste management 3.0 2.7 3.3
Corporate 1.5 1.0 .7
------- ------- -------
$ 61.8 $ 73.0 $ 78.4
======= ======= =======
Capital expenditures:
Chemicals $ 32.6 $ 35.2 $ 39.3
Component products 12.7 8.9 5.4
Waste management .6 .4 3.7
Corporate .1 .2 .1
------- ------- -------
$ 46.0 $ 44.7 $ 48.5
======= ======= =======
December 31,
2002 2003 2004
---- ---- ----
(In millions)
Total assets:
Operating segments:
Chemicals $1,346.5 $1,542.2 $1,773.5
Component products 202.1 209.4 170.2
Waste management 28.5 24.5 36.4
Investment in:
TIMET common stock 12.9 20.4 44.5
TIMET debt securities - .3 -
TIMET preferred stock - - .2
Other joint ventures 12.6 12.2 13.9
Corporate and eliminations 553.2 490.5 640.9
-------- -------- --------
$2,155.8 $2,299.5 $2,679.6
======== ======== ========
Net property and equipment:
United States $ 78.2 $ 72.3 $ 69.8
Germany 275.9 319.7 331.3
Canada 82.1 91.7 91.4
Norway 68.1 67.4 72.5
Belgium 60.5 71.1 73.8
Netherlands 10.0 9.6 8.3
Taiwan 5.9 5.7 5.7
-------- -------- --------
$ 580.7 $ 637.5 $ 652.8
======== ======== ========
Note 3 - Business combinations and related transactions:
NL Industries, Inc. At the beginning of 2002, Valhi held 61% of NL's
outstanding common stock, and Tremont held an additional 21% of NL. During 2002,
NL purchased shares of its own common stock in market and private transactions
for an aggregate of $21.3 million, thereby increasing Valhi's and Tremont's
ownership of NL to 62% and 21% at December 31, 2004, respectively. See Note 17.
In January 2002, NL purchased the insurance brokerage operations conducted
by EWI Re, Inc. and EWI Re, Ltd. for an aggregate cash purchase price of $9
million. See Note 17.
Kronos Worldwide, Inc. Prior to December 2003, Kronos was a wholly-owned
subsidiary of NL. In December 2003, and in conjunction with a recapitalization
of Kronos, NL completed the distribution of approximately 48.8% of Kronos'
common stock to NL shareholders (including Valhi and Tremont LLC) in the form of
a pro-rata dividend. Shareholders of NL received one share of Kronos common
stock for every two shares of NL held. During 2004, NL paid each of its four
$.20 per share regular quarterly dividends in the form of shares of Kronos
common stock in which an aggregate of approximately 2.5% of Kronos' outstanding
common stock were distributed to NL shareholders (including Valhi and Tremont)
in the form of pro-rata dividends. Valhi and Tremont received an aggregate of
approximately 20.2 million shares and 1.0 million shares of Kronos with respect
to the December 2003 distribution and the 2004 distributions, respectively.
NL's December 2003 and 2004 quarterly distributions of shares of common
stock of Kronos is taxable to NL, and NL is required to recognize a taxable gain
equal to the difference between the fair market value of the shares of Kronos
common stock distributed on the various dates of distribution and NL's adjusted
tax basis in such stock at such dates of distribution. The amount of such tax
liability related to the shares of Kronos distributed to NL shareholders other
than Valhi and Tremont was approximately $22.5 million and $2.5 million in 2003
and 2004, respectively, and such amounts are recognized as a component of the
Company's consolidated provision for income taxes in such periods. Other than
the Company's recognition of such NL tax liabilities, the completion of the
December 2003 and 2004 distributions of Kronos had no other impact on the
Company's consolidated financial position, results of operations or cash flows.
The amount of NL's separate tax liability with respect to the shares of
Kronos distributed to Valhi and Tremont, while recognized by NL at its separate
company level, is not recognized in the Company's consolidated financial
statements because the separate tax liability is eliminated at the Valhi level
due to Valhi, Tremont and NL all being members of the Contran Tax Group. With
respect to such shares of Kronos distributed to Valhi and Tremont, effective
December 1, 2003, Valhi and NL amended the terms of their tax sharing agreement
to not require NL to pay up to Valhi the separate tax liability generated from
the distribution of such Kronos shares to Valhi and Tremont. On November 30,
2004 Valhi and NL agreed to further amend the terms of their tax sharing
agreement to provide that NL would now be required to pay up to Valhi the
separate tax liability generated from the distribution of shares of Kronos
common stock to Valhi and Tremont, including the tax related to such shares
distributed to Valhi and Tremont in December 2003 and the tax related to the
shares distributed to Valhi and Tremont during all of 2004. In determining to so
amend the terms of the tax sharing agreement, NL and Valhi considered, among
other things, the changed expectation for the generation of taxable income at
the NL level resulting from the inclusion of CompX in NL's consolidated taxable
income effective in the fourth quarter of 2004, as discussed in Note 1. Valhi
and NL further agreed that in lieu of a cash income tax payment, such separate
tax liability could be paid by NL to Valhi in the form of shares of Kronos
common stock held by NL. Such tax liability related to the shares of Kronos
distributed to Valhi and Tremont in December 2003 and 2004, including the tax
liability resulting from the use of Kronos common stock to settle such
liability, aggregated approximately $227 million. Accordingly, in the fourth
quarter of 2004 NL transferred approximately 5.5 million shares of Kronos common
stock to Valhi in satisfaction of such separate tax liability and the tax
liability generated from the use of such Kronos shares to settle such tax
liability. In agreeing to settle such tax liability with such 5.5 million shares
of Kronos common stock, the Kronos shares were valued at an agreed-upon price of
$41 per share. Kronos' average closing market price during the months of
November and December 2004 was $41.53 and $41.77, respectively. NL also
considered the fact that the shares of Kronos held by non-affiliates are very
thinly traded, and consequently an average price over a period of days mitigates
the effect of the thinly-traded nature of Kronos' common stock. The transfer of
such 5.5 million shares of Kronos common stock, accounted for under GAAP as a
transfer of net assets among entities under common control at carryover basis,
had no effect on the Company's consolidated financial statements, and as noted
above such tax liability is not recognized in the Company's consolidated
financial statements because it is eliminated at the Valhi level due to Valhi,
Tremont and NL all being members of Valhi's tax group on a separate-company
basis and of the Contran Tax Group. Therefore, this aggregate $227 million tax
liability has not been paid by Valhi to Contran, nor has Contran paid such tax
liability to the applicable tax authority. Such income tax liability would
become payable by Valhi to Contran, and by Contran to the applicable tax
authority, when the shares of Kronos transferred or distributed by NL to Valhi
and Tremont are sold or otherwise transferred outside the Contran Tax Group or
in the event of certain restructuring transactions involving NL and Valhi.
However, as discussed in Note 1, the Company does recognize deferred income
taxes with respect to its investment in Kronos, and in accordance with GAAP the
amount of such deferred income taxes recognized by Valhi ($193.0 million at
December 31, 2004) is limited to this $227 million tax liability.
During December 2003 and 2004, Valhi purchased shares of Kronos common
stock in market transactions for an aggregate of $23.5 million. During the
fourth quarter of 2004, NL sold shares of Kronos common stock in market
transactions for an aggregate of $2.7 million, and the Company recognized a $2.2
million pre-tax gain related to the reduction of its ownership interest in
Kronos related to such sales. See Note 12.
During 2004, Kronos acquired additional shares of its majority-owned
subsidiary in France for approximately $575,000. See Note 13.
TIMET. At the beginning of 2002, the Company owned 39% of TIMET. During
2002 and 2003, the Company purchased additional shares of TIMET common stock in
market transactions for an aggregate of $1.5 million, increasing the Company's
ownership of TIMET to 41% as of December 31, 2003. During 2003, the Company also
purchased certain convertible debt securities issued by a wholly-owned
subsidiary of TIMET, and during 2004 such convertible debt securities were
exchanged for convertible preferred stock of TIMET. See Note 7.
Tremont Corporation, Tremont Group, Inc. and Tremont LLC. At the beginning
of 2002, Valhi and NL owned 80% and 20%, respectively, of Tremont Group, Inc.
Tremont Group was a holding company which owned 80% of Tremont Corporation. In
February 2003, Valhi completed two consecutive merger transactions pursuant to
which Tremont Group and Tremont both became wholly-owned subsidiaries of Valhi.
Under these merger transactions, (i) Valhi issued 3.5 million shares of its
common stock to NL in exchange for NL's 20% ownership interest in Tremont Group
and (ii) Valhi issued 3.4 shares of its common stock (plus cash in lieu of
fractional shares) to Tremont stockholders (other than Valhi and Tremont Group)
in exchange for each share of Tremont common stock held by such stockholders, or
an aggregate of 4.3 million shares of Valhi common stock, in each case in a
tax-free exchange. A special committee of Tremont's board of directors,
consisting of members unrelated to Valhi who retained their own independent
financial and legal advisors, recommended approval of the second merger.
Subsequent to these two mergers, Tremont Group and Tremont merged to form
Tremont LLC, also wholly owned by Valhi. The number of shares of Valhi common
stock issued to NL in exchange for NL's 20% ownership interest in Tremont Group
was equal to NL's 20% pro-rata interest in the shares of Tremont common stock
held by Tremont Group, adjusted for the 3.4 exchange ratio in the second merger.
For financial reporting purposes, the Tremont shares previously held by NL
(either directly or indirectly through NL's ownership interest in Tremont Group)
were already considered as part of the Valhi consolidated group's ownership of
Tremont to the extent of Valhi's ownership interest in NL. Therefore, that
portion of such Tremont shares was not considered as held by the Tremont
minority stockholders. As a result, the Valhi shares issued to NL in the merger
transactions described above were deemed to have been issued in exchange for the
Tremont shares held by the Tremont minority interest only to the extent that
Valhi did not have an ownership interest in NL. At December 31, 2003 and 2004,
NL and its subsidiaries owned an aggregate of 4.7 million shares of Valhi common
stock, including 3.5 million shares received by NL in the merger transactions
described above and 1.2 million shares previously acquired by NL. As discussed
in Note 14, the amount shown as treasury stock in the Company's consolidated
balance sheet for financial reporting purposes includes the Company's
proportional interest in the shares of Valhi common stock held by NL.
Accordingly, a portion of the 3.5 million shares of Valhi common stock issued to
NL in the merger transactions were reported as treasury stock, and were not
deemed to have been issued in exchange for Tremont shares held by the minority
interest, since they represent shares issued to "acquire" the portion of the
Tremont shares already held directly or indirectly by NL that were considered as
part of the Valhi consolidated group's ownership of Tremont.
The following table presents the number of Valhi common shares that were
issued pursuant to the merger transactions described above.
Equivalent
Tremont Valhi
shares Shares(1)
Valhi shares issued to NL in exchange for NL's ownership interest in Tremont
Group:
Valhi shares issued to NL(2) 3,495,200
Less shares deemed Valhi has issued to itself based
on Valhi's ownership interest in NL (2,957,288)
----------
537,912
Valhi shares issued to the Tremont stockholders:
Total number of Tremont shares outstanding 6,424,858
Less Tremont shares held by Tremont Group and Valhi(3) (5,146,421)
----------
1,278,437 4,346,686
==========
Less fractional shares converted into cash (1,758)
Less shares deemed Valhi has issued to itself based on
Valhi's ownership interest in NL(4) (23,494)
----------
4,321,434
Net Valhi shares issued to acquire the Tremont minority interest 4,859,346
==========
(1) Based on the 3.4 exchange ratio.
(2) Represents 5,141,421 shares of Tremont held by Tremont Group, multiplied by
NL's 20% ownership interest in Tremont Group, adjusted for the 3.4 exchange
ratio in the merger.
(3) The Tremont shares held by Tremont Group and Valhi were cancelled in the
merger transactions.
(4) Represents shares of Tremont held directly by NL, multiplied by Valhi's
ownership interest in NL and adjusted for the 3.4 exchange ratio.
For financial reporting purposes, the merger transactions described above
were accounted for by the purchase method (step acquisition of Tremont). The
shares of Valhi common stock issued to the Tremont minority interest were valued
at $10.49 per share, representing the average of Valhi's closing NYSE stock
price for the period beginning two trading days prior to the November 5, 2002
public announcement of the signing of the definitive merger agreement and ending
two trading days following such public announcement. The shares of Valhi common
stock issued to acquire the Tremont shares held by NL that were already
considered as part of the Valhi's consolidated group ownership of Tremont, which
were reported as treasury stock, were valued at carryover cost basis of
approximately $19.2 million. The following presents the purchase price for the
step acquisition of Tremont. The value assigned to the shares of Valhi common
stock issued is $10.49 per share, as discussed above.
Valhi
shares Assigned
issued value
---------- --------
(In millions)
Net Valhi shares issued 4,859,346 $51.0
=========
Plus cash fees and expenses 0.9
-----
Total purchase price $51.9
=====
The purchase price was allocated based upon an estimate of the fair value
of the net assets acquired as follows:
Amount
(In millions)
Book value of historical minority interest in Tremont's net
assets acquired $28.7
Remaining purchase price allocation:
Increase property and equipment to fair value 4.0
Reduce Tremont's accrued OPEB costs to accumulated benefit
obligations 4.4
Adjust deferred income taxes 8.9
Goodwill 5.9
-----
Purchase price $51.9
=====
The adjustments to increase the carrying value of property and equipment
relate to such assets of NL and Kronos, and gives recognition to the effect that
Valhi's acquisition of the minority interest in Tremont results in an increase
in Valhi's effective ownership of NL due to Tremont's ownership of NL. The
reduction in Tremont's accrued OPEB costs to an amount equal to the accumulated
benefit obligations eliminates the unrecognized prior service credit and the
unrecognized actuarial gains. The adjustment to deferred income taxes includes
(i) the deferred income tax effect of the estimated purchase price allocated to
property and equipment and accrued OPEB costs and (ii) the effect of adjusting
the deferred income taxes separately-recognized by Tremont (principally an
elimination of a deferred income tax asset valuation allowance
separately-recognized by Tremont which Valhi does not believe is required to be
recognized at the Valhi level under the "more-likely-than-not" recognition
criteria).
Assuming the merger transactions had been completed as of January 1, 2002,
the Company would have reported a net loss of $3.5 million, or $.03 per diluted
share, in 2002. Such pro forma effect on the Company's reported net income in
2003 was not material.
As noted above, the Company's proportional interest in shares of Valhi
common stock held by NL are reported as treasury stock in the Company's
consolidated balance sheet. As a result of the merger transactions discussed
above, the acquisition of minority interest in Tremont effectively resulted in
an increase in the Company's overall ownership of NL due to Tremont's 21%
ownership interest in NL. Accordingly, as a result of the merger transactions
noted above, the Company also recognized a $7.6 million increase in its treasury
stock attributable to the shares of Valhi common stock held by NL. At December
31, 2003 and 2004, the amount reported as treasury stock, at cost, in the
Company's consolidated balance sheet includes an aggregate of $37.9 million
attributable to the 4.7 million shares of Valhi common stock held by NL (or 85%
of NL's aggregate original cost basis in such shares of $44.8 million).
CompX International Inc. At the beginning of 2002, the Company held 69% of
CompX's common stock. Of such 69%, 66% was held by Valcor, Inc., a wholly-owned
subsidiary of Valhi, and 3% was owned by Valhi directly. Prior to September
2004, the Company's aggregate ownership in CompX was reduced to 68% due to
CompX's issuance of shares of its common stock upon the exercise of options to
purchase CompX common stock. On September 24, 2004, NL completed the acquisition
of the CompX shares previously held by Valhi and Valcor at a purchase price of
$16.25 per share, or an aggregate of $168.6 million. The purchase price was paid
by NL's transfer to Valhi and Valcor of an aggregate $168.6 million of NL's $200
million long-term note receivable from Kronos (which long-term note was
eliminated in the preparation of the Company's consolidated financial
statements). The acquisition was approved by a special committee of NL's board
of directors comprised of directors who were not affiliated with Valhi, and such
special committee retained their own legal and financial advisors who rendered
an opinion to the special committee that the purchase price was fair, from a
financial point of view, to NL. NL's acquisition was accounted for under GAAP as
a transfer of net assets among entities under common control at carryover basis,
and such transaction had no effect on the Company's consolidated financial
statements.
Effective October 1, 2004, NL and TIMET contributed shares of CompX common
stock representing 68% and 15%, respectively, of CompX's outstanding common
stock to newly-formed CompX Group in return for their 82.4% and 17.6% ownership
interest in CompX Group, respectively, and CompX Group became the owner of the
83% of CompX that NL and TIMET had previously owned in the aggregate. These
CompX shares are the sole asset of CompX Group. CompX Group recorded the shares
of CompX received from NL at NL's carryover basis. The shares of CompX
contributed to CompX Group by TIMET are excluded from the Company's consolidated
investment in CompX. See Note 2.
Waste Control Specialists LLC. In 1995, the Company acquired a 50% interest
in newly-formed Waste Control Specialists LLC. The Company's ownership of Waste
Control Specialists is held by Andrews County Holding, Inc., a subsidiary of
Valhi. The Company contributed $25 million to Waste Control Specialists at
various dates through early 1997 for its 50% interest. The Company contributed
an additional aggregate $50 million to Waste Control Specialists' equity during
1997 through 2000, thereby increasing its membership interest from 50% to 90%. A
substantial portion of such equity contributions were used by Waste Control
Specialists to reduce the then-outstanding balance of its revolving intercompany
borrowings from the Company. At formation in 1995, the other owner of Waste
Control Specialists, KNB Holdings, Ltd., contributed certain assets, primarily
land and certain operating permits for the facility site, and Waste Control
Specialists also assumed certain indebtedness of the other owner. The
liabilities of the other owner assumed by Waste Control Specialists in 1995
exceeded the carrying value of the assets contributed by the other owner.
Accordingly, all of Waste Control Specialists' cumulative net losses to date
accrued to the Company for financial reporting purposes. See Note 13.
Andrews County had also previously loaned approximately $1.5 million to an
individual who controlled KNB Holdings, and such loan was collateralized by KNB
Holdings' subordinated 10% membership interest in Waste Control Specialists.
During 2004, KNB Holdings entered into an agreement with Andrews County in
which, among other things, Andrews County acquired the remaining 10% ownership
interest in Waste Control Specialists and the outstanding balance of such loan
($2.5 million, including accrued and unpaid interest), was cancelled. As a
result, Waste Control Specialists became wholly owned by Andrews County. Valhi
owns 100% of the outstanding common stock of Andrews County.
Other. NL (NYSE: NL), Kronos (NYSE: KRO), CompX (NYSE: CIX) and TIMET
(NYSE: TIE) each file periodic reports with the Securities and Exchange
Commission ("SEC") pursuant to the Securities Exchange Act of 1934, as amended.
Note 4 - Accounts and other receivables:
December 31,
2003 2004
---- ----
(In thousands)
Accounts receivable $187,256 $219,764
Notes receivable 2,026 1,993
Allowance for doubtful accounts (4,649) (3,826)
-------- --------
$184,633 $217,931
Note 5 - Marketable securities:
December 31,
2003 2004
---- ----
(Restated) (Restated)
(In thousands)
Current assets - available for sale
restricted debt securities $ 6,147 $ 9,446
======== ========
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC $250,000 $250,000
Restricted debt securities 6,870 6,725
Other common stocks 71 45
-------- --------
$256,941 $256,770
Amalgamated. Prior to 2002, 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.
When the Company transferred control of such operations to Snake River in return
of its interest in the LLC, the Company recognized a gain in earnings equal to
the difference between $250 million (the fair value of the Company's investment
in the LLC as evidenced by its $250 million redemption price, as discussed
below) and the $34 million cost basis of the net assets contributed to the LLC,
net of applicable deferred income taxes. Therefore, the cost basis of the
Company's investment in the LLC is $250 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 2002
when Snake River obtained an equal amount of third-party term loan financing.
After such repayments, $80 million principal amount of Valhi's loans to Snake
River remain outstanding. See Notes 8 and 10.
The Company and Snake River share in distributions from the LLC up to an
aggregate of $26.7 million per year (the "base" level), with a preferential 95%
share going to the Company. To the extent the LLC's distributions are below this
base level in any given year, the Company is entitled to an additional 95%
preferential share of any future annual LLC distributions in excess of the base
level until such shortfall is recovered. Under certain conditions, the Company
is entitled to receive additional cash distributions from the LLC, including
amounts discussed in Note 8. The Company may, at its option, require the LLC to
redeem the Company's interest in the LLC beginning in 2010, and the LLC has the
right to redeem the Company's interest in the LLC beginning in 2027. The
redemption price is generally $250 million plus the amount of certain
undistributed income allocable to the Company. In the event the Company requires
the LLC to redeem the Company's interest in the LLC, Snake River has the right
to accelerate the maturity of and call Valhi's $250 million loans from Snake
River.
The LLC Company Agreement contains certain restrictive covenants intended
to protect the Company's interest in the LLC, including limitations on capital
expenditures and additional indebtedness of the LLC. The Company also has the
ability to temporarily take control of the LLC in the event the Company's
cumulative distributions from the LLC fall below specified levels. As a
condition to exercising temporary control, the Company would be required to
escrow funds in amounts up to the next three years of debt service of Snake
River's third-party term loan (an aggregate of $22 million at December 31, 2004)
unless the Company and Snake River's third-party lender otherwise mutually
agree. Through December 31, 2004, the Company's cumulative distributions from
the LLC had not fallen below the specified levels.
Prior to 2002, 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 and 2003,
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, 2004, 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, with fair value determined
to be the $250 million redemption price of the Company's investment in the LLC.
The Company also provides certain services to the LLC. See Note 17. The Company
does not expect to report a gain in earnings for financial reporting purposes at
the time its LLC interest is redeemed, as the redemption price of $250 million
is expected to equal the carrying value of its investment in the LLC at the time
of redemption.
Other. During 2003, Valhi sold approximately 2,500 shares of Halliburton
Company common stock in market transactions for aggregate proceeds of
approximately $50,000. The aggregate cost of the debt securities, restricted
pursuant to the terms of one of NL's environmental special purpose trusts
discussed in Note 1, approximates their net carrying value at December 31, 2003
and 2004. The aggregate cost of other noncurrent available-for-sale securities
is nominal at December 31, 2003 and 2004. See Note 12.
Note 6 - Inventories:
December 31,
2003 2004
---- ----
(In thousands)
Raw materials:
Chemicals $ 61,960 $ 45,961
Component products 6,170 8,193
-------- --------
68,130 54,154
-------- --------
In process products:
Chemicals 19,854 16,612
Component products 10,852 10,827
-------- --------
30,706 27,439
-------- --------
Finished products:
Chemicals 148,047 131,161
Component products 9,166 9,696
-------- --------
157,213 140,857
Supplies (primarily chemicals) 37,064 40,964
-------- --------
$293,113 $263,414
Note 7 - Investment in affiliates:
December 31,
2003 2004
---- ----
(In thousands)
TIMET:
Common stock $ 20,357 $ 44,514
Preferred stock - 183
Debt securities 265 -
-------- -----
20,622 44,697
Ti02 manufacturing joint venture 129,010 120,251
Basic Management and Landwell 12,186 13,867
-------- --------
$161,818 $178,815
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
both required to purchase one-half of the TiO2 produced by LPC. LPC 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. Kronos' share of the joint ventures production costs
are reported as cost of sales as the related Ti02 acquired from LPC is sold.
Distributions from LPC, which generally relate to excess cash generated by LPC
from its non-cash production costs, and contributions to LPC, which generally
relate to cash required by LPC when it builds working capital, are reported as
part of cash generated by operating activities in the Company's Consolidated
Statements of Cash Flows. Such distributions are reported net of any
contributions made to LPC during the periods. Net distributions of $8.0 million
in 2002, $900,000 in 2003 and $8.6 million in 2004 are stated net of
contributions of $14.2 million in 2002, $13.1 million in 2003 and $15.6 million
in 2004.
LPC's net sales aggregated $186.3 million in 2002, $202.9 million in 2003
and $210.4 million in 2004, of which $92.4 million, $101.3 million and $104.9
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, 2004, LPC reported total assets and partners' equity of
$269.8 million and $243.3 million, respectively (2003 - $284.0 million and
$260.8 million, respectively). Approximately 80% of LPC's assets at December 31,
2003 and 2004 are comprised of property and equipment. LPC's liabilities at
December 31, 2003 and 2004 are current. LPC has no indebtedness at December 31,
2003 and 2004.
TIMET. At December 31, 2004, the Company held 6.5 million shares of TIMET
with a quoted market price of $24.14 per share, or an aggregate market value of
$157 million (2003 - 6.5 million shares with an aggregate market value of $68
million). In February 2003, TIMET effected a reverse split of its common stock
at a ratio of one share of post-split common stock for each outstanding ten
shares of pre-split common stock, and in the third quarter of 2004 TIMET
effected a 5:1 split of its common stock. Such stock splits had no financial
statement impact to the Company, and the Company's ownership interest in TIMET
did not change as a result of such splits. The share disclosures related to
TIMET common stock as of December 31, 2003 have been adjusted to give effect to
the 5:1 split in 2004.
At December 31, 2004, TIMET reported total assets of $665.5 million and
stockholders' equity of $379.7 million (2003 - $567.4 million and $158.8
million, respectively). TIMET's total assets at December 31, 2004 include
current assets of $343.6 million, property and equipment of $228.2 million,
marketable securities of $47.2 million and investment in joint ventures of $22.6
million (2003 - $276.0 million, $239.2 million, nil and $22.5 million,
respectively). TIMET's total liabilities at December 31, 2004 include current
liabilities of $162.2 million, capital lease obligations of $.2 million, accrued
OPEB and pension costs aggregating $92.2 million and debt payable to TIMET
Capital Trust I (the subsidiary of TIMET that issued the convertible preferred
securities) of $12.0 million (2003 - $77.8 million, $9.8 million, $76.0 million
and $207.5 million, respectively). During 2004, TIMET reported net sales of
$501.8 million, operating income of $35.3 million and income before cumulative
effect of change in accounting principle of $39.9 million (2003 - net sales of
$385.3 million, operating income attributable to common stockholders of $5.4
million and a loss before cumulative effect of change in accounting principle
attributable to common stockholders of $12.9 million; 2002 - net sales of $366.5
million, an operating loss of $20.8 million and a loss before cumulative effect
of change in accounting principle attributable to common stockholders of $67.2
million).
The Company's equity in losses of TIMET in 2002 includes a $15.7 million
impairment provision for an other than temporary decline in the value of
Tremont's investment in TIMET. In determining the amount of the impairment
charge, Tremont considered, among other things, then-recent ranges of TIMET's
NYSE market price and estimates of TIMET's future operating losses that would
further reduce Tremont's carrying value of its investment in TIMET as it records
additional equity in losses of TIMET.
During 2003, the Company purchased 14,700 of TIMET's 6.625% convertible
preferred securities (with an aggregate liquidation amount of $735,000) for an
aggregate cost of $238,000, including expenses. The securities were issued by
TIMET Capital Trust I, a wholly-owned subsidiary of TIMET, and have been
guaranteed by TIMET. Such securities represented less than 1% of the aggregate 4
million convertible preferred securities that are outstanding. Each share of
TIMET's convertible preferred securities is convertible into .1339 shares of
TIMET's common stock. TIMET has the right to defer payments of distributions on
the convertible preferred securities for up to 20 consecutive quarters, although
distributions continue to accrue at the coupon rate during the deferral period
on the liquidation amount and any unpaid distributions. In October 2002, TIMET
exercised such deferral rights starting with the quarterly distribution payable
in December 2002. In April 2004, TIMET paid all previously-deferred
distributions with respect to the convertible preferred debt securities and
resumed quarterly distributions with the next scheduled distribution in June
2004. The convertible preferred securities mature in 2026, and do not require
any amortization prior to maturity. The convertible preferred securities are
accounted for as available-for-sale marketable securities carried at estimated
fair value. At December 31, 2003, the quoted market price of the convertible
preferred securities was $33.00 per share, the amortized cost basis of the
convertible preferred securities approximated their carrying amount, and Contran
held an additional 1.6 million shares of such convertible preferred securities.
In August 2004, TIMET completed an exchange offer in which approximately
3.9 million shares of the outstanding convertible preferred debt securities
issued by TIMET Capital Trust I were exchanged for an aggregate of 3.9 million
shares of a newly-created Series A Preferred Stock of TIMET at the exchange rate
of one share of Series A Preferred Stock for each convertible preferred debt
security. Dividends on the Series A shares accumulate at the rate of 6 3/4% of
their liquidation value of $50 per share, and are convertible into shares of
TIMET common stock at the rate of one and two-thirds of a share of TIMET common
stock per Series A share. The Series A shares are not mandatorily redeemable,
but are redeemable at the option of TIMET in certain circumstances. Valhi
exchanged its 14,700 shares of the convertible preferred debt securities in the
exchange offer for 14,700 Series A shares, and recognized a nominal gain related
to such exchange. The Series A shares are accounted for as available-for-sale
marketable securities carried at estimated fair value. At December 31, 2004, the
cost basis of the Series A shares approximated their carrying amount, and Mr.
Simmons' spouse held an additional 41% of such Series A shares.
Basic Management and Landwell. At December 31, 2003 and 2004, other joint
ventures, held by TRECO LLC, a wholly-owned subsidiary of Tremont, 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, which is actively
engaged in efforts to develop certain real estate. Basic Management owns an
additional 50% interest in Landwell.
At September 30, 2004, the combined balance sheets of Basic Management and
Landwell reflected total assets and partners' equity of $124.8 million and $57.3
million, respectively (2003 - $91.9 million and $49.8 million, respectively).
The combined total assets at September 30, 2004 include current assets of $44.4
million, property and equipment of $15.9 million, prepaid costs and expenses of
$19.3 million, land and development costs of $16.7 million, long-term notes and
other receivables of $4.6 million and investment in undeveloped land and water
rights of $21.9 million (2003 - $26.6 million, $16.7 million, $19.1 million,
$21.5 million, $5.4 million and $2.2 million, respectively). Combined total
liabilities at September 30, 2004 include current liabilities of $31.2 million,
long-term debt of $29.8 million and deferred income taxes of $5.7 million (2003
- $17.8 million, $17.2 million and $6.2 million, respectively).
During the 12 months ended September 30, 2004, Basic Management and
Landwell reported combined revenues of $27.5 million, income before income taxes
of $8.9 million and net income of $7.7 million (2003 - $20.1 million, $3.3
million and $2.9 million, respectively; 2002 - $20.7 million, $1.9 million and
$1.7 million, respectively). Landwell is treated for federal income tax purposes
as a partnership, and accordingly the combined results of operations of Basic
Management and Landwell include a provision for income taxes on Landwell's
earnings only to the extent that such earnings accrue to Basic Management.
Other. The Company has certain transactions with certain of these
affiliates, as more fully described in Note 17. The Company records equity in
earnings of Basic Management and Landwell on a one-quarter lag because their
financial statements are generally not available on a timely basis. The Company
records equity in earnings for all other equity method investees without such a
lag because their financial statements are available on a timely basis.
Note 8 - Other noncurrent assets:
December 31,
2003 2004
---- ----
(In thousands)
Loans and other receivables:
Snake River Sugar Company:
Principal $ 80,000 $ 80,000
Interest 33,102 38,294
Other 5,490 3,151
-------- --------
118,592 121,445
Less current portion 2,026 1,993
-------- --------
Noncurrent portion $116,566 $119,452
======== ========
Other assets:
IBNR receivables $ 11,788 $11,646
Deferred financing costs 10,569 10,933
Waste disposal site operating permits 1,654 9,269
Refundable insurance deposit 1,972 2,483
Restricted cash equivalents 488 494
Other 13,150 17,501
-------- --------
$ 39,621 $ 52,326
======== ========
Valhi's loan to Snake River is subordinate to Snake River's third-party
senior term loan and bears interest at a fixed rate of 6.49%, 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 the maturity of
the senior term loan in 2007. The Company does not currently expect to receive
any significant debt service payments from Snake River during 2005, and
accordingly all accrued and unpaid interest has been classified as a noncurrent
asset as of December 31, 2004. 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, 2004,
and the Company does not currently expect it will be required to pledge any such
amount during 2005.
Prior to 2002, the Company amended its loan to Snake River to, among other
things, reduce the interest rate from 12.99% to 6.49%. The reduction of interest
income resulting from such interest rate reduction 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, 2004, 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 current scheduled maturity date of April 2007.
The IBNR receivables relate to certain insurance liabilities, the risk of
which has been reinsured with certain third party insurance carriers. The
insurance liabilities which have been reinsured are reported as part of
noncurrent accrued insurance claims and expenses. See Notes 11 and 17.
Note 9 - Goodwill and other intangible assets:
Goodwill. Changes in the carrying amount of goodwill during the past three
years is presented in the table below. Substantially all of the goodwill related
to the chemicals operating segment was generated from the Company's various step
acquisitions of its interest in NL and Kronos. Substantially all of the goodwill
related to the component products operating segment was generated from CompX's
acquisitions of certain business units completed prior to 2002.
Operating segment
Component
Chemicals products Total
(In millions)
Balance at December 31, 2001 $307.2 $ 41.9 $349.1
Goodwill acquired during the year 14.1 - 14.1
Changes in foreign exchange rates - 1.8 1.8
--- ------ ------
Balance at December 31, 2002 321.3 43.7 365.0
Goodwill acquired during the year 10.0 - 10.0
Changes in foreign exchange rates - 2.6 2.6
--- ------ ------
Balance at December 31, 2003 331.3 46.3 377.6
Goodwill acquired during the year 8.4 - 8.4
Elimination of deferred income taxes - (26.9) (26.9)
Impairment charge - (6.5) (6.5)
Changes in foreign exchange rates - 1.5 1.5
--- ------ ------
Balance at December 31, 2004 $339.7 $ 14.4 $354.1
====== ====== ======
Upon adoption of SFAS No. 142 effective January 1, 2002 (see Note 19), the
goodwill related to the chemicals operating segment was assigned to the
reporting unit (as that term is defined in SFAS No. 142) consisting of Kronos in
total, and the goodwill related to the components product operating segment was
assigned to three reporting units within that operating segment, one consisting
of CompX's security products operations, one consisting of CompX's European
operations and one consisting of CompX's Canadian and Taiwanese operations.
As discussed in Note 1, the Company provides deferred income taxes for the
expected future tax consequences of temporary differences between the income tax
and financial reporting carrying amounts of investments in subsidiaries that are
not members of the Contran Tax Group. Also as discussed in Note 1, prior to
October 2004 CompX was not a member of the Contran Tax Group, and the Company
provided deferred income taxes with respect to its investment in CompX.
Effective October 2004, CompX became a member of the Contran Tax Group, and the
Company no longer provides such deferred income taxes. In accordance with GAAP,
and as a result of CompX becoming a member of the Contran Tax Group, a net $26.9
million deferred tax liability, previously provided with respect to the
Company's investment in CompX, was eliminated through a reduction in goodwill at
December 31, 2004.
In December 2004, CompX's board of directors committed to a formal plan to
dispose of CompX's European operations. As a result, the Company recognized a
non-cash charge of $6.5 million in the fourth quarter of 2004, representing an
impairment of goodwill associated with such operations, to write-down the
Company's investment in such operations to its estimated realizable value based
upon the expected net proceeds resulting from the sale of such operations. See
Note 22.
Other intangible assets.
December 31,
2003 2004
- ----- ------
(In millions)
Patents:
Cost $3.4 $3.4
Less accumulated amortization 1.5 1.7
---- ----
Net 1.9 1.7
---- ----
Customer list:
Cost 2.6 2.6
Less accumulated amortization .7 1.1
---- ----
Net 1.9 1.5
---- ----
$3.8 $3.2
==== ====
The patents intangible asset relates to the estimated fair value of certain
patents acquired in connection with the acquisition of certain business units by
CompX, and the customer list intangible asset relates to NL's acquisition of EWI
discussed in Note 3. The patents intangible asset is amortized by the
straight-line method over the lives of the patents (approximately 9 years
remaining at December 31, 2004), with no assumed residual value at the end of
the life of the patents. The customer list intangible asset is amortized by the
straight-line method over the estimated seven-year life of such intangible asset
(approximately 4 years remaining at December 31, 2004), with no assumed residual
value at the end of the life of the intangible asset. Amortization expense of
intangible assets was approximately $600,000 in each of 2002, 2003 and 2004, and
amortization expense of intangible assets is expected to be approximately
$600,000 in each of calendar 2005 through 2008 and $250,000 in 2009.
Note 10 - Long-term debt:
December 31,
2003 2004
---- ----
(In thousands)
Valhi:
Snake River Sugar Company $250,000 $250,000
Bank credit facility 5,000 -
-------- -----
255,000 250,000
-------- --------
Subsidiaries:
Kronos International Senior Secured Notes 356,136 519,225
Kronos European bank credit facility - 13,622
CompX bank credit facility 26,000 -
Other 789 1,090
-------- --------
382,925 533,937
-------- --------
637,925 783,937
Less current maturities 5,392 14,412
-------- --------
$632,533 $769,525
Valhi. Valhi's $250 million in loans from Snake River Sugar Company bear
interest at a weighted average fixed interest rate of 9.4%, are collateralized
by the Company's interest in The Amalgamated Sugar Company LLC and are due in
January 2027. Currently, these loans are nonrecourse to Valhi. Up to $37.5
million principal amount of such loans will become recourse to Valhi to the
extent that the balance of Valhi's loan to Snake River (including accrued
interest) becomes less than $37.5 million. Under certain conditions, Snake River
has the ability to accelerate the maturity of these loans. See Notes 5 and 8.
At December 31, 2004, Valhi has a $100 million revolving bank credit
facility which matures in October 2005, generally bears interest at LIBOR plus
1.5% (for LIBOR-based borrowings) or prime (for prime-based borrowings), and is
collateralized by 15 million shares of Kronos common stock held by Valhi. The
agreement limits dividends and additional indebtedness of Valhi and contains
other provisions customary in lending transactions of this type. In the event of
a change of control of Valhi, as defined, the lenders would have the right to
accelerate the maturity of the facility. The maximum amount which may be
borrowed under the facility is limited to one-third of the aggregate market
value of the shares of Kronos common stock pledged as collateral. Based on
Kronos' December 31, 2004 quoted market price of $40.75 per share, the shares of
Kronos common stock pledged under the facility provide more than sufficient
collateral coverage to allow for borrowings up to the full amount of the
facility. At December 31, 2004, Valhi would only have become limited to
borrowing less than the full $100 million amount of the facility, or would be
required to pledge additional collateral if the full amount of the facility had
been borrowed, if the quoted market price of Kronos' common stock was less than
$20 per share. At December 31, 2004, no amounts have been borrowed, letters of
credit aggregating $4.1 million had been issued and $95.9 million was available
for borrowing under the facility.
Kronos and its subsidiaries. In June 2002, Kronos International ("KII"),
which conducts Kronos' TiO2 operations in Europe, issued at par value euro 285
million principal amount ($280 million when issued) of its 8.875% Senior Secured
Notes due 2009, and in November 2004 KII issued at 107% of par an additional
euro 90 million principal amount ($130 million when issued) of the KII Senior
Secured Notes. The KII Senior Secured Notes are collateralized by a pledge of
65% of the common stock or other ownership interests of certain of KII's
first-tier operating subsidiaries. The KII Senior Secured Notes are issued
pursuant to an indenture which contains a number of covenants and restrictions
which, among other things, restricts the ability of KII and its subsidiaries to
incur debt, incur liens, pay dividends or merge or consolidate with, or sell or
transfer all or substantially all of their assets to, another entity. The KII
Senior Secured Notes are redeemable, at KII's option, on or after December 30,
2005 at redemption prices ranging from 104.437% of the principal amount,
declining to 100% on or after December 30, 2008. In addition, on or before June
30, 2005, KII may redeem up to 35% of its Senior Secured Notes with the net
proceeds of a qualified public equity offering at 108.875% of the principal
amount. In the event of a change of control of KII, as defined, KII would be
required to make an offer to purchase its Senior Secured Notes at 101% of the
principal amount. KII would also be required to make an offer to purchase a
specified portion of its Senior Secured Notes at par value in the event KII
generates a certain amount of net proceeds from the sale of assets outside the
ordinary course of business, and such net proceeds are not otherwise used for
specified purposes within a specified time period. At December 31, 2003 and
2004, the market price of the KII Senior Secured Notes was approximately euro
1,000 and euro 1,075, respectively, per euro 1,000 principal amount. At December
31, 2004, the carrying amount of the KII Senior Secured Notes includes euro 6.2
million ($8.4 million) of unamortized premium associated with the November 2004
issuance.
Also in June 2002, KII's operating subsidiaries in Germany, Belgium and
Norway entered into a euro 80 million secured revolving bank credit facility
that matures in June 2005. Borrowings may be denominated in euros, Norwegian
kroners or U.S. dollars, and bear interest at the applicable interbank market
rate plus 1.75%. The facility also provides for the issuance of letters of
credit up to euro 5 million. The KII bank credit facility is collateralized by
the accounts receivable and inventories of the borrowers, plus a limited pledge
of all of the other assets of the Belgian borrower. The KII bank credit facility
contains certain restrictive covenants that, among other things, restricts the
ability of the borrowers to incur debt, incur liens, pay dividends or merge or
consolidate with, or sell or transfer all or substantially all of their assets
to, another entity. At December 31, 2004, euro 10 million ($13.6 million) was
outstanding at an interest rate of 3.85% and the equivalent of $92.6 million was
available for additional borrowing by the subsidiaries.
In September 2002, certain of Kronos' U.S. subsidiaries entered into a $50
million revolving credit facility (nil outstanding at December 31, 2004) that
matures in September 2005. The facility is collateralized by the accounts
receivable, inventories and certain fixed assets of the borrowers. Borrowings
under this facility are limited to the lesser of $45 million or a
formula-determined amount based upon the accounts receivable and inventories of
the borrowers. Borrowings bear interest at either the prime rate or rates based
upon the eurodollar rate. The facility contains certain restrictive covenants
which, among other things, restricts the abilities of the borrowers to incur
debt, incur liens, pay dividends in certain circumstances, sell assets or enter
into mergers. At December 31, 2004, no amounts were outstanding and $38 million
was available for borrowing under the facility.
In January 2004, Kronos' Canadian subsidiary entered into a Cdn. $30
million revolving credit facility that matures in January 2009. The facility is
collateralized by the accounts receivable and inventories of the borrower.
Borrowings under this facility are limited to the lesser of Cdn. $26 million or
a formula-determined amount based upon the accounts receivable and inventories
of the borrower. Borrowings bear interest at rates based upon either the
Canadian prime rate, the U.S. prime rate or LIBOR. The facility contains certain
restrictive covenants which, among other things, restricts the ability of the
borrower to incur debt, incur liens, pay dividends in certain circumstances,
sell assets or enter into mergers. At December 31, 2004, no amounts were
outstanding and the equivalent of $8 million was available for additional
borrowing by the subsidiary.
Under the cross-default provisions of the KII Senior Secured Notes, the
notes may be accelerated prior to their stated maturity if KII or any of KII's
subsidiaries default under any other indebtedness in excess of $20 million due
to a failure to pay such other indebtedness at its due date (including any due
date that arises prior to the stated maturity as a result of a default under
such other indebtedness). Under the cross-default provisions of KII's European
revolving credit facility, any outstanding borrowings under such facility may be
accelerated prior to their stated maturity if the borrowers or KII default under
any other indebtedness in excess of euro 5 million due to a failure to pay such
other indebtedness at its due date (including any due date that arises prior to
the stated maturity as a result of a default under such other indebtedness).
Under the cross-default provisions of the U.S. revolving credit facility, any
outstanding borrowing under such facility may be accelerated prior to their
stated maturity in the event of the bankruptcy of Kronos. The Canadian revolving
credit facility contains no cross-default provisions. The European, U.S. and
Canadian revolving credit facilities each contain provisions that allow the
lender to accelerate the maturity of the applicable facility in the event of a
change of control, as defined, of the applicable borrower. In the event any of
these cross-default or change-of-control provisions become applicable, and such
indebtedness is accelerated, Kronos would be required to repay such indebtedness
prior to their stated maturity.
NL. In 2002, NL redeemed $194 million principal amount of the NL Senior
Secured Notes at par value, using available cash on hand ($25 million) and a
portion of the net proceeds from the issuance of the KII Senior Secured Notes.
In accordance with the terms of the indenture governing the NL Senior Secured
Notes, on June 28, 2002, NL irrevocably placed on deposit with the NL Senior
Secured Note trustee funds in an amount sufficient to pay in full the redemption
price plus all accrued and unpaid interest due on the July 28, 2002 redemption
date for the $169 million of NL Senior Notes redeemed using a portion of the net
proceeds from the issuance of the KII Senior Notes. Immediately thereafter, NL
was released from its obligations under such indenture, the indenture was
discharged and all collateral was released to NL. Because NL had been released
as the primary obligor under the indenture as of June 30, 2002, the NL Senior
Secured Notes were eliminated from the balance sheet as of that date along with
the funds placed on deposit with the trustee to effect the July 28, 2002
redemption. NL recognized a loss on the early extinguishment of debt of
approximately $2 million in the second quarter of 2002, consisting primarily of
the interest on the NL Senior Secured Notes for the period from July 1 to July
28, 2002. Such loss is recognized as a component of interest expense.
CompX. At December 31, 2004, CompX has a $47.5 million secured revolving
bank credit facility maturing in January 2006 with interest at rates based on
the prime rate or LIBOR. The credit facility is collateralized by substantially
all of CompX's U.S. tangible assets and a pledge of at least 65% of the
ownership interests in CompX's first-tier foreign subsidiaries. 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, pay dividends or merge or consolidate
with, or transfer all or substantially all of their assets, to another entity.
In the event of a change of control of CompX, as defined, the lenders would have
the right to accelerate the maturity of the facility. CompX would also be
required under certain conditions to use the net proceeds from the sale of
assets outside the ordinary course of business to reduce outstanding borrowings
under the facility, and such a transaction would also result in a permanent
reduction of the size of the facility. At December 31, 2004, no amounts were
outstanding and $47.5 million was available for additional borrowing under the
facility.
Other indebtedness. In February 2003, Valcor redeemed for par value the
remaining $2.4 million principal amount of its 9 5/8% Senior Notes due November
2003.
Aggregate maturities of long-term debt at December 31, 2004:
Years ending December 31, Amount
(In thousands)
2005 $ 14,412
2006 240
2007 57
2008 3
2009 519,225
2010 and thereafter 250,000
--------
$783,937
Restrictions. Certain of the credit facilities described above require the
respective borrower to maintain minimum levels of equity, require the
maintenance of certain financial ratios, limit dividends and additional
indebtedness and contain other provisions and restrictive covenants customary in
lending transactions of this type. At December 31, 2004, none of the net assets
of Valhi's consolidated subsidiaries were restricted.
At December 31, 2004, amounts available for the payment of Valhi dividends
pursuant to the terms of Valhi's revolving bank credit facility aggregated $.06
per Valhi share outstanding per quarter, plus an additional $125 million.
Note 11 - Accrued liabilities:
December 31,
2003 2004
---- ----
(In thousands)
Current:
Employee benefits $ 48,827 $ 53,295
Environmental costs 24,956 21,316
Deferred income 4,699 5,276
Interest 383 243
Other 51,226 50,989
-------- --------
$130,091 $131,119
Noncurrent:
Insurance claims and expenses $ 21,729 $ 22,718
Employee benefits 9,705 5,380
Deferred income 1,634 1,427
Asset retirement obligations 1,670 1,357
Other 8,596 10,179
-------- --------
$ 43,334 $ 41,061
======== ========
The asset retirement obligations are discussed in Note 19. The risks
associated with certain of the Company's accrued insurance claims and expenses
have been reinsured, and the related IBNR receivable is recognized as a
noncurrent asset. See Note 8.
Note 12 - Other income, net:
Years ended December 31,
2002 2003 2004
---- ---- ----
(In thousands)
Securities earnings:
Dividends and interest $35,642 $33,724 $34,576
Securities transactions, net 6,413 487 2,113
------- ------- -------
42,055 34,211 36,689
Contract dispute settlement - - 6,289
Legal settlement gains, net 5,225 823 552
Currency transactions, net 4,997 (8,288) (3,764)
Noncompete agreement income 4,000 333 -
Disposal of property and equipment, net (259) 9,845 (855)
Other, net 4,878 4,503 5,333
------- ------- -------
$60,896 $41,427 $44,244
======= ======= =======
Dividends and interest income includes distributions from The Amalgamated
Sugar Company LLC of $23.6 million in 2002, $23.7 million in 2003 and $23.8
million in 2004, and interest income of $5.2 million in each of 2002, 2003 and
2004 related to the Company's loan to Snake River Sugar Company. See Notes 5 and
8. Dividends and interest income also includes interest of $1.3 million in 2002,
$1.4 million in 2003 and $1.5 million in 2004 of interest on certain
intercompany receivables of CompX related to its operations in The Netherlands.
The related interest expense on such intercompany indebtedness is included as a
component of discontinued operations. See Note 22.
Net securities transactions gains in 2004 includes a $2.2 million gain
related to NL's sale of shares of Kronos common stock in market transactions.
See Note 3. Net securities transactions gains in 2002 are comprised of (i) a
$3.0 million unrealized gain related to the reclassification of 621,000 shares
of Halliburton common stock from available-for-sale to trading securities and
(ii) a $3.4 million gain relates to changes in the market value of the
Halliburton common stock classified as trading securities.
The contract dispute settlement relates to Kronos' settlement with a
customer. As part of the settlement, the customer agreed to make payments to
Kronos through 2007 aggregating $7.3 million. The $6.3 million gain recognized
in 2004 represents the present value of the future payments to be paid by the
customer to Kronos. Of such $7.3 million, $1.5 million was paid to Kronos in the
second quarter of 2004, $1.75 million is due in each of the second quarter of
2005 and 2006 and $2.25 million is due in the second quarter of 2007. At
December 31, 2004, the present value of the remaining amounts due to be paid to
Kronos aggregated approximately $5.1 million, of which $1.7 million is included
in accounts receivable and $3.4 million is included in other noncurrent assets.
The legal settlement gains relate to settlements with certain of NL's
former insurance carriers. These and similar NL settlements in 2000 and 2001
resolved court proceedings in which NL sought reimbursement from the carriers
for legal defense expenditures and indemnity coverage for certain of its
environmental remediation expenditures. Proceeds from substantially all of such
settlements NL reached in 2000 and 2001 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, 2003 and 2004, restricted
cash equivalents and debt securities include an aggregate of $24 million and $19
million, respectively, held by such special purpose trusts. See Note 18.
Net currency transaction gains in 2002 includes $6.3 million related to the
extinguishment of certain intercompany indebtedness of NL. Prior to June 28,
2002, KII had certain intercompany indebtedness payable to Kronos, a portion of
which was denominated in U.S. dollars, and a portion of which was denominated in
euro. Through June 19, 2002, such intercompany indebtedness was deemed to be of
a long-term nature for which settlement was not planned or anticipated in the
foreseeable future, and in accordance with GAAP, the foreign currency
transaction gains and losses related to such intercompany indebtedness were not
recognized in net income, but instead were reported as part of accumulated other
comprehensive income. On June 19, 2002, when the purchase agreement was entered
into in connection with KII's 2002 issuance of the KII Senior Secured Notes
discussed above in Note 10, the expectation that such intercompany indebtedness
was of a long-term nature was no longer applicable, as KII had stated that it
intended to use a portion of the net proceeds of such offering to repay such
intercompany indebtedness owed to Kronos. Accordingly, from the time period of
June 19, 2002 (the date the purchase agreement related to KII Senior Secured
Notes was executed) until June 28, 2002 (the closing date for the 2002 issuance
of the KII Senior Secured Note offering, and the date such intercompany
indebtedness was repaid), the foreign currency transaction gains and losses
related to such intercompany indebtedness during such time period, which
aggregated a net gain of $6.3 million, was recognized in net income in
accordance with GAAP.
Noncompete agreement income related to NL's agreement not to compete in the
specialty chemicals industry and was recognized in income ratably over the
five-year noncompete period that ended in January 2003. Net gains from the
disposal of property and equipment in 2002 includes $1.6 million related to the
sale of certain real estate held by Tremont. Net gains from the disposal of
property and equipment in 2003 includes $10.3 million related primarily to the
sale of certain real property of NL not associated with Kronos' TiO2 operations.
Note 13 - Minority interest:
December 31,
2003 2004
---- ----
(In thousands)
(Restated) (Restated)
Minority interest in net assets:
NL Industries $20,281 $ 51,662
Kronos Worldwide 11,076 29,569
CompX International 48,424 49,153
Subsidiary of NL 8,502 9,250
Subsidiary of Kronos 525 76
------- -------
$88,808 $139,710
Years ended December 31,
2002 2003 2004
---- ---- ----
(In thousands)
(Restated) (Restated) (Restated)
Minority interest in net earnings (losses) - continuing operations:
NL Industries $ 6,623 $ (8,149) $24,891
Kronos Worldwide - 246 19,659
Tremont Corporation (4,151) (217) -
CompX International 299 1,814 2,993
Subsidiary of NL 1,209 371 747
Subsidiary of Kronos 55 72 53
------- ------- -------
$ 4,035 $(5,863) $48,343
======= ======== =======
Kronos Worldwide. The Company commenced recognizing minority interest in
Kronos' net assets and net earnings following NL's December 2003 distribution of
a portion of the shares of Kronos common stock to its shareholders. See Note 3.
Subsidiary of NL. Minority interest in NL's subsidiary relates to NL's
majority-owned environmental management subsidiary, NL Environmental Management
Services, Inc. ("EMS"). EMS was established in 1998, at which time EMS
contractually assumed certain of NL's environmental liabilities. EMS' earnings
are based, in part, upon its ability to favorably resolve these liabilities on
an aggregate basis. The shareholders of EMS, other than NL, actively manage the
environmental liabilities and share in 39% of EMS' cumulative earnings. NL
continues to consolidate EMS and provides accruals for the reasonably estimable
costs for the settlement of EMS' environmental liabilities, as discussed in Note
18.
Tremont Corporation. The Company no longer reports minority interest in
Tremont's net assets or net earnings (losses) subsequent to the February 2003
mergers of Valhi and Tremont. 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 prior to the
time when Waste Control Specialists became a wholly-owned subsidiary of the
Company in the second quarter of 2004 have accrued to the Company for financial
reporting purposes. Accordingly, no minority interest in Waste Control
Specialists has been recognized in the Company's consolidated financial
statements.
Subsidiary of Kronos. Minority interest in Kronos' subsidiary relates to
Kronos' majority-owned subsidiary in France, which conducts Kronos' sales and
marketing activities in that country.
Discontinued operations. Minority interest in losses of discontinued
operations was $101,000 in 2002, $1.4 million in 2003 and $4.1 million in 2004.
See Note 22.
Note 14 - Stockholders' equity:
Shares of common stock
Issued Treasury Outstanding
(In thousands)
Balance at December 31, 2001 125,811 (10,570) 115,241
Issued 350 - 350
------- ------- -------
Balance at December 31, 2002 126,161 (10,570) 115,591
Issued:
Tremont merger 7,840 (2,981) 4,859
Other 26 - 26
Other - (290) (290)
------- ------- -------
Balance at December 31, 2003 134,027 (13,841) 120,186
Issued 25 - 25
Retired (9,857) 9,857 -
------- ------- ----
Balance at December 31, 2004 124,195 (3,984) 120,211
======= ======= =======
The shares of Valhi issued in 2003 pursuant to the Tremont merger are
discussed in Note 3. Other shares of Valhi common stock issued during 2002, 2003
and 2004 consist of (i) shares issued upon exercise of stock options and (ii)
stock awards issued to members of Valhi's board of directors.
During 2004, the Company cancelled 9.9 million shares of its common stock
that previously had been reported as treasury stock in the Company's
consolidated financial statements. Of such 9.9 million shares, 8.9 million
shares were held in treasury by Valhi, and 1 million shares had been held by a
wholly-owned subsidiary of Valhi. During 2004, these 1 million Valhi shares
previously held by a subsidiary of Valhi were distributed to Valhi and
cancelled. The aggregate $64.6 million cost of such treasury shares cancelled
was allocated to common stock at par value, additional paid in capital and
retained earnings in accordance with GAAP. Such cancellations had no impact on
the net Valhi shares outstanding for financial reporting purposes. The 4.0
million shares of treasury stock reported for financial reporting purposes at
December 31, 2004 represents the Company's proportional interest in 4.7 million
Valhi shares held by NL. Under Delaware Corporation Law, 100% (and not the
proportionate interest) of a parent company's shares held by a majority-owned
subsidiary of the parent are considered to be treasury stock. As a result, Valhi
common shares outstanding for financial reporting purposes differ from those
outstanding for legal purposes.
Valhi options. Valhi has an incentive stock option plan that provides for
the discretionary grant of, among other things, qualified incentive stock
options, nonqualified stock options, restricted common stock, stock awards and
stock appreciation rights. Up to five million shares of Valhi common stock may
be issued pursuant to this plan. Options are generally granted at a price not
less than fair market value on the date of grant, generally vest ratably over a
five-year period beginning one year from the date of grant and expire 10 years
from the date of grant. Restricted stock, when granted, is generally forfeitable
unless certain periods of employment are completed and held in escrow in the
name of the grantee until the restriction period expires. No stock appreciation
rights have been granted.
Outstanding options at December 31, 2004 represent less than 1% of Valhi's
outstanding shares at that date and expire at various dates through 2013, with a
weighted-average remaining term of 3.8 years. At December 31, 2004, options to
purchase 840,000 Valhi shares were exercisable at prices ranging from $6.38 to
$12.45 per share, or an aggregate amount payable upon exercise of $8.3 million.
All of such exercisable options are exercisable at various dates through 2013 at
prices lower than the Company's December 31, 2004 market price of $16.09 per
share. At December 31, 2004, options to purchase 35,000 shares become
exercisable during the first quarter of 2005, at which point all outstanding
options will be fully vested according to their original vesting schedule at
issuance, and an aggregate of 4.1 million shares were available for future
grants.
The following table sets forth changes in outstanding options during the
past three years under all Valhi option plans in effect during such periods.
Amount
Exercise payable
price per upon
Shares share exercise
(In thousands, except
per share amounts)
Outstanding at December 31, 2001 2,384 $4.96-$12.06 $18,644
Granted 8 12.45 100
Exercised (346) 4.96- 12.00 (2,564)
Canceled (865) 6.38 (5,517)
------ ----- -------
Outstanding at December 31, 2002 1,181 4.96- 12.45 10,663
Granted 8 10.05 80
Exercised (20) 9.50- 12.00 (210)
Canceled (76) 4.96- 6.56 (417)
------ ------------ -------
Outstanding at December 31, 2003 1,093 5.48- 12.45 10,116
Exercised (20) 5.72- 12.00 (177)
Canceled (198) 5.48- 12.45 (1,231)
------ ------------ -------
Outstanding at December 31, 2004 875 $6.38-$12.45 $ 8,708
====== ============ =======
Stock option plans of subsidiaries and affiliate. NL, Kronos, CompX and
TIMET each maintain plans which provide for the grant of options to purchase
their respective common stocks. Provisions of these plans vary by company.
Outstanding options to purchase common stock of NL, CompX and TIMET at December
31, 2004 are summarized below. There are no outstanding options to purchase
Kronos common stock at December 31, 2004.
Amount
Exercise payable
price per upon
Shares share exercise
(In thousands, except
per share amounts)
NL Industries 245 $ 2.66-$13.34 $ 2,401
CompX 562 10.00- 20.00 9,952
TIMET 534 3.32- 70.63 19,139
Other. The pro forma information included in Note 1, required by SFAS No.
123, "Accounting for Stock-Based Compensation," as amended, is based on an
estimation of the fair value of options issued subsequent to January 1, 1995
using the Black-Scholes stock option valuation model. The aggregate fair value
of the nominal number of Valhi options granted during 2002 and 2003 (no options
were granted during 2004) was not material. The Black-Scholes model was not
developed for use in valuing employee stock options, but was developed for use
in estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, it requires the use of subjective
assumptions including expectations of future dividends and stock price
volatility. Such assumptions are only used for making the required fair value
estimate and should not be considered as indicators of future dividend policy or
stock price appreciation. Because changes in the subjective assumptions can
materially affect the fair value estimate, and because employee stock options
have characteristics significantly different from those of traded options, the
use of the Black-Scholes option-pricing model may not provide a reliable
estimate of the fair value of employee stock options. The pro forma impact on
net income and basic earnings per share disclosed in Note 1 is not necessarily
indicative of future effects on net income or earnings per share. See also Note
21.
Note 15 - Income taxes:
Years ended December 31,
2002 2003 2004
---- ---- ----
(Restated) (Restated) (Restated)
(In millions)
Components of pre-tax income - income (loss) from continuing operations:
United States:
Contran Tax Group $(60.2) $(34.8) $ 75.7
CompX tax group (1.9) 6.3 6.1
------ ------ -------
(62.1) (28.5) 81.8
Non-U.S. subsidiaries 61.4 73.9 (3.7)
------ ------ -------
$ (.7) $ 45.4 $ 78.1
====== ====== =======
Expected tax expense (benefit), at U.S.
federal statutory income tax rate of 35% $ (.3) $ 15.9 $ 27.3
Non-U.S. tax rates (7.2) (1.5) (.3)
Incremental U.S. tax and rate differences
on equity in earnings (1.5) 106.8 93.0
Income tax on distribution of shares of Kronos - 22.5 2.5
Change in deferred income tax valuation
allowance, net .4 (7.2) (311.8)
Refund of prior year income taxes - (38.0) (2.5)
Change in Belgian income tax law (2.7) - -
U.S. state income taxes, net (1.8) (.6) 1.0
Tax contingency reserve adjustment, net 1.2 30.5 (16.5)
Nondeductible expenses 3.4 3.7 5.1
Other, net .9 1.8 7.8
------ ------ -------
$ (7.6) $ 133.9 $(194.4)
====== ======= =======
Components of income tax expense (benefit):
Currently payable (refundable):
U.S. federal and state $ (9.4) $ 15.2 $ .9
Non-U.S. 12.8 (34.0) 17.6
------ ----- -------
3.4 (18.8) 18.5
------ ------ -------
Deferred income taxes (benefit):
U.S. federal and state (11.3) 121.5 68.3
Non-U.S. .3 31.2 (281.2)
------- ----- -------
(11.0) 152.7 (212.9)
------- ------ -------
$ (7.6) $133.9 $(194.4)
====== ====== =======
Comprehensive provision for income taxes (benefit) allocable to:
Income from continuing operations $ (7.6) $ 133.9 $(194.4)
Discontinued operations (.2) (2.6) (4.6)
Cumulative effect of change in
accounting principle - .3 -
Additional paid-in-capital - 22.5 8.2
Other comprehensive income:
Marketable securities (1.6) 2.1 2.1
Currency translation 3.9 4.9 (8.2)
Pension liabilities (16.0) (15.4) (6.9)
------ ------ -------
$(21.5) $ 145.7 $(203.8)
====== ======= =======
The components of the net deferred tax liability at December 31, 2003 and
2004, and changes in the deferred income tax valuation allowance during the past
three years, are summarized in the following tables. At December 31, 2003, the
deferred tax valuation allowance relates to Kronos tax jurisdictions in Germany
and NL tax jurisdictions in the U.S.
December 31,
2003 2004
------------------------- ---------------
Assets Liabilities Assets Liabilities
(Restated) (Restated) (Restated) (Restated)
(In millions)
Tax effect of temporary differences related to:
Inventories $ .9 $ (3.3) $ 2.6 $ (6.3)
Marketable securities - (102.7) - (107.5)
Property and equipment 46.3 (108.4) 38.3 (104.6)
Accrued OPEB costs 15.1 - 13.9 -
Accrued environmental liabilities and
other deductible differences 72.9 - 120.1 -
Other taxable differences - (201.9) - (185.8)
Investments in subsidiaries and
affiliates not members of the
Contran Tax Group 27.2 (131.5) 24.9 (198.2)
Tax loss and tax credit carryforwards 166.7 - 245.3 -
Valuation allowance (193.8) - - -
------- ------- ------- ----
Adjusted gross deferred tax assets
(liabilities) 135.3 (547.8) 445.1 (602.4)
Netting of items by tax jurisdiction (113.9) 113.9 (195.9) 195.9
------- ------- ------- -------
21.4 (433.9) 249.2 (406.5)
Less net current deferred tax asset
(liability) 14.4 (3.9) 9.7 (24.2)
------- ------- ------- -------
Net noncurrent deferred tax asset
(liability) $ 7.0 $(430.0) $ 239.5 $(382.3)
======== ======= ======= =======
Years ended December 31,
2002 2003 2004
---- ---- ----
(In millions)
Increase (decrease) in valuation allowance:
Increase in certain deductible temporary
differences which the Company believes do
not meet the "more-likely-than-not"
recognition criteria $ 3.8 $ - $ -
Recognition of certain deductible tax
attributes for which the benefit had not
previously been recognized under the
"more-likely-than-not" recognition criteria (3.4) (7.2) (311.8)
Foreign currency translation 21.6 28.2 (3.0)
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 10.1 (11.8) 121.0
Valhi/Tremont merger - (10.8) -
Other, net .1 (.1) -
----- ------ ----
$32.2 $ (1.7) $(193.8)
===== ====== =======
A reduction in the Belgian income tax rate from 40% to 34% was enacted in
December 2002 and became effective in January 2003. This reduction in the
Belgian income tax rate resulted in a $2.7 million decrease in the Company's
income tax expense in 2002 because the Company had previously recognized a net
deferred income tax liability with respect to Belgium temporary differences.
Certain of the Company's U.S. and non-U.S. tax returns are being examined
and tax authorities have or may propose tax deficiencies, including penalties
and interest. For example:
o NL's and NL's majority-owned subsidiary, EMS, 1998 U.S. federal income tax
returns are being examined by the U.S. tax authorities, and NL and EMS have
granted extensions of the statute of limitations for assessments of tax
with respect to their 1998, 1999 and 2000 income tax returns until
September 30, 2005. During the course of the examination, the IRS proposed
a substantial tax deficiency, including interest, related to a
restructuring transaction. In an effort to avoid protracted litigation and
minimize the hazards of such litigation, NL applied to take part in an IRS
settlement initiative applicable to transactions similar to the
restructuring transaction, and in April 2003 NL received notification from
the IRS that NL had been accepted into such settlement initiative. Under
the initiative, a final settlement with the IRS is to be reached through
expedited negotiations and, if necessary, through a specified arbitration
procedure. NL has reached an agreement with the IRS concerning the
settlement of this matter pursuant to which, among other things, the
Company agreed to pay approximately $26 million, including interest, up
front as a partial payment of the settlement amount (which amount is
expected to be paid in the next 12 months and is classified as a current
liability at December 31, 2004), and NL will be required to recognize the
remaining settlement amount in its taxable income over the 15-year time
period beginning in 2004. NL has signed the settlement agreement that was
prepared by the IRS. The IRS signed the settlement agreement in January
2005, and the case will be closed after certain procedural matters are
concluded, which procedural matters both NL and its outside legal counsel
believe are perfunctory. NL had previously provided accruals to cover its
estimated additional tax liability (and related interest) concerning this
matter. As a result of the settlement, NL decreased its previous estimate
of the amount of additional income taxes and interest it will be required
to pay, and NL recognized a $18.0 million tax benefit in the second quarter
of 2004 related to the revised estimate. In addition, during the second
quarter of 2004, the Company recognized a $31.1 million tax benefit related
to the reversal of a deferred income tax asset valuation allowance related
to certain tax attributes of EMS which NL believes now meet the
"more-likely-than-not" recognition criteria. A majority of the deferred
income tax asset valuation allowance relates to net operating loss
carryforwards of EMS. As a result of the settlement agreement, NL (which
previously was not allowed to utilize such net operating loss carryforwards
of EMS) utilized such carryforwards in its 2003 taxable year, eliminating
the need for a valuation allowance related to such carryforwards. The
remainder of the deferred income tax asset valuation allowance relates to
deductible temporary differences associated with accrued environmental
obligations of EMS which NL now believes meet the "more-likely-than-not"
recognition criteria since, as a result of the settlement agreement, such
obligations and the related tax deductions have been or will be included in
NL's taxable income.
o Kronos has received a preliminary tax assessment related to 1993 from the
Belgian tax authorities proposing tax deficiencies, including related
interest, of approximately euro 6 million ($8 million at December 31,
2004). Kronos has filed a protest to this assessment, and believes that a
significant portion of the assessment is without merit. The Belgian tax
authorities have filed a lien on the fixed assets of Kronos' Belgian TiO2
operations in connection with this assessment. In April 2003, Kronos
received a notification from the Belgian tax authorities of their intent to
assess a tax deficiency related to 1999 that, including interest, is
expected to be approximately euro 9 million ($13 million). Kronos believes
the proposed assessment is substantially without merit, and Kronos has
filed a written response.
o The Norwegian tax authorities have notified Kronos of their intent to
assess tax deficiencies of approximately kroner 12 million ($2 million)
relating to the years 1998 through 2000. Kronos has objected to this
proposed assessment.
o Kronos has received a preliminary tax assessment from the Canadian tax
authorities related to the years 1998 and 1999 proposing tax deficiencies
of Cdn. $11.4 million ($7.7 million). Kronos is in the process of filing a
protest and believes a significant portion of the assessment is 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 settlement
initiatives, 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, 2003, Kronos had a significant amount of net operating loss
carryforwards for German corporate and trade tax purposes, all of which have no
expiration date. These net operating loss carryforwards were generated by KII
principally during the 1990's when KII had a significantly higher level of
outstanding indebtedness than is currently outstanding. For financial reporting
purposes, however, the benefit of such net operating loss carryforwards had not
previously been recognized because Kronos did not believe they met the
"more-likely-than-not" recognition criteria, and accordingly Kronos had a
deferred income tax asset valuation allowance offsetting the benefit of such net
operating loss carryforwards and Kronos' other tax attributes in Germany. KII
had generated positive taxable income in Germany for both German corporate and
trade tax purposes since 2000, and starting with the quarter ended December 31,
2002 and for each quarter thereafter, KII had cumulative taxable income in
Germany for the most recent twelve quarters. However, offsetting this positive
evidence was the fact that prior to the end of 2003, Kronos believed there was
significant uncertainty regarding its ability to utilize such net operating loss
carryforwards under German tax law and, principally because of the uncertainty
caused by this negative evidence, Kronos had concluded the benefit of the net
operating loss carryforwards did not meet the "more-likely-than-not" criteria.
By the end of 2003, and primarily as a result of a favorable German court ruling
in 2003 and the procedures Kronos had completed during 2003 with respect to the
filing of certain amended German tax returns (as discussed below), Kronos had
concluded that the significant uncertainty regarding its ability to utilize such
net operating loss carryforwards under German tax law had been eliminated.
However, at the end of 2003, Kronos believed at that time that it would generate
a taxable loss in Germany during 2004. Such expectation was based primarily upon
then-current levels of prices for TiO2, and the fact that Kronos was
experiencing a downward trend in its TiO2 selling prices and Kronos did not have
any positive evidence to indicate that the downward trend would improve. If the
price trend continued downward throughout all of 2004 (which was a possibility
given Kronos' prior experience), Kronos would likely have a taxable loss in
Germany for 2004. If the downward trend in prices had abated, ceased, or
reversed at some point during 2004, then Kronos would likely have taxable income
in Germany during 2004. Accordingly, Kronos continued to conclude at the end of
2003 that the benefit of the German net operating loss carryforwards did not
meet the "more-likely-than-not" criteria and that it would not be appropriate to
reverse the deferred income tax asset valuation allowance, given the likelihood
that Kronos would generate a taxable loss in Germany during 2004. The
expectation for a taxable loss in Germany continued through the end of the first
quarter of 2004. By the end of the second quarter of 2004, however, Kronos' TiO2
selling prices had started to increase, and Kronos believed its selling prices
would continue to increase during the second half of 2004 after Kronos and its
major competitors announced an additional round of price increases. The fact
that Kronos' selling prices started to increase during the second quarter of
2004, combined with the fact that Kronos and its competitors had announced
additional price increases (which based on past experience indicated to Kronos
that some portion of the additional price increases would be realized in the
marketplace), provided additional positive evidence that was not present at
December 31, 2003. Consequently, Kronos' revised projections now reflected
taxable income for Germany in 2004 as well as 2005. Accordingly, based on all
available evidence, including the fact that (i) KII had generated positive
taxable income in Germany since 2000, and starting with the quarter ended
December 31, 2002 and for each quarter thereafter, KII had cumulative taxable
income in Germany for the most recent twelve quarters, (ii) Kronos was now
projecting positive taxable income in Germany for 2004 and 2005 and (iii) the
German net operating loss carryforwards have no expiration date, Kronos
concluded that the benefit of the net operating loss carryforwards and other
German tax attributes now met the "more-likely-than-not" recognition criteria,
and that reversal of the deferred income tax asset valuation allowance related
to Germany was appropriate. Given the magnitude of the German net operating loss
carryforwards and the fact that current provisions of German law limit the
annual utilization of net operating loss carryforwards to 60% of taxable income
after the first euro 1 million of taxable income, KII believes it will take
several years to fully utilize the benefit of such loss carryforwards. However,
given the number of years for which Kronos has now generated positive taxable
income in Germany, combined with the fact that the net operating loss
carryforwards were generated during a time when KII had a significantly higher
level of outstanding indebtednesss than it currently has outstanding, and the
fact that the net operating loss carryforwards have no expiration date, Kronos
concluded it was now appropriate to reverse all of the valuation allowance
related to the net operating loss carryforwards because the benefit of such
operating loss carryforwards now meet the "more-likely-than-not" recognition
criteria. Under applicable GAAP related to accounting for income taxes at
interim periods, a change in estimate at an interim period resulting in a
decrease in the valuation allowance is segregated into two components, the
portion related to the remaining interim periods of the current year and the
portion related to all future years. The portion of the valuation allowance
reversal related to the former is recognized over the remaining interim periods
of the current year, and the portion of the valuation allowance related to the
later is recognized at the time the change in estimate is made. Accordingly,
Kronos has recognized a $280.7 million income tax benefit in 2004 related to the
reversal of such deferred income tax asset valuation allowance attributable to
Kronos' income tax attributes in Germany (principally the net operating loss
carryforwards). Of such $280.7 million, (i) $8.7 million relates primarily to
the utilization of the German net operating loss carryforwards during the first
six months of 2004, the benefit of which had previously not met the
"more-likely-than-not" recognition criteria, (ii) $268.6 million relates to the
valuation allowance reversal recognized as of June 30, 2004 and (iii) $3.4
million relates to the valuation allowance reversal recognized during the last
six months of 2004.
In the first quarter of 2003, KII was notified by the German Federal Fiscal
Court that the Court had ruled in KII's favor concerning a claim for refund suit
in which KII sought refunds of prior taxes paid during the periods 1990 through
1997. KII and KII's German operating subsidiary were required to file amended
tax returns with the German tax authorities to receive refunds for such years,
and all of such amended returns were filed during 2003. Such amended returns
reflected an aggregate net refund of taxes and related interest to KII and its
German operating subsidiary of euro 26.9 million ($32.1 million), and the
Company recognized the benefit of these net refunds in its 2003 results of
operations. During 2004, the Company recognized the benefit of euro 2.5 million
($3.1 million) related to additional net interest which has accrued on the
outstanding refund amount. Assessments and refunds will be processed by year as
the respective returns are reviewed by the tax authorities. Certain interest
components may also be refunded separately. The German tax authorities have
reviewed and accepted the amended returns with respect to the 1990 through 1994
tax years. Through December 2004, KII and its German operating subsidiary had
received net refunds of euro 35.6 million ($44.7 million when received). All
refunds relating to the periods 1990 to 1997 were received by December 31, 2004.
In addition to the refunds for the 1990 to 1997 periods, the court ruling also
resulted in a refund of 1999 income taxes and interest for which KII received
euro 21.5 million ($24.6 million) in 2003, and the Company recognized the
benefit of this refund in the second quarter of 2003.
At December 31, 2004, (i) Kronos had the equivalent of $671 million and
$232 million of the net operating loss carryforwards for German corporate and
trade tax purposes, respectively, all of which have no expiration date, (ii)
Tremont had $6 million of U.S. net operating loss carryforwards expiring in 2018
through 2020, (iii) CompX had $8 million of U.S. net operating loss
carryforwards expiring in 2007 through 2018 and (iv) Valhi had $35 million of
U.S. net operating loss carryforwards expiring in 2019 through 2024. At December
31, 2004, the U.S. tax attribute carryforwards of Tremont may only be used to
offset future taxable income of Tremont and are not available to offset future
taxable income of other members of the Contran Tax Group, and the U.S. net
operating loss carryforwards of CompX may only be used to offset future taxable
income of a subsidiary of CompX acquired prior to 2001, are not available to
offset future taxable income of other members of the Contran Tax Group and are
limited in utilization to approximately $400,000 per year. In addition,
approximately $6 million of Valhi's net operating loss carryforwards may only be
used to offset taxable income of NL and are not available to offset future
taxable income of other members of the Contran Tax Group.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law contains several provisions that could impact the Company.
These provisions provide for, among other things, a special deduction from U.S.
taxable income equal to a stipulated percentage of qualified income from
domestic production activities (as defined) beginning in 2005, and a special 85%
dividends received deduction for certain dividends received from controlled
foreign corporations. Both of these provisions are complex and subject to
numerous limitations. The Company is still studying the new law, including the
technical guidance related to the two complex provisions noted above. The effect
on the Company of the new law, if any, has not yet been determined, in part
because the Company has not definitively determined whether its operations
qualify for the special deduction or whether it would benefit from the special
dividends received deduction. If the Company determines it qualifies for the
special deduction, the tax benefit of such special deduction would be recognized
in the period earned. With respect to the special dividends received deduction
for certain dividends received from controlled foreign corporations, the Company
will likely not be able to complete its evaluation of whether it would benefit
from the special dividends received deduction until sometime after the U.S.
government has issued clarifying regulations regarding this provision of the
Act, the timing for the issuance of which is not known. The aggregate amount of
unremitted earnings that is potentially subject to the special dividends
received deduction is approximately $662 million at December 31, 2004. The
Company is unable to reasonably estimate a range of income tax effects if such
unremitted earnings would be repatriated and became eligible for the special
dividends received deduction, as the calculation would be extremely complex.
Note 16 - Employee benefit plans:
Defined benefit plans. The Company maintains various U.S. and foreign
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 and, the components of net periodic
defined benefit pension cost are presented in the tables below. Effective
January 1, 2001, CompX ceased providing future defined pension benefits under
its plan in The Netherlands. Certain obligations related to the terminated plan
were not fully settled until 2002, at which time CompX recognized a $677,000
settlement gain. See Note 22. At December 31, 2004, the Company currently
expects to contribute the equivalent of $9.4 million to all of its defined
benefit pension plans during 2005, and aggregate benefit payments to plan
participants out of plan assets are expected to be the equivalent of $23.1
million in 2005, $24.6 million in 2006, $23.7 million in 2007, $25.8 million in
2008, $24.8 million in 2009 and $138.1 million during 2010 through 2014.
Years ended December 31,
2003 2004
---- ----
(In thousands)
Change in projected benefit obligations ("PBO"):
Benefit obligations at beginning of the year $ 331,452 $ 409,517
Service cost 5,347 6,758
Interest cost 20,063 22,219
Participant contributions 1,357 1,420
Plan amendments 3,200 -
Actuarial losses 28,583 7,218
Change in foreign currency exchange rates 43,514 30,820
Benefits paid (23,999) (23,041)
--------- ---------
Benefit obligations at end of the year $ 409,517 $ 454,911
========= =========
Change in plan assets:
Fair value of plan assets at beginning of the year $ 244,655 $ 263,773
Actual return on plan assets (327) 31,951
Employer contributions 14,838 17,812
Participant contributions 1,357 1,420
Change in foreign currency exchange rates 27,249 19,983
Benefits paid (23,999) (23,041)
--------- ---------
Fair value of plan assets at end of year $ 263,773 $ 311,898
========= =========
Funded status at end of the year:
Plan assets less than PBO $(145,744) $(143,013)
Unrecognized actuarial losses 143,786 147,264
Unrecognized prior service cost 8,566 8,757
Unrecognized net transition obligations 5,079 4,878
--------- ---------
$ 11,687 $ 17,886
========= =========
Amounts recognized in the balance sheet:
Unrecognized net pension obligations $ 13,747 $ 13,518
Accrued pension costs:
Current (8,374) (9,090)
Noncurrent (90,517) (77,360)
Accumulated other comprehensive loss 96,831 90,818
--------- ---------
$ 11,687 $ 17,886
========= =========
Years ended December 31,
2002 2003 2004
---- ---- ----
(In thousands)
Net periodic pension cost:
Service cost benefits $ 4,538 $ 5,347 $ 6,758
Interest cost on PBO 18,387 20,063 22,219
Expected return on plan assets (18,135) (19,294) (20,975)
Amortization of prior service cost 307 354 502
Amortization of net transition obligations 515 733 657
Recognized actuarial losses 1,223 2,423 4,361
-------- -------- --------
$ 6,835 $ 9,626 $ 13,522
======== ======== ========
The weighted-average rate assumptions used in determining the actuarial
present value of benefit obligations as of December 31, 2003 and 2004 are
presented in the table below. Such weighted-average rates were determined using
the projected benefit obligations at each date.
December 31,
Rate 2003 2004
---- ---- ----
Discount rate 5.5% 5.3%
Increase in future compensation levels 2.9% 2.3%
The weighted-average rate assumptions used in determining the net periodic
pension cost for 2002, 2003 and 2004 are presented in the table below. The
weighted-average discount rate and the weighted-average increase in future
compensation levels were determined using the projected benefit obligations at
the beginning of each year, and the weighted-average long-term return on plan
assets was determined using the fair value of plan assets at the beginning of
each year.
Years ended December 31,
Rate 2002 2003 2004
---------------- ---- ---- ----
Discount rate 6.3% 6.0% 5.6%
Increase in future compensation levels 2.9% 2.7% 2.2%
Long-term return on plan assets 7.7% 7.4% 7.8%
At December 31, 2004, the accumulated benefit obligations for all defined
benefit pension plans was approximately $403 million (2003 - $364 million). At
December 31, 2004, the projected benefit obligations for all defined benefit
pension plans was comprised of $100 million related to U.S. plans and $355
million related to non-U.S. plans (2003 - $86 million and $324 million,
respectively). At December 31, 2003 and 2004, all of the projected benefit
obligations attributable to non-U.S. plans relates to plans maintained by
Kronos. At December 31, 2004, approximately 52% and 14% of the projected benefit
obligations attributable to U.S. plans relate to plans maintained by NL and
Kronos, respectively, and 34% relates to a plan maintained by a disposed
business unit of Valhi (2003 - 63% relates to NL and Kronos and 37% to the
disposed business unit). Kronos and NL use a September 30th measurement date for
their defined benefit pension plans, and all other plans use a December 31st
measurement date.
At December 31, 2004, the fair value of plan assets for all defined benefit
pension plans was comprised of $82 million related to U.S. plans and $230
million related to non-U.S. plans (2003 - $67 million and $197 million,
respectively). At December 31, 2003 and 2004, all of the plan assets
attributable to non-U.S. plans relates to plans maintained by Kronos. At
December 31, 2004, approximately 54% and 15% of the plan assets attributable to
U.S. plans relates to plans maintained by NL and Kronos, respectively, and 31%
relates to a plan maintained by a disposed business unit of Valhi (2003 - 66%
relates to NL and Kronos and 34% to the disposed business unit).
At December 31, 2004, the projected benefit obligations, accumulated
benefit obligations and fair value of plan assets for all defined benefit
pension plans for which the accumulated benefit obligation exceeded the fair
value of plan assets were $455 million, $403 million and $312 million,
respectively (2003 - $410 million, $364 million and $264 million, respectively).
At December 31, 2003 and 2004, approximately 79% and 78%, respectively, of such
unfunded amount relates to non-U.S. plans maintained by Kronos, and most of the
remainder relates to U.S. plans maintained by NL and the disposed business unit.
At December 31, 2003 and 2004, substantially all of the assets attributable
to U.S. plans were invested in The CMRT, a collective investment trust
established by Valhi to permit the collective investment by certain master
trusts which fund certain employee benefits plans sponsored by Contran and
certain of its affiliates. At December 31, 2004, the asset mix of the CMRT was
77% in U.S. equity securities, 14% in U.S. fixed income securities, 7% in
international equity securities and 2% in cash and other investments (2003 -
63%, 24%, 7% and 6%, respectively).
The CMRT's long-term investment objective is to provide a rate of return
exceeding a composite of broad market equity and fixed income indices (including
the S&P 500 and certain Russell indicies) utilizing both third-party investment
managers as well as investments directed by Mr. Harold Simmons. Mr. Harold
Simmons is the sole trustee of the CMRT. The trustee of the CMRT, along with the
CMRT's investment committee, of which Mr. Simmons is a member, actively manage
the investments of the CMRT. Such parties have in the past, and may in the
future, periodically change the asset mix of the CMRT based upon, among other
things, advice they receive from third-party advisors and their expectations as
to what asset mix will generate the greatest overall return. For the years ended
December 31, 2002, 2003 and 2004, the assumed long-term rate of return for plan
assets invested in the CMRT was 10%. In determining the appropriateness of such
long-rate of return assumption, the Company considered, among other things, the
historical rates of return for the CMRT, the current and projected asset mix of
the CMRT and the investment objectives of the CMRT's managers. During the
17-year history of the CMRT from its inception in 1987 through December 31,
2004, the average annual rate of return has been approximately 13%.
At December 31, 2004, plan assets attributable to Kronos' non-U.S. plans
related primarily to Germany, Canada and Norway. In determining the expected
long-term rate of return on plan asset assumptions for its non-U.S. plans, the
Company considers the long-term asset mix (e.g. equity vs. fixed income) for the
assets for each of its plans and the expected long-term rates of return for such
asset components. In addition, the Company receives advice about appropriate
long-term rates of return from the Company's third-party actuaries. Such assumed
asset mixes are summarized below: o In Germany, the composition of Kronos' plan
assets is established to satisfy the requirements of the German insurance
commissioner. The current plan asset allocation at December 31, 2004 was 23% to
equity managers and 48% to fixed income managers and 29% to real estate. o In
Canada, Kronos' currently has a plan asset target allocation of 65% to equity
managers and 35% to fixed income managers, with an expected long-term rate of
return for such investments to average approximately 125 basis points above the
applicable equity or fixed income index. The current plan asset allocation at
December 31, 2004 was 60% to equity managers and 40% to fixed income managers. o
In Norway, Kronos' currently has a plan asset target allocation of 14% to equity
managers and 62% to fixed income managers and the remainder to liquid
investments such as money markets. The expected long-term rate of return for
such investments is approximately 8%, 4.5% to 6.5% and 2.5%, respectively. The
current plan asset allocation at December 31, 2004 was 16% to equity managers,
64% to fixed income managers and the remainder invested primarily in cash and
liquid investments.
The Company regularly reviews its actual asset allocation for each of its
plans, and periodically rebalances the investments in each plan to more
accurately reflect the targeted allocation when considered appropriate.
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 million in each of 2002, 2003 and
2004.
Postretirement benefits other than pensions. Certain subsidiaries currently
provide certain health care and life insurance benefits for eligible retired
employees. The components of the periodic OPEB cost and accumulated OPEB
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, 2004, the expected rate of increase in future
health care costs ranges from 8% to 9.3% in 2005, declining to rates of between
4% to 5.5% in 2010 and thereafter (2003 - 8% to 10.4% in 2004, declining to 4%
to 5.5% in 2010 and thereafter). If the health care cost trend rate was
increased (decreased) by one percentage point for each year, OPEB expense would
have increased by $198,000 (decreased by $196,000) in 2004, and the actuarial
present value of accumulated OPEB obligations at December 31, 2004 would have
increased by $2.5 million (decreased by $2.3 million). At December 31, 2004, the
Company currently expects to contribute the equivalent of approximately $4.5
million to all of its OPEB plans during 2005, and aggregate benefit payments to
OPEB plan participants are expected to be the equivalent of $4.5 million in
2005, $4.1 million in 2006, $4.2 million in 2007, $4.1 million in 2008, $4.0
million in 2009 and $17.3 million during 2010 through 2014.
Years ended December 31,
2003 2004
---- ----
(In thousands)
Change in accumulated OPEB obligations:
Obligations at beginning of the year $ 48,866 $ 46,177
Service cost 152 232
Interest cost 2,820 2,418
Plan amendments - (2,044)
Actuarial gains (1,278) (4,925)
Change in foreign currency exchange rates 772 411
Benefits paid (5,155) (5,666)
-------- --------
Obligations at end of the year $ 46,177 $ 36,603
======== ========
Change in plan assets:
Employer contributions $ 5,155 $ 5,666
Benefits paid (5,155) (5,666)
-------- --------
Fair value of plan assets at end of the year $ - $ -
======== =====
Funded status at end of the year:
Plan assets less than benefit obligations $(46,177) $(36,603)
Unrecognized net actuarial losses (gains) 4,364 (606)
Unrecognized prior service credit (1,633) (2,818)
-------- --------
$(43,446) $(40,027)
Accrued OPEB costs recognized in the balance sheet:
Current $ (6,036) $ (5,039)
Noncurrent (37,410) (34,988)
-------- --------
$(43,446) $(40,027)
Years ended December 31,
2002 2003 2004
---- ---- ----
(In thousands)
Net periodic OPEB cost (credit):
Service cost $ 103 $ 152 $ 232
Interest cost 3,030 2,820 2,418
Expected return on plan assets (3) - -
Amortization of prior service credit (2,516) (2,075) (859)
Recognized actuarial gains (59) 38 192
------- ------- ------
$ 555 $ 935 $1,983
======= ======= ======
The weighted average discount rate used in determining the actuarial
present value of benefit obligations as of December 31, 2004 was 5.7% (2003 -
5.9%). Such weighted average rate was determined using the projected benefit
obligations as of such dates. The impact of assumed increases in future
compensation levels does not have a material effect on the actuarial present
value of the benefit obligations as substantially all of such benefits relate
solely to eligible retirees, for which compensation is not applicable.
The weighted average discount rate used in determining the net periodic
OPEB cost for 2004 was 5.9% (2003 - 6.4%; 2003 - 7.0%). Such weighted average
rate was determined using the projected benefit obligations as of the beginning
of each year. The impact of assumed increases in future compensation levels does
not have a material effect on the net periodic OPEB cost as substantially all of
such benefits relate solely to eligible retirees, for which compensation is not
applicable.
As of December 31, 2003 and 2004, the accumulated benefit obligations for
all OPEB plans was equal to the projected benefit obligations. At December 31,
2004, the projected benefit obligations for all OPEB plans was comprised of
$31.2 million related to U.S. plans and $5.4 million related to non-U.S. plans
(2003 - $40.6 million and $5.5 million, respectively). At December 31, 2003 and
2004, all of the projected benefit obligations attributable to non-U.S. plans
relates to plans maintained by Kronos. At December 31, 2004, approximately 51%
and 16% of the projected benefit obligations attributable to U.S. plans relates
to plans maintained by NL and Kronos, respectively, and 32% relates to a plan
maintained by Tremont (2003 - 69% maintained by NL and Kronos and 31% maintained
by Tremont). Kronos and NL use a September 30th measurement date for their OPEB
plans, and Tremont uses a December 31st measurement date.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the "Medicare 2003 Act") introduced a prescription drug benefit under Medicare
(Medicare Part D) as well as a federal subsidy to sponsors of retiree health
care benefit plans that provide a benefit that is at least equivalent to
Medicare Part D. During the third quarter of 2004, the Company determined that
benefits provided by its two U.S. plans are actuarially equivalent to the
Medicare Part D benefit and therefore the Company is eligible for the federal
subsidy provided for by the Medicare 2003 Act for those plans. The effect of
such subsidy, which is accounted for prospectively from the date actuarial
equivalence was determined, as permitted by and in accordance with FASB Staff
Position No. 106-2, did not have a material impact on the applicable accumulated
postretirement benefit obligation, and will not have a material impact on the
net periodic OPEB cost going forward.
Note 17 - 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,
2003 2004
---- ----
(In thousands)
(Restated) (Restated)
Current receivables from affiliates:
Contran:
Demand loan $ - $ 4,929
Income taxes - 578
TIMET 50 24
Other 267 -
------- ----
$ 317 $ 5,531
======= =======
Noncurrent receivable from affiliate -
loan to Contran family trust $14,000 $10,000
======= =======
Current payables to affiliates:
Louisiana Pigment Company $ 8,560 $ 8,844
Contran:
Demand loan 7,332 -
Income taxes 2,049 -
Trade items 1,790 2,753
Other 13 10
------- -------
$19,744 $11,607
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.
Prior to 2002, 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 ($10 million outstanding at December 31,
2004). 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, 2004, $15 million is available for borrowing by the
family trust, and the loan has been classified as a noncurrent asset because EMS
does not presently intend to demand repayment within the next 12 months.
During 2002, 2003 and 2004, Valhi borrowed varying amounts from Contran,
and during 2004 Contran borrowed varying amounts from Valhi, pursuant to the
terms of demand notes. Such unsecured borrowings bear interest at a rate of
prime less .5%.
Interest income on all loans to related parties, including EMS' loan to one
of the Contran family trusts, was $964,000 in 2002, $723,000 in 2003 and
$645,000 in 2004. Interest expense on all loans from related parties was
$922,000 in 2002, $154,000 in 2003 and $131,000 in 2004 and relates solely to
borrowings from Contran.
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
and other expenses associated with 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.
The net ISA fees charged by Contran to the Company, including NL, Kronos,
Tremont, TIMET, CompX and Waste Control Specialists, aggregated approximately
$9.6 million in 2002, $10.0 million in 2003 and $17.3 million in 2004. The
increase in the aggregate ISA fee charged to the Company in 2004 is due
primarily to approximately 30 staff positions who had previously been
compensated by NL and Kronos, who in 2004 commenced being compensated by
Contran. TIMET had an ISA with Tremont whereby TIMET provided certain services
to Tremont for approximately $400,000 in 2002 and $180,000 in 2003. NL had an
ISA with TIMET whereby NL provided certain services to TIMET for approximately
$300,000 in 2002 and $14,000 in 2003. 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.
Tall Pines Insurance Company (including a predecessor company, Valmont
Insurance Company, which was merged into Tall Pines in December 2004) and EWI
RE, Inc. provide for or broker certain insurance policies for Contran and
certain of its subsidiaries and affiliates, including the Company. Tall Pines is
wholly-owned by Tremont, and EWI is wholly-owned by NL. Prior to January 2002,
an entity controlled by one of Harold C. Simmons' daughters owned a majority of
EWI, and Contran owned the remainder of EWI. In January 2002, NL purchased EWI
from its previous owners for an aggregate cash purchase price of approximately
$9 million. See Note 3. 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. Consistent with
insurance industry practices, Tall Pines and EWI receive commissions from the
insurance and reinsurance underwriters for the policies that they provide or
broker. The Company expects that these relationships with Tall Pines and EWI
will continue in 2005.
Contran and certain of its subsidiaries and affiliates, including the
Company, purchase certain of their insurance policies as a group, with the costs
of the jointly-owned policies apportioned among the participating companies.
With respect to certain of such policies, it is possible that unusually large
losses incurred by one or more insureds during a given policy period could leave
the other participating companies without adequate coverage under that policy
for the balance of the policy period. As a result, Contran and certain of its
subsidiaries and affiliates, including the Company, have entered into a loss
sharing agreement under which any uninsured loss is shared by those entities who
have submitted claims under the relevant policy. The Company believes the
benefits in the form of reduced premiums and broader coverage associated with
the group coverage for such policies justifies the risk associated with the
potential of any uninsured loss.
Basic Management, Inc., among other things, provides utility services
(primarily water distribution, maintenance of a common electrical facility and
sewage disposal monitoring) to TIMET and other manufacturers within an
industrial complex located in Nevada. The other owners of BMI are generally the
other manufacturers located within the complex. Power transmission and sewer
services are provided on a cost reimbursement basis, similar to a cooperative,
while water delivery is currently provided at the same rates as are charged by
BMI to an unrelated third party. Amounts paid by TIMET to BMI for these utility
services were $1.0 million in 2002, $1.2 million in 2003 and $1.3 million in
2004. TIMET also paid BMI an electrical facilities upgrade fee of $1.3 million
in each of 2002, 2003 and 2004. Such fee is scheduled to decline to $800,000
annually for 2005 through 2009, and then terminates completely after January
2010.
During 2002, NL purchased approximately 52,200 shares of its common stock
from certain of its officers and directors, in part in connection with the
exercise of certain options to purchase NL common stock held by such officers
and directors, at a net cost to NL (after considering the proceeds to NL from
the exercise of such options) of approximately $500,000. All of such shares of
NL common stock purchased had been held by the respective owner for at least six
months, and all of such purchases were valued at market prices on the respective
date of purchase. See Notes 3 and 10.
COAM Company is a partnership which has sponsored research agreements with
the University of Texas Southwestern Medical Center at Dallas to develop and
commercially market a safe and effective treatment for arthritis (the "Arthritis
Research Agreement") and to develop and commercially market patents and
technology resulting from a cancer research program (the "Cancer Research
Agreement"). At December 31, 2004, COAM partners are Contran, Valhi and another
Contran subsidiary. Harold C. Simmons is the manager of COAM. The final payment
under the Arthritis Research Agreement was made in 2004. The Cancer Research
Agreement, as amended, provides for funds of up to $22 million through 2015.
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 2005.
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 $849,000 in 2002, $865,000 in 2003 and
$956,000 in 2004. 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 18 - Commitments and contingencies:
Lead pigment litigation - NL.
NL's former operations included the manufacture of lead pigments for use in
paint and lead-based paint. NL, other former manufacturers of lead pigments for
use in paint and lead-based paint, and the Lead Industries Association, which
discontinued business operations in 2002, have been named as defendants in
various legal proceedings seeking damages for personal injury, property damage
and governmental expenditures allegedly caused by the use of lead-based paints.
Certain of these actions have been filed by or on behalf of states, large U.S.
cities or their public housing authorities and school districts, and certain
others have been asserted as class actions. These lawsuits seek recovery under a
variety of theories, including public and private nuisance, negligent product
design, negligent failure to warn, strict liability, breach of warranty,
conspiracy/concert of action, aiding and abetting, enterprise liability, market
share liability, intentional tort, fraud and misrepresentation, violations of
state consumer protection statutes, supplier negligence and similar claims.
The plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and 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. A number of cases are inactive or
have been dismissed or withdrawn. Most of the remaining cases are in various
pre-trial stages. Some are on appeal following dismissal or summary judgment
rulings in favor of the defendants. In addition, various other cases are pending
(in which NL is not a defendant) seeking recovery for injury allegedly caused by
lead pigment and lead-based paint. Although NL is not a defendant in these
cases, the outcome of these cases may have an impact on additional cases being
filed against NL in the future.
NL believes these actions are without merit, intends to continue to deny
all allegations of wrongdoing and liability and to defend against all actions
vigorously. NL has neither lost nor settled any of these cases. NL has not
accrued any amounts for pending lead pigment and lead-based paint litigation.
Liability that may result, if any, cannot reasonably be estimated. There can be
no assurance that NL will not incur liability in the future in respect of this
pending litigation in view of the inherent uncertainties involved in court and
jury rulings in pending and possible future cases.
Whether insurance coverage for defense costs or indemnity or both will be
found to exist for lead pigment litigation depends on 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 litigation in
determining related accruals.
Environmental matters and litigation.
General. The Company's operations are governed by various environmental
laws and regulations. Certain of the Company's operations are and have been
engaged in the handling, manufacture or use of substances or compounds that may
be considered toxic or hazardous within the meaning of applicable environmental
laws and regulations. As with other companies engaged in similar businesses,
certain past and current operations and products of the Company have the
potential to cause environmental or other damage. The Company has implemented
and continues to implement various policies and programs in an effort to
minimize these risks. The Company's policy is to maintain compliance with
applicable environmental laws and regulations at all of its plants and to strive
to improve its environmental performance. From time to time, the Company may be
subject to environmental regulatory enforcement under U.S. and foreign statutes,
resolution of which typically involves the establishment of compliance programs.
It is possible that future developments, such as stricter requirements of
environmental laws and enforcement policies thereunder, could adversely affect
the Company's production, handling, use, storage, transportation, sale or
disposal of such substances. The Company believes all of its plants are in
substantial compliance with applicable environmental laws.
Certain properties and facilities used in the Company's former businesses,
including divested primary and secondary lead smelters and former mining
locations of NL, are the subject of civil litigation, administrative proceedings
or investigations arising under federal and state environmental laws.
Additionally, in connection with past disposal practices, the Company has been
named as a defendant, potential responsible party ("PRP") or both, pursuant to
the Comprehensive Environmental Response, Compensation and Liability Act, as
amended by the Superfund Amendments and Reauthorization Act ("CERCLA") and
similar state laws in various governmental and private actions associated with
waste disposal sites, mining locations, and facilities currently or previously
owned, operated or used by the Company or its subsidiaries, or their
predecessors, certain of which are on the U.S. EPA's Superfund National
Priorities List or similar state lists. These proceedings seek cleanup costs,
damages for personal injury or property damage and/or damages for injury to
natural resources. Certain of these proceedings involve claims for substantial
amounts. Although the Company may be jointly and severally liable for such
costs, in most cases it is only one of a number of PRPs who may also be jointly
and severally liable.
Environmental obligations are difficult to assess and estimate for numerous
reasons including the complexity and differing interpretations of governmental
regulations, the number of PRPs and the PRPs' ability or willingness to fund
such allocation of costs, their financial capabilities and the allocation of
costs among PRPs, the solvency of other PRPs, the multiplicity of possible
solutions, and the years of investigatory, remedial and monitoring activity
required. In addition, the imposition of more stringent standards or
requirements under environmental laws or regulations, new developments or
changes respecting site cleanup costs or allocation of such costs among PRPs,
solvency of other PRPs, the results of future testing and analysis undertaken
with respect to certain sites or a determination that the Company is potentially
responsible for the release of hazardous substances at other sites, could result
in expenditures in excess of amounts currently estimated by the Company to be
required for such matters. In addition, with respect to other PRPs and the fact
that the Company may be jointly and severally liable for the total remediation
cost at certain sites, the Company could ultimately be liable for amounts in
excess of its accruals due to, among other things, reallocation of costs among
PRPs or the insolvency of one or more PRPs. No assurance can be given that
actual costs will not exceed accrued amounts or the upper end of the range for
sites for which estimates have been made, and no assurance can be given that
costs will not be incurred with respect to sites as to which no estimate
presently can be made. Further, there can be no assurance that additional
environmental matters will not arise in the future.
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, 2003 and 2004, no receivables for recoveries have been
recognized.
The exact time frame over which the Company makes payments with respect to
its accrued environmental costs is unknown and is dependent upon, among other
things, the timing of the actual remediation process that in part depends on
factors outside the control of the Company. At each balance sheet date, the
Company makes an estimate of the amount of its accrued environmental costs that
will be paid out over the subsequent 12 months, and the Company classifies such
amount as a current liability. The remainder of the accrued environmental costs
is classified as a noncurrent liability.
A summary of the activity in the Company's accrued environmental costs
during the past three years is presented in the table below.
Years ended December 31,
2002 2003 2004
---- ---- ----
(In thousands)
Balance at the beginning of the year $110,640 $101,166 $ 86,681
Additions charged to expense 12,777 29,524 2,477
Payments (22,251) (44,009) (12,392)
-------- -------- --------
Balance at the end of the year $101,166 $ 86,681 $ 76,766
======== ======== ========
Amounts recognized in the balance sheet:
Current liability $ 24,956 $ 21,316
Noncurrent liability 61,725 55,450
-------- --------
$ 86,681 $ 76,766
======== ========
NL. Certain properties and facilities used in NL's former businesses,
including divested primary and secondary lead smelters and former mining
locations of NL, are the subject of civil litigation, administrative proceedings
or investigations arising under federal and state environmental laws.
Additionally, in connection with past disposal practices, NL has been named as a
defendant, PRP, or both, pursuant to CERCLA, and similar state laws in
approximately 60 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. 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.
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. See Note 12. At December 31,
2004, NL had accrued $68 million for those environmental matters which NL
believes are reasonably estimable. NL believes it is not possible to estimate
the range of costs for certain sites. The upper end of the range of reasonably
possible costs to NL for sites for which NL believes it is possible to estimate
costs is approximately $93 million. NL's estimates of such liabilities have not
been discounted to present value.
At December 31, 2004, there are approximately 20 sites for which NL is
unable to estimate a range of costs. For these sites, generally the
investigation is in the early stages, and it is either unknown as to whether or
not NL actually had any association with the site, or if NL had association with
the site, the nature of its responsibility, if any, for the contamination at the
site and the extent of contamination. The timing on when information would
become available to NL to allow NL to estimate a range of loss is unknown and
dependent on events outside the control of NL, such as when the party alleging
liability provides information to NL.
At December 31, 2004, NL had $19 million in restricted cash equivalents and
marketable debt securities held by special purpose trusts, the assets of which
can only be used to pay for certain of NL's future environmental remediation and
other environmental expenditures (2003 - $24 million). Use of such restricted
balances does not affect the Company's consolidated net cash flows. Such
restricted balances declined by approximately $35 million during 2003 due
primarily to a $30.8 million payment made by NL related to the final settlement
of one of NL's sites.
Tremont. In July 2000 Tremont, entered into a voluntary settlement
agreement with the Arkansas Department of Environmental Quality and certain
other PRPs pursuant to which Tremont and the other PRPs will undertake certain
investigatory and interim remedial activities at a former mining site located in
Hot Springs County, Arkansas. Tremont currently believes that it has accrued
adequate amounts ($2.7 million at December 31, 2004) to cover its share of
probable and reasonably estimable environmental obligations for these
activities. Tremont currently expects that the nature and extent of any final
remediation measures that might be imposed with respect to this site will not be
known until 2007. Currently, no reasonable estimate can be made of the cost of
any such final remediation measures, and accordingly Tremont has accrued no
amounts at December 31, 2004 for any such cost. The amount accrued at December
31, 2004 represents Tremont's estimate of the costs to be incurred through 2007
with respect to the interim remediation measures.
TIMET. TIMET and BMI entered into an agreement in 1999 providing that upon
BMI's payment to TIMET of the cost to design, purchase and install a new
wastewater neutralization facility necessary to allow TIMET to stop discharging
liquid and solid effluents and co-products into settling ponds located on
certain lands owned by TIMET adjacent to its Nevada facility (the "TIMET Pond
Property"), TIMET would convey the TIMET Pond Property to BMI, at no additional
cost. In November 2004, TIMET and BMI entered into several agreements which
superceded the 1999 agreement. Under these new agreements, TIMET conveyed the
TIMET Pond Property to BMI in exchange for (i) $12.0 million cash, (ii) BMI's
assumption of the liability for certain environmental issues associated with the
TIMET Pond Property, including certain possible groundwater issues and (iii)
other consideration, including TIMET's potential receipt of an additional $3.3
million from BMI in the event that BMI is unable to add TIMET to certain
insurance policies by a specified date.. TIMET will continue to use certain of
the settling ponds located on the TIMET Pond Property pursuant to a lease until
a wastewater treatment facility is operational, construction of which TIMET
currently expects to be completed during the second quarter of 2005.
TIMET is also continuing assessment work with respect to its own active
plant site in Nevada. TIMET currently has $4.3 million accrued based on the
undiscounted cost estimates of the probable costs for remediation of these
sites, which TIMET expects will be paid over a period of up to thirty years.
At December 31, 2004, TIMET had accrued approximately $4.5 million for
environmental cleanup matters, principally related to TIMET's facility in
Nevada. The upper end of the range of reasonably possible costs related to these
matters is approximately $7.0 million.
Other. The Company has also accrued approximately $6.3 million at December
31, 2004 in respect of other environmental cleanup matters. Such accrual is near
the upper end of the range of the Company's estimate of reasonably possible
costs for such matters.
Other litigation.
NL has been named as a defendant in various lawsuits in a variety of
jurisdictions, alleging personal injuries as a result of occupational exposure
primarily to products manufactured by formerly-owned operations of NL containing
asbestos, silica and/or mixed dust. Approximately 500 of these types of cases
involving a total of approximately 22,000 plaintiffs and their spouses remain
pending, down from cases involving approximately 32,000 plaintiffs from one year
ago. Of these plaintiffs, approximately 4,700 are represented by five cases
pending in Mississippi state courts and approximately 5,000 are represented by
four cases that have been removed to federal court in Mississippi, where they
have been, or are in the process of being, transferred to the multi-district
litigation pending in the United States District Court for the Eastern District
of Pennsylvania. NL has not accrued any amounts for this litigation because
liability that might result to NL, if any, cannot be reasonably estimated. Based
on information available to NL, including facts concerning its historical
operations, the rate of new claims, the number of claims from which NL has been
dismissed and NL's prior experience in the defense of these matters, NL believes
that the range of reasonably possible outcomes of these matters will be
consistent with NL's historical costs with respect to these matters (which are
not material), and no reasonably possible outcome is expected to involve amounts
that are material to NL. NL has and will continue to vigorously seek dismissal
from each claim and/or a finding of no liability by NL in each case. In
addition, from time to time, NL has received notices regarding asbestos or
silica claims purporting to be brought against former subsidiaries of NL,
including notices provided to insurers with which NL has entered into
settlements extinguishing certain insurance policies. These insurers may seek
indemnification from NL.
Kronos' Belgian subsidiary and certain of its employees are the subject of
civil and criminal proceedings relating to an accident that resulted in two
fatalities at NL's Belgian facility in 2000. In May 2004, the court ruled and,
among other things, imposed a fine of euro 200,000 against Kronos and fines
aggregating less than euro 40,000 against various Kronos employees. Kronos and
the individual employees have appealed the ruling.
In addition to the litigation described above, the Company and its
affiliates are also involved in various other environmental, contractual,
product liability, patent (or intellectual property), employment and other
claims and disputes incidental to its present and former businesses. The Company
currently believes that the disposition of all claims and disputes, individually
or in the aggregate, should not have a material adverse effect on its
consolidated financial position, results of operations or liquidity.
Other matters
Concentrations of credit risk. Sales of TiO2 accounted for substantially
all of Kronos' sales during the past three years. TiO2 is generally sold to the
paint, plastics and paper industries, which are generally considered
"quality-of-life" markets whose demand for TiO2 is influenced by the relative
economic well-being of the various geographic regions. TiO2 is sold to over
4,000 customers and the ten largest customers accounted for about one-fourth of
chemicals sales. In each of the past three years, approximately one-half of NL's
TiO2 sales volume were to Europe with about 30% to 40% attributable to North
America.
Component products are sold primarily to original equipment manufacturers
in North America and Europe. In 2004, the ten largest customers accounted for
approximately 43% of component products sales (2003 - 44%; 2002 - 38%).
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 43% of its sales in 2002, 44% in 2003 and 48% in 2004.
At December 31, 2004, consolidated cash, cash equivalents and restricted
cash includes $120.9 million invested in U.S. Treasury securities purchased
under short-term agreements to resell (2003 - $38 million), all of which are
held in trust for the Company by a single U.S. bank (2003 - $17 million). At
December 31, 2004, consolidated cash, cash equivalents and restricted cash
includes approximately $96 million on deposit at a single U.S. bank (2003 -
$328,000).
Capital expenditures. At December 31, 2004, firm commitments for capital
projects in process approximated $10.0 million, of which $6.7 million relates to
Kronos' TiO2 facilities and the remainder relates to CompX.
Royalties. Royalty expense, which relates principally to the volume of
certain products manufactured in Canada and sold in the United States under the
terms of a third-party patent license agreement approximated $700,000 in 2002,
$450,000 in 2003 and $222,000 in 2004.
Long-term contracts. Kronos has certain long-term supply contracts that
provide for Kronos' TiO2 feedstock requirements through 2009. The agreements
require Kronos to purchase certain minimum quantities of feedstock with purchase
commitments aggregating approximately $525 million at December 31, 2004. CompX's
open purchase orders and contractual obligations, primarily commitments to
purchase raw materials, approximated $12.6 million at December 31, 2004.
TIMET has a long-term supply agreement with Boeing pursuant to which Boeing
advanced TIMET $28.5 million for each of 2002, 2003, 2004 and 2005, and Boeing
is required to advance TIMET $28.5 million annually from 2006 through 2007. The
agreement is structured as a take-or-pay agreement such that Boeing, beginning
in calendar year 2002, will forfeit a proportionate part of the $28.5 million
annual advance, or effectively $3.80 per pound, in the event that its annual
orders or those of Boeing's subcontractors for delivery for such calendar year
are less than 7.5 million pounds. TIMET can only be required, however, to
deliver up to 3 million pounds per quarter. Under a separate agreement, TIMET
must establish and hold buffer stock for Boeing at TIMET's facilities, for which
Boeing pays TIMET as such stock is produced.
In addition to its agreement with Boeing, TIMET has long-term supply
agreements with certain other major aerospace customers, including, among
others, Rolls-Royce plc and its German and U.S. affiliates, United Technologies
Corporation (Pratt & Whitney and related companies) and Wyman-Gordon Company (a
unit of Precision Castparts Corporation). These agreements expire in 2007
through 2008, subject to certain conditions, and generally provide for (i)
minimum market shares of the customers' titanium requirements or firm annual
volume commitments and (ii) fixed or formula-determined prices. Certain of these
agreements also contain market pricing provisions that may, under certain
circumstances, become applicable. Generally, the agreements require TIMET's
service and product performance to meet specified criteria, and also contain a
number of other terms and conditions customary in transactions of these types.
In certain events of nonperformance by TIMET or the customer, the agreements may
be terminated early.
TIMET also has a long-term agreement with VALTIMET, a manufacturer of
welded stainless steel and titanium tubing principally for industrial markets.
TIMET owns 44% of VALTIMET at December 31, 2004. 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 amended in the past and may be amended in the future
to meet changing business conditions.
In 2002, TIMET entered into a long-term agreement, effective through 2007,
for the purchase of titanium sponge. This agreement replaced and superceded a
previous agreement. The new agreement requires annual minimum purchases by TIMET
of approximately $10 million. TIMET has no other long-term sponge supply
agreements.
Waste Control Specialists has agreed to pay an independent consultant fees
for performing certain services based on specified percentages of certain of
Waste Control Specialists' revenues through 2009. Expense related to this
agreement 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. Rent for the Leverkusen facility is periodically
established by agreement with the lessor for periods of at least two years at a
time. Under a separate supplies and services agreement expiring in 2011, the
lessor provides some raw materials, auxiliary and operating materials and
utilities services necessary to operate the Leverkusen facility. Both the lease
and the supplies and services agreements restrict ownership and use of the
Leverkusen facility.
The Company also leases various other manufacturing facilities and
equipment. Some of the leases contain purchase and/or various term renewal
options at fair market and fair rental values, respectively. In most cases the
Company expects that, in the normal course of business, such leases will be
renewed or replaced by other leases. Rent expense related to continuing
operations approximated $12 million in 2002, $13 million in 2003 and $12 million
in 2004. At December 31, 2004, 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)
2005 $ 5,701
2006 4,076
2007 3,306
2008 2,688
2009 2,121
2010 and thereafter 21,613
-------
$39,505
Approximately $25.3 million of the $39.5 million aggregate future minimum
rental commitments at December 31, 2004 relates to Kronos' Leverkusen facility
lease discussed above. The minimum commitment amounts for such lease included in
the table above for each year through the 2050 expiration of the lease are based
upon the current annual rental rate as of December 31, 2004.
Income taxes. Contran and Valhi have agreed to a policy providing for the
allocation of tax liabilities and tax payments as described in Note 1. Under
applicable law, the Company, as well as every other member of the Contran Tax
Group, are each jointly and severally liable for the aggregate federal income
tax liability of Contran and the other companies included in the Contran Tax
Group for all periods in which the Company is included in the Contran Tax Group.
Contran has agreed, however, to indemnify the Company for any liability for
income taxes of the Contran Tax Group in excess of the Company's tax liability
previously computed and paid by Valhi in accordance with the tax allocation
policy.
Other. TIMET is the primary obligor on workers' compensation bonds having a
maximum aggregate obligation of $3.0 million that were issued on behalf of a
divested subsidiary that is currently under Chapter 11 bankruptcy protection.
The issuers of the bonds have been required to make payments on the bonds for
applicable claims and have requested reimbursement from TIMET. Through December
31, 2004, TIMET has reimbursed the issuer approximately $1.1 million under these
bonds, and $600,000 remains accrued for future payments. TIMET may revise its
estimated liability under these bonds in the future as additional facts become
known or claims develop.
Note 19 - Accounting principles newly adopted in 2002, 2003 and 2004:
Impairment of long-lived assets. The Company adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, effective
January 1, 2002. SFAS No. 144 retains the fundamental provisions of prior GAAP
with respect to the recognition and measurement of long-lived asset impairment
contained in SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Lived-Lived Assets to be Disposed Of. However, SFAS No. 144 provides new
guidance intended to address certain implementation issues associated with SFAS
No. 121, including expanded guidance with respect to appropriate cash flows to
be used to determine whether recognition of any long-lived asset impairment is
required, and if required how to measure the amount of the impairment. SFAS No.
144 also requires that net assets to be disposed of by sale are to be reported
at the lower of carrying value or fair value less cost to sell, and expands the
reporting of discontinued operations to include any component of an entity with
operations and cash flows that can be clearly distinguished from the rest of the
entity.
Goodwill. The Company adopted SFAS No. 142, Goodwill and Other Intangible
Assets, effective January 1, 2002. Under SFAS No. 142, goodwill, including
goodwill arising from the difference between the cost of an investment accounted
for by the equity method and the amount of the underlying equity in net assets
of such equity method investee ("equity method goodwill"), is no longer
amortized on a periodic basis. Goodwill (other than equity method goodwill) is
subject to an impairment test to be performed at least on an annual basis, and
impairment reviews may result in future periodic write-downs charged to
earnings. Equity method goodwill is not tested for impairment in accordance with
SFAS No. 142; rather, the overall carrying amount of an equity method investee
will continue to be reviewed for impairment in accordance with existing GAAP.
There is currently no equity method goodwill associated with any of the
Company's equity method investees. Under the transition provisions of SFAS No.
142, all goodwill existing as of June 30, 2001 ceased to be periodically
amortized as of January 1, 2002, and all goodwill arising in a purchase business
combination (including step acquisitions) completed on or after July 1, 2001 was
not periodically amortized from the date of such combination.
As discussed in Note 9, the Company has assigned its goodwill to four
reporting units (as that term is defined in SFAS No. 142). Goodwill attributable
to the chemicals operating segment was assigned to the reporting unit consisting
of Kronos in total. Goodwill attributable to the component products operating
segment was assigned to three reporting units within that operating segment, one
consisting of CompX's security products operations, one consisting of CompX's
European operations and one consisting of CompX's Candaian and Taiwanese
operations. Under SFAS No. 142, such goodwill will be deemed to not be impaired
if the estimated fair value of the applicable reporting unit exceeds the
respective net carrying value of such reporting unit, including the allocated
goodwill. If the fair value of the reporting unit is less than carrying value,
then a goodwill impairment loss would be recognized equal to the excess, if any,
of the net carrying value of the reporting unit goodwill over its implied fair
value (up to a maximum impairment equal to the carrying value of the goodwill).
The implied fair value of reporting unit goodwill would be the amount equal to
the excess of the estimated fair value of the reporting unit over the amount
that would be allocated to the tangible and intangible net assets of the
reporting unit (including unrecognized intangible assets) as if such reporting
unit had been acquired in a purchase business combination accounted for in
accordance with GAAP as of the date of the impairment testing.
In determining the estimated fair value of the Kronos reporting unit, the
Company will consider quoted market prices for Kronos' common stock, as adjusted
for an appropriate control premium. The Company will also use other appropriate
valuation techniques, such as discounted cash flows, to estimate the fair value
of the three CompX reporting units.
The Company completed its initial, transitional goodwill impairment
analysis under SFAS No. 142 as of January 1, 2002, and no goodwill impairments
were deemed to exist as of such date. In accordance with the requirements of
SFAS No. 142, the Company began reviewing the goodwill of its four reporting
units for impairment during the third quarter of each year starting in 2002.
Goodwill will also be reviewed for impairment at other times during each year
when events or changes in circumstances indicate that an impairment might be
present. No goodwill impairments were deemed to exist as a result of the
Company's annual impairment reviews completed during 2002, 2003 and 2004.
However, as a result of CompX's decision to dispose of its European operations,
the Company recognized a goodwill impairment charge in the fourth quarter of
2004. See Notes 9 and 22.
Debt extinguishment gains and losses. The Company adopted SFAS No. 145
effective April 1, 2002. SFAS No. 145, among other things, eliminated the prior
requirement that all gains and losses from the early extinguishment of debt were
to be classified as an extraordinary item. Upon adoption of SFAS No. 145, gains
and losses from the early extinguishment of debt are now classified as an
extraordinary item only if they meet the "unusual and infrequent" criteria
contained in Accounting Principles Board Opinion ("APBO") No. 30. In addition,
upon adoption of SFAS No. 145, all gains and losses from the early
extinguishment of debt that had previously been classified as an extraordinary
item are to be reassessed to determine if they would have met the "unusual and
infrequent" criteria of APBO No. 30; any such gain or loss that would not have
met the APBO No. 30 criteria is to be retroactively reclassified and reported as
a component of income before extraordinary item. The Company concluded that all
of its previously-recognized gains and losses from the early extinguishment of
debt that occurred on or after January 1, 1998 would not have met the APBO No.
30 criteria for classification as an extraordinary item, and accordingly such
previously-reported gains and losses from the early extinguishment of debt were
retroactively reclassified and are now reported as a component of income before
extraordinary item.
Guarantees. The Company complied with the disclosure requirements of FIN
No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, as of December 31,
2002. As required by the transition provisions of FIN No. 45, beginning in 2003
the Company will apply the recognition and initial measurement provisions of
this FIN on a prospective basis for any guarantees issued or modified after
December 31, 2002. The Company is not a party to any such guarantee at December
31, 2003 or 2004.
Asset retirement obligations; closure and post closure costs. Through
December 31, 2002, the Company provided for the estimated closure and
post-closure monitoring costs of its waste disposal facility over the operating
life of the facility as airspace was consumed. Such costs were estimated based
on the technical requirements of applicable state or federal regulations,
whichever were stricter, and included such items as final cap and cover on the
site, methane gas and leachate management and groundwater monitoring. Cost
estimates were based on management's judgment and experience and information
available from regulatory agencies as to costs of remediation. These estimates
were sometimes a range of possible outcomes. In such cases, the Company provided
for the amount within the range which constituted its best estimate. If no
amount within the range appeared to be a better estimate than any other amount,
the Company provided for at least the minimum amount within the range.
Effective January 1, 2003, the Company adopted SFAS No. 143, Accounting for
Asset Retirement Obligations. Under SFAS No. 143, the fair value of a liability
for an asset retirement obligation covered under the scope of SFAS No. 143 is
recognized in the period in which the liability is incurred, with an offsetting
increase in the carrying amount of the related long-lived asset. Over time, the
liability is accreted to its future value, and the capitalized cost is
depreciated over the useful life of the related asset. Future revisions in the
estimated fair value of the asset retirement obligation, due to changes in the
amount and/or timing of the expected future cash flows to settle the retirement
obligation, are accounted for prospectively as an adjustment to the
previously-recognized asset retirement cost. Upon settlement of the liability,
an entity will either settle the obligation for its recorded amount or incur a
gain or loss upon settlement. The Company's closure and post closure obligations
related to its waste disposal facility are covered by the scope of SFAS No. 143.
The Company also has certain other obligations covered by the scope of SFAS No.
143.
Under the transition provisions of SFAS No. 143, at the date of adoption on
January 1, 2003 the Company recognized (i) an asset retirement cost capitalized
as an increase to the carrying value of its property and equipment, (ii)
accumulated depreciation on such capitalized cost and (iii) a liability for the
asset retirement obligation. Amounts resulting from the initial application of
SFAS No. 143 were measured using information, assumptions and interest rates all
as of January 1, 2003. The amount recognized as the asset retirement cost was
measured as of the date the asset retirement obligation was incurred. Cumulative
accretion on the asset retirement obligation, and accumulated depreciation on
the asset retirement cost, was recognized for the time period from the date the
asset retirement cost and liability would have been recognized had the
provisions of SFAS No. 143 been in effect at the date the liability was
incurred, through January 1, 2003. The difference, if any, between the amounts
to be recognized as described above and any associated amounts recognized in the
Company's balance sheet as of December 31, 2002 was recognized as a cumulative
effect of a change in accounting principles as of the date of adoption. The
effect of adopting SFAS No. 143 as of January 1, 2003 was a net gain of
approximately $600,000 as summarized in the table below. Such change in
accounting relates principally to accounting for closure and post-closure
obligations at the Company's waste management operations.
Amount
(In millions)
Increase in carrying value of net property and equipment:
Cost $ .8
Accumulated depreciation (.2)
Investment in TIMET (.1)
Decrease in carrying value of previously-accrued closure and
post-closure activities 1.7
Asset retirement obligations recognized (1.3)
Deferred income taxes (.3)
-----
Net impact $ .6
=====
The change in the asset retirement obligations from January 1, 2003 ($1.3
million) to December 31, 2003 ($1.7 million) is due primarily to accretion
expense, which is reported as a component of cost of good sold. The change in
the asset retirement obligations from December 31, 2003 to December 31, 2004
($1.4 million) is due primarily to the net effects of accretion expense as well
as a $492,000 payment charged to the asset retirement obligation related to the
settlement of a portion of the retirement obligations related to the Company's
waste management operations.
The types of estimated costs used in determining the Company's asset
retirement obligations under SFAS No. 143 are the same types of costs the
Company used to estimate its closure and post closure obligations prior to
adoption of SFAS No. 143. Estimates of the ultimate cost to be incurred to
settle the Company's closure and post closure obligations require a number of
assumptions, are inherently difficult to develop and the ultimate outcome may
differ from current estimates. As additional information becomes available, cost
estimates will be adjusted as necessary. It is possible that technological,
regulatory or enforcement developments, the results of studies or other factors
could necessitate the recording of additional liabilities.
Costs associated with exit or disposal activities. The Company adopted SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities, on
January 1, 2003 for exit or disposal activities initiated on or after that date.
Under SFAS No. 146, costs associated with exit activities, as defined, that are
covered by the scope of SFAS No. 146 will be recognized and measured initially
at fair value, generally in the period in which the liability is incurred. Costs
covered by the scope of SFAS No. 146 include termination benefits provided to
employees, costs to consolidate facilities or relocate employees, and costs to
terminate contracts (other than a capital lease). Under prior GAAP, a liability
for such an exit cost is recognized at the date an exit plan is adopted, which
may or may not be the date at which the liability has been incurred. The effect
of adopting SFAS No. 146 as of January 1, 2003 was not material as the Company
was not involved in any exit or disposal activities covered by the scope of the
new standard as of such date.
Variable interest entities. The Company complied with the consolidation
requirements of FASB Interpretation ("FIN") No. 46R, Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51, as amended, as of March 31,
2004. The Company does not have any involvement with any variable interest
entity (as that term is defined in FIN No. 46R) covered by the scope of FIN No.
46R that would require the Company to consolidate such entity under FIN No. 46R
which had not already been consolidated under prior applicable GAAP, and
therefore the impact to the Company of adopting the consolidation requirements
of FIN No. 46R was not material.
Note 20 - Accounting principles not yet adopted:
Inventory costs. The Company will adopt SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4, for inventory costs incurred on or after
January 1, 2006. SFAS No. 151 requires that the allocation of fixed production
overhead costs to inventory shall be based on normal capacity. Normal capacity
is not defined as a fixed amount; rather, normal capacity refers to a range of
production levels expected to be achieved over a number of periods under normal
circumstances, taking into account the loss of capacity resulting from planned
maintenance shutdowns. The amount of fixed overhead allocated to each unit of
production is not increased as a consequence of idle plant or production levels
below the low end of normal capacity, but instead a portion of fixed overhead
costs is charged to expense as incurred. Alternatively, in periods of production
above the high end of normal capacity, the amount of fixed overhead costs
allocated to each unit of production is decreased so that inventories are not
measured above cost. SFAS No. 151 also clarifies existing GAAP to require that
abnormal freight and wasted materials (spoilage) are to be expensed as incurred.
The Company believes its production cost accounting already complies with the
requirements of SFAS No. 151, and the Company does not expect adoption of SFAS
No. 151 will have a material effect on its consolidated financial statements.
Stock options. The Company will adopt SFAS No. 123R, Share-Based Payment,
as of July 1, 2005. SFAS No. 123R, among other things, eliminates the
alternative in existing GAAP to use the intrinsic value method of accounting for
stock-based employee compensation under APBO No. 25. Upon adoption of SFAS No.
123R, the Company will generally be required to recognize the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award, with the cost recognized over the period
during which an employee is required to provide services in exchange for the
award (generally, the vesting period of the award). No compensation cost will be
recognized in the aggregate for equity instruments for which the employee does
not render the requisite service (generally, the instrument is forfeited before
it has vested). The grant-date fair value will be estimated using option-pricing
models (e.g. Black-Sholes or a lattice model). Under the transition alternatives
permitted under SFAS No. 123R, the Company will apply the new standard to all
new awards granted on or after July 1, 2005, and to all awards existing as of
June 30, 2005 which are subsequently modified, repurchased or cancelled.
Additionally, as of July 1, 2005, the Company will be required to recognize
compensation cost for the portion of any non-vested award existing as of June
30, 2005 over the remaining vesting period. Because the number of non-vested
awards as of June 30, 2005 with respect to options granted by Valhi and its
subsidiaries and affiliates is not expected to be material, the effect of
adopting SFAS No. 123R is not expected to be significant in so far as it relates
to existing stock options. Should Valhi or its subsidiaries and affiliates,
however, either grant a significant number of options or modify, repurchase or
cancel existing options in the future, the effect on the Company's consolidated
financial statements could be material.
Impairment of investments. In June 2004, the Emerging Issues Task Force
("EITF") issued EITF No. 03-01, The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments. EITF No. 03-01, the effective date
of which is still pending based upon a deferral granted by the Financial
Accounting Standards Board, provides guidance for determining when an investment
covered by its scope is considered impaired, whether any impairment is other
than temporary and the date when an impairment loss is to be recognized. The
Company does not currently expect compliance with EITF No. 03-01 will have a
material affect on its consolidated financial statements, whenever it becomes
effective.
Note 21 - Financial instruments:
December 31,
2003 2004
------------------- ------------
Carrying Fair Carrying Fair
amount value amount value
(In millions)
(Restated) (Restated) (Restated) (Restated)
Cash, cash equivalents and restricted cash
equivalents $123.2 $ 123.2 $277.9 $ 277.9
Marketable securities:
Current $ 6.1 $ 6.1 $ 9.4 $ 9.4
Noncurrent 256.9 256.9 256.8 256.8
Loan to Snake River Sugar Company $ 80.0 $ 111.5 $ 80.0 $ 96.3
Long-term debt (excluding capitalized leases):
Publicly-traded fixed rate debt -
KII Senior Secured Notes $356.1 $ 356.1 $519.2 $ 549.1
Snake River Sugar Company loans 250.0 250.0 250.0 250.0
Other fixed-rate debt .1 .1 .6 .6
Variable rate debt 31.0 31.0 13.6 13.6
Minority interest in:
NL common stock $ 31.3 $ 87.0 $ 70.2 $ 178.8
Kronos common stock 11.1 75.8 29.6 125.3
CompX common stock 48.4 30.4 49.2 79.4
Valhi common stockholders' equity $659.7 $1,798.0 $989.5 $1,934.2
The fair value of the Company's publicly-traded marketable securities and
debt, minority interest in NL Industries, Kronos and CompX and Valhi's common
stockholders' equity are all based upon quoted market prices at each balance
sheet date. The estimated fair value of the Company's investment in The
Amalgamated Sugar Company LLC is $250 million (the redemption price of the
Company's investment in the LLC). The fair value of the Company's fixed-rate
loan to Snake River Sugar Company is based upon relative changes in market
interest rates since the interest rates were fixed. The fair value of Valhi's
fixed-rate nonrecourse loans from Snake River Sugar Company is based upon the
$250 million redemption price of Valhi's investment in the Amalgamated Sugar
Company LLC, which investment collateralizes such nonrecourse loans. Fair values
of variable interest rate debt and other fixed-rate debt are deemed to
approximate book value. See Notes 5 and 10.
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. Derivatives
used to hedge forecasted transactions and specific cash flows associated with
foreign currency denominated financial assets and liabilities which meet the
criteria for hedge accounting are designated as cash flow hedges. Consequently,
the effective portion of gains and losses is deferred as a component of
accumulated other comprehensive income and is recognized in earnings at the time
the hedged item affects earnings. Contracts that do not meet the criteria for
hedge accounting are marked-to-market at each balance sheet date with any
resulting gain or loss recognized in income currently as part of net currency
transactions. To manage such exchange rate risk, at December 31, 2004, the
Company held a series of contracts maturing through March 2005 to exchange an
aggregate of U.S. $7.2 million for an equivalent amount of Canadian dollars at
an exchange rates of Cdn. $1.19 to Cdn. $1.23 per U.S. dollar (2003 - contracts
maturing through February 2004 to exchange an aggregate of U.S. $4.2 million for
an equivalent amount of Canadian dollars at an exchange rates of Cdn. $1.30 to
Cdn. $1.33 per U.S. dollar). At December 31, 2003 and 2004, the actual exchange
rate was Cdn. $1.31 and Cdn. $1.21 per U.S. dollar, respectively. The estimated
fair values of such foreign currency forward contracts at December 31, 2003 and
2004 is insignificant.
At December 31, 2003, the Company also had entered into a short-term
currency forward contract maturing on January 2, 2004 to exchange an aggregate
of euro 40 million into U.S. dollars at an exchange rate of U.S. $1.25 per euro.
Such contract was entered into in conjunction with the January 2004 payment of
an intercompany dividend from one of the Company's European subsidiaries. At
December 31, 2003, the actual exchange rate was U.S. $1.25 per euro. The
estimated fair value of such foreign currency forward contract was not material
at December 31, 2003.
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 2002, 2003 or 2004.
Note 22 - Discontinued operations:
In December 2004, CompX's board of directors committed to a formal plan to
dispose of its Thomas Regout operations in The Netherlands. Such operations,
which previously were included in the Company's component products operating
segment (see Note 3), met all of the criteria under GAAP to be classified as an
asset held for sale at December 31, 2004, and accordingly the results of
operations of Thomas Regout have been classified as discontinued operations for
all periods presented. The Company has not reclassified its consolidated balance
sheets or statements of cash flows. In classifying the net assets of the Thomas
Regout operations as an asset held for sale, the Company concluded that the
carrying amount of the net assets of such operations exceeded the estimated fair
value less costs to sell of such operations, and accordingly in the fourth
quarter of 2004 the Company recognized a $6.5 million impairment charge to
write-down its investment in the Thomas Regout operations to its estimated net
realizable value. Such charge represented an impairment of goodwill. See Note 9.
In January 2005, CompX completed the sale of such operations for proceeds
(net of expenses) of approximately $22.6 million. The net proceeds consisted of
approximately $18.4 million in cash at the date of sale and a $4.2 million
principal amount note receivable from the purchaser bearing interest at a fixed
rate of 7% and payable over four years. The note receivable is collateralized by
a secondary lien on the assets sold and is subordinated to certain third-party
indebtedness of the purchaser. Accordingly, the Company will no longer include
the results of operations of Thomas Regout subsequent to December 31, 2004 in
its consolidated financial statements. The net proceeds from the January 2005
sale of Thomas Regout approximated the net realizable value estimated at the
time the goodwill impairment charge was recognized.
Condensed income statement data for Thomas Regout is presented below. The
$6.5 million goodwill impairment charge is included in Thomas Regout's operating
loss for 2004. Interest expense included in discontinued operations represents
interest on certain intercompany indebtedness with CompX, which indebtedness
arose at the time of CompX's acquisition of such operations prior to 2002 and
corresponded to certain third-party indebtedness CompX incurred at the time such
operations were acquired. Discontinued operations in 2004 includes a $4.2
million income tax benefit associated with the U.S. capital loss expected to be
realized in the first quarter of 2005 upon completion of the sale of the Thomas
Regout operations. Recognition of the benefit of such capital loss by the
Company is appropriate under GAAP in the fourth quarter of 2004 at the time such
operations were classified as held for sale.
Years ended December 31,
2002 2003 2004
---- ---- ----
(In millions)
Net sales $ 31.3 $ 35.3 $ 41.7
====== ====== ======
Operating income (loss) $ .1 $ (5.5) $ (3.5)
Pension settlement gain .7 - -
Interest expense (1.3) (1.4) (1.5)
Income tax benefit .2 2.6 4.6
Minority interest in losses .1 1.4 4.1
------ ------ ------
Net income (loss) $ (.2) $ (2.9) $ 3.7
====== ====== ======
Condensed balance sheet data for Thomas Regout, included in the Company's
consolidated balance sheets, is presented below.
December 31,
2003 2004
---- ----
(In millions)
Current assets $12.7 $18.0
Noncurrent assets 25.9 11.0
----- -----
$38.6 $29.0
===== =====
Current liabilities $ 7.1 $ 5.0
Net assets 31.5 24.0
----- -----
$38.6 $29.0
===== =====
Included in the net assets of Thomas Regout are certain intercompany loans
payable by Thomas Regout to CompX which are eliminated in the Company's
consolidated balance sheet.
Note 23 - Quarterly results of operations (unaudited):
Quarter ended
------------- --------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(Restated) (Restated) (Restated) (Restated)
(In millions, except per share data)
Year ended December 31, 2003
Net sales $296.7 $309.5 $287.5 $292.5
Operating income 30.7 29.9 31.5 27.8
Income from continuing operations $ 2.0 $ 18.4 $ 8.3 $(111.3)
Discontinued operations (.4) (.6) (1.5) (.4)
Cumulative effect of change in
accounting principle .6 - - -
------ ------ ------ ----
Net income $ 2.2 $ 17.8 $ 6.8 $(111.7)
====== ====== ====== ========
Per basic share:
Continuing operations $ .01 $ .15 $ .07 $ (.93)
Discontinued operations - - (.01) -
Cumulative effect of change
in accounting principle .01 - - -
------ ------ ------ ----
$ .02 $ .15 $ .06 $ (.93)
====== ====== ====== =======
Year ended December 31, 2004
Net sales $307.7 $343.3 $336.8 $332.3
Operating income 21.5 37.7 30.2 20.1
Income from continuing operations $ 1.0 $246.2 $ 10.5 $(33.5)
Discontinued operations - .2 .2 3.3
------ ------ ------ ------
Net income $ 1.0 $246.4 $ 10.7 $(30.2)
====== ====== ====== =======
Per basic share:
Continuing operations $ .01 $ 2.05 $ .09 $ (.28)
Discontinued operations - - - .03
------ ------ ------ ------
$ .01 $ 2.05 $ .09 $ (.25)
====== ====== ====== =======
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 2004, Kronos determined that it should have
recognized an additional $17.3 million net deferred income tax benefit during
the second quarter of 2004, primarily related to the amount of the valuation
allowance related to Kronos' German operations which should have been reversed.
While the additional tax benefit is not material to the Company's second quarter
2004 results, the quarterly results of operations for 2004, as presented above,
reflects this additional tax benefit. Accordingly, income from continuing
operations for the second quarter of 2004 of $278.3 million ($2.32 per basic
share), as reflected above, differs from the $263.5 million ($2.19 per basic
share) previously reported by the Company. Such $14.8 million increase in income
from continuing operations is comprised of (i) the additional deferred income
tax benefit of $17.3 million and (ii) an additional minority interest in
earnings of $2.5 million.
As discussed in Note 1, the Company has restated its consolidated financial
statements. Income (loss) from continuing operations and net income, and the
related per diluted share amounts, for the third and fourth quarter of 2003, as
presented above, differs from amounts previously reported by $2.0 million ($.01
per share) and $122.4 million ($1.02 per share).
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of Valhi, Inc.:
Our audits of the consolidated financial statements, of management's
assessment of the effectiveness of internal control over financial reporting and
of the effectiveness of internal control over financial reporting referred to in
our report dated March 30, 2005, except for the restatement discussed in Note 1
to the consolidated financial statements and the matter described in the
penultimate paragraph of Management's Report On Internal Control Over Financial
Reporting, as to which the date is December 23, 2005, appearing in this Annual
Report on Form 10-K 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 30, 2005, except for the restatement discussed in Note 1 to the
consolidated financial statements and the matter described in the penultimate
paragraph of Management's Report On Internal Control Over Financial Reporting,
as to which the date is December 23, 2005
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheets
December 31, 2003 and 2004
(In thousands)
2003 2004
---- ----
(Restated) (Restated)
Current assets:
Cash and cash equivalents $ 5,443 $ 94,337
Restricted cash equivalents 320 270
Accounts and notes receivable 342 226
Receivables from subsidiaries and affiliates:
Demand loan to Contran Corporation - 4,929
Income taxes, net 7,663 -
Other 1,953 2,165
Deferred income taxes 219 201
Other 1,350 267
---------- ----------
Total current assets 17,290 102,395
---------- ----------
Other assets:
Marketable securities 250,033 250,023
Restricted cash equivalents 488 494
Investment in and advances to subsidiaries and
affiliate 738,348 935,438
Other receivable from subsidiary 2,258 696
Loans and notes receivable 115,535 118,294
Other assets 3,564 206
Property and equipment, net 2,160 1,893
---------- ----------
Total other assets 1,112,386 1,307,044
---------- ----------
$1,129,676 $1,409,439
Current liabilities:
Current maturities of long-term debt $ 5,000 $ -
Payables to subsidiaries and affiliates:
Demand loan from Tremont LLC and subsidiaries 16,293 -
Demand loan from Contran Corporation 7,332 -
Income taxes, net - 1,050
Other 10 20
Accounts payable and accrued liabilities 7,372 822
Income taxes 381 381
---------- ----------
Total current liabilities 36,388 2,273
---------- ----------
Noncurrent liabilities:
Long-term debt 250,000 250,000
Deferred income taxes 207,997 288,269
Other 11,277 1,314
---------- ----------
Total noncurrent liabilities 469,274 539,583
---------- ----------
Stockholders' equity 624,014 867,583
---------- ---------
$1,129,676 $1,409,439
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed Statements of Income
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
(Restated) (Restated) (Restated)
Revenues and other income:
Interest and dividend income $ 30,424 $30,432 $ 32,438
Securities transaction gains, net 6,413 3 -
Other, net 3,184 3,419 3,306
-------- ------- --------
40,021 33,854 35,744
-------- ------- --------
Costs and expenses:
General and administrative 10,283 8,385 9,302
Interest 28,216 24,613 25,202
-------- ------- --------
38,499 32,998 34,504
-------- ------- --------
1,522 856 1,240
Equity in earnings of subsidiaries and
affiliate (3,074) 15,418 303,509
-------- ------- --------
Income (loss) before income taxes (1,552) 16,274 304,749
Provision for income taxes (benefit) (4,432) 98,937 80,548
---------- -------- ---------
Income from continuing operations 2,880 (82,663) 224,201
Discontinued operations (206) (2,874) 3,732
Cumulative effect of change in accounting
Principle - 586 -
------- ------- -----
Net income $ 2,674 $(84,951) $227,933
======== ========= ========
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed Statements of Cash Flows
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
(Restated) (Restated) (Restated)
Cash flows from operating activities:
Net income $ 2,674 $ (84,951) $ 227,933
Securities transactions gains, net (6,413) (3) -
Proceeds from disposal of marketable
securities (trading) 18,136 50 -
Noncash interest expense 2,143 - -
Deferred income taxes 5,981 106,063 75,473
Equity in earnings of subsidiaries
and affiliate:
Continuing operations 3,074 (15,418) (303,509)
Discontinued operations 206 2,874 (3,732)
Cumulative effect of change in
accounting principle - (586) -
Dividends from subsidiaries and
affiliates 105,786 25,405 37,209
Other, net 591 (37) 683
Net change in assets and liabilities (18,908) (2,838) (9,264)
-------- -------- ---------
Net cash provided by operating
activities 113,270 30,559 24,793
-------- -------- ---------
Cash flows from investing activities:
Purchase of:
Kronos common stock - (6,428) (17,057)
TIMET common stock - (840) -
TIMET debt securities - (238) -
Loans to subsidiaries and affiliates:
Loans (7,303) (9,689) (32,328)
Collections 184 1,000 178,227
Change in restricted cash equivalents, net (902) 94 44
Other, net (83) (919) (558)
-------- -------- ---------
Net cash provided (used) by
investing activities (8,104) (17,020) 128,328
-------- -------- ---------
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed Statements of Cash Flows (Continued)
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
(Restated) (Restated) (Restated)
Cash flows from financing activities:
Indebtedness:
Borrowings $ 27,300 $ 10,000 $ 53,000
Principal payments (92,572) (5,000) (58,000)
Loans from affiliates:
Loans 13,718 34,583 30,529
Repayments (26,825) (23,262) (54,154)
Dividends (27,872) (29,796) (29,804)
Other, net 2,680 264 (424)
--------- -------- --------
Net cash used by financing activities (103,571) (13,211) (58,853)
--------- -------- --------
Cash and cash equivalents:
Net increase 1,595 328 94,268
Valmont Insurance Company - - (5,374)
Balance at beginning of year 3,520 5,115 5,443
--------- -------- --------
Balance at end of year $ 5,115 $ 5,443 $ 94,337
========= ======== ========
Supplemental disclosures - cash paid (received) for:
Interest $ 26,153 $ 24,613 $ 25,116
Income taxes, net 2,456 (4,231) (2,134)
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Notes to Condensed Financial Information
Note 1 - Basis of presentation:
The accompanying financial statements of Valhi, Inc. reflect Valhi's
investment in (i) the common stocks (or equivalent thereof) of NL Industries,
Inc., Kronos Worldwide, Inc., Tremont LLC, Valcor, Inc., Waste Control
Specialists LLC and Titanium Metals Corporation ("TIMET") on the equity method
and (ii) the debt and preferred stock securities of TIMET as available-for-sale
marketable securities carried at fair value. The Consolidated Financial
Statements of Valhi, Inc. and Subsidiaries, including the notes thereto, are
incorporated herein by reference.
Note 2 - Marketable securities:
December 31,
2003 2004
---- ----
(In thousands)
(Restated) (Restated)
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC $250,000 $250,000
Other securities 33 23
-------- --------
$250,033 $250,023
Note 3 - Investment in and advances to subsidiaries and affiliate:
December 31,
2003 2004
---- ----
(In thousands)
(Restated) (Restated)
Investment in:
NL Industries (NYSE: NL) $231,633 $209,681
Kronos Worldwide, Inc. (NYSE: KRO) 191,662 398,628
Tremont LLC 231,054 312,789
Valcor and subsidiaries 65,677 (15,803)
Waste Control Specialists LLC (13,815) 23,766
TIMET (NYSE: TIE) common stock 1,013 1,611
TIMET preferred stock - 183
TIMET debt securities 265 -
-------- -----
707,489 930,855
Noncurrent loans to Waste Control Specialists LLC 30,859 4,583
-------- --------
$738,348 $935,438
Noncurrent receivable from subsidiary at December 31, 2003 and 2004
consists of accrued interest due from Waste Control Specialists on the Company's
loans to Waste Control Specialists. During 2004, Valhi contributed an aggregate
of $47.5 million of loans and related accrued interest to Waste Control
Specialists' equity.
Prior to December 2003, Kronos was a wholly-owned subsidiary of NL. In
December 2003, NL completed the distribution of approximately 48.8% of Kronos'
common stock to NL shareholders (including Valhi and Tremont LLC) in the form of
a pro-rata dividend. Shareholders of NL received one share of Kronos common
stock for every two shares of NL held. Valhi's equity in earnings of Kronos for
2003 relates to Kronos' earnings subsequent to the December 2003 distribution.
During 2004, NL paid each of its four $.20 per share regular quarterly dividend
in the form of shares of Kronos common stock in which an aggregate of
approximately was 2.5% of Kronos' outstanding common stock, were distributed to
NL shareholders (including Valhi and Tremont) in the form of pro-rata dividends.
During the fourth quarter of 2004, NL transferred approximately 5.5 million
shares of Kronos common stock to Valhi in satisfaction of a tax liability and
the tax liability generated from the use of such Kronos shares to settle such
tax liability. The transfer of such 5.5 million shares of Kronos common stock,
accounted for under GAAP as a transfer of net assets among entities under common
control at carryover basis, had no effect on the Company's consolidated
financial statements.
At December 31, 2002, Valhi and NL owned 80% and 20%, respectively, of
Tremont Group, Inc. Tremont Group was a holding company that owned 80% of
Tremont Corporation. In February 2003, Valhi completed a series of merger
transactions pursuant to which, among other things, both Tremont Group, and
Tremont became wholly-owned subsidiaries of Valhi and Tremont Group and Tremont
subsequently merged to form Tremont LLC. Tremont LLC is a holding company whose
principal assets at December 31, 2004 are a 40% interest in TIMET, a 21%
interest in NL, a 11% interest in Kronos and interests in other joint ventures.
In January 2005, Tremont distributed to Valhi its ownership interest in NL and
Kronos.
Prior to September 2004, Valcor's principal asset was a 66% interest in
CompX International, Inc., and Valhi owned an additional 3% of CompX directly.
Valhi's direct investment in CompX was considered part of its investment in
Valcor. On September 24, 2004, NL completed the acquisition the Compx shares
previously held by Valhi and Valcor at a purchase price of $16.25 per share, or
an aggregate of approximately $168.6 million. The purchase price was paid by
NL's transfer to Valhi and Valcor of an aggregate $168.6 million of NL's $200
million long-term note receivable from Kronos. Subsequently in 2004, Valcor
distributed to Valhi its notes receivable from Kronos that Valcor received in
this transaction, and Kronos prepaid the entire note balance.
In December 2004, Valmont Insurance Company, a subsidiary of Valhi, merged
into Tall Pines Insurance Company, a subsidiary of Tremont, with Tall Pines
surviving the merger. Valmont was previously included as part of the
registrant's consolidated financial information. At December 27, 2004, the net
assets of Valmont were transferred to Tall Pines for financial reporting
purposes at Valhi's carryover basis, and such net assets are included as part of
Valhi's investment in Tremont at December 31, 2004. Valmont's cash and cash
equivalents was approximately $5.4 million at December 27, 2004, and such cash
is shown as a reconciling item on the accompany condensed statements of cash
flows.
See the notes to the Company's Consolidated Financial Statements for a
discussion of these and other transactions affecting the Company's investment in
its subsidiaries and affiliates.
Years ended December 31,
2002 2003 2004
---- ---- ----
(Restated) (Restated) (Restated)
(In thousands)
Equity in earnings of subsidiaries and
affiliate from continuing operations
NL Industries $ 16,635 $ 12,369 $124,035
Kronos Worldwide - 804 99,948
Tremont LLC (11,965) 11,617 86,033
Valcor 462 3,503 5,399
Waste Control Specialists LLC (8,206) (12,923) (12,379)
TIMET - 48 473
-------- -------- --------
$ (3,074) $ 15,418 $303,509
======== ======== ========
Cash dividends from subsidiaries
NL Industries $ 99,447 $ 24,108 $ -
Kronos Worldwide - - 17,586
Tremont LLC 1,152 - 19,623
Valcor 5,187 1,297 -
Waste Control Specialists LLC - - -
-------- -------- -----
$105,786 $ 25,405 $ 37,209
======== ======== ========
Equity in earnings of discontinued operations relates to CompX's operations
in The Netherlands.
Note 4 - Loans and notes receivable:
December 31,
2003 2004
---- ----
(In thousands)
Snake River Sugar Company:
Principal $ 80,000 $ 80,000
Interest 33,102 38,294
Other 2,433 -
-------- -----
$115,535 $118,294
Note 5 - Long-term debt:
December 31,
2003 2004
---- ----
(In thousands)
Snake River Sugar Company $250,000 $250,000
Bank credit facility 5,000 -
-------- -----
255,000 250,000
Less current maturities 5,000 -
-------- -----
$250,000 $250,000
Valhi's $250 million in loans from Snake River bear interest at a weighted
average fixed interest rate of 9.4%, are collateralized by the Company's
interest in The Amalgamated Sugar Company LLC and are due in January 2027.
Currently, these loans are nonrecourse to Valhi. Up to $37.5 million of such
loans will become recourse to Valhi to the extent that the balance of Valhi's
loan to Snake River (including accrued interest) becomes less than $37.5
million. See Note 4. Under certain conditions, Snake River has the ability to
accelerate the maturity of these loans.
At December 31, 2004, Valhi has a $100 million revolving bank credit
facility which matures in October 2005, generally bears interest at LIBOR plus
1.5% (for LIBOR-based borrowings) or prime (for prime-based borrowings), and is
collateralized by 15 million shares of Kronos common stock held by Valhi. The
agreement limits dividends and additional indebtedness of Valhi and contains
other provisions customary in lending transactions of this type. In the event of
a change of control of Valhi, as defined, the lenders would have the right to
accelerate the maturity of the facility. The maximum amount which may be
borrowed under the facility is limited to one-third of the aggregate market
value of the shares of Kronos common stock pledged as collateral. Based on
Kronos' December 31, 2004 quoted market price of $40.75 per share, the shares of
Kronos common stock pledged under the facility provide more than sufficient
collateral coverage to allow for borrowings up to the full amount of the
facility. At December 31, 2004, Valhi would only have become limited to
borrowing less than the full $100 million amount of the facility, or would be
required to pledge additional collateral if the full amount of the facility had
been borrowed, if the quoted market price of the shares of Kronos pledged was
less than $20 per share. At December 31, 2004, no amounts were outstanding,
letters of credit aggregating $4.1 million had been issued, and $95.9 million
was available for borrowing under this facility.
Note 6 - Income taxes:
Years ended December 31,
2002 2003 2004
---- ---- ----
(Restated) (Restated) (Restated)
(In thousands)
Components of provision for income taxes (benefit):
Currently payable (refundable) $(10,413) $ (7,126) $5,075
Deferred income tax expense 5,981 106,063 75,473
------ -------- --------
(benefit)
$ (4,432) $ 98,937 $ 80,548
========= ======== ========
Cash paid (received) for income taxes, net:
Paid to (received from) subsidiaries, net $ 2,455 $(5,768) $(2,174)
Paid to Contran - 1,490 -
Paid to tax authorities, net 1 47 40
------- ------- -------
$ 2,456 $(4,231) $(2,134)
======= ======= =======
The Amalgamated Sugar Company LLC is treated as a partnership 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, as recognition of such income tax
(benefit) is not appropriate at the Waste Control Specialist level.
Deferred tax
asset (liability)
December 31,
2003 2004
---- ----
(In thousands)
(Restated) (Restated)
Components of the net deferred tax asset (liability) - tax effect of temporary
differences related to:
Marketable securities $ (99,309) $(104,151)
Investment in Kronos Worldwide (100,347) (192,996)
Investment in Waste Control Specialists LLC 1,373 1,952
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 (6,808) (7,984)
Tax attributes of Valhi:
Federal loss carryforwards - 16,627
State net operating and capital loss carryforwards - 2,941
AMT credit carryforwards 381 381
Accrued liabilities and other deductible differences 4,532 2,649
Other taxable differences (7,600) (7,487)
-------- --------
$(207,778) $(288,068)
Current deferred tax asset $ 219 $ 201
Noncurrent deferred tax liability (207,997) (288,269)
--------- ---------
$(207,778) $(288,068)
VALHI, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
Balance at charged to Balance
beginning costs and Net Currency at end
Description of year expenses deductions translation Other of year
--------------------------------- --------- --------- ---------- ----------- ----- -------
Year ended December 31, 2002:
Allowance for doubtful accounts $ 6,326 $ 692 $(1,014) $ 352 $ - $ 6,356
======= ======= ======= ======= ======== =======
Amortization of intangible assets $ 1,010 $ 612 $ - $ (1) $ - $ 1,621
======= ======= ======= ======== ======== =======
Accrual for planned major
maintenance activities $ 3,389 $ 3,848 $(3,746) $ 495 $ - $ 3,986
======= ======= ======= ======= ======== =======
Year ended December 31, 2003:
Allowance for doubtful accounts $ 6,356 $(1,768) $ (425) $ 486 $ - $ 4,649
======= ======= ======= ======= ======== =======
Amortization of intangible assets $ 1,621 $ 605 $ - $ 19 $ - $ 2,245
======= ======= ======= ======= ======== =======
Accrual for planned major
maintenance activites $ 3,986 $ 5,337 $(3,896) $ 900 $ - $ 6,327
======= ======= ======= ======= ======== =======
Year ended December 31, 2004:
Allowance for doubtful accounts $ 4,649 $ (30) $(1,013) $ 220 $ $ 3,826
======= ======= ======= ======= ======== =======
Amortization of intangible assets $ 2,245 $ 603 $ - $ 14 $ - $ 2,862
======= ======= ======= ======= ======== =======
Accrual for planned major
maintenance activities $ 6,327 $ 6,602 $(8,001) $ 425 $ - $ 5,353
======= ======= ======= ======= ======== =======
Note - Certain information has been omitted from this Schedule because it is
disclosed in the notes to the Consolidated Financial Statements.