SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2000 Commission file number 1-5467
---------------------- ------
VALHI, INC.
------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 87-0110150
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Number of shares of common stock outstanding on October 31, 2000: 114,680,014.
<PAGE>
VALHI, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1999
and September 30, 2000 3-4
Consolidated Statements of Income -
Three months and nine months ended
September 30, 1999 and 2000 5-6
Consolidated Statements of Comprehensive Income -
Nine months ended September 30, 1999 and 2000 7
Consolidated Statement of Stockholders' Equity -
Nine months ended September 30, 2000 8
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1999 and 2000 9-10
Notes to Consolidated Financial Statements 11-18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 19-36
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 37-38
Item 6. Exhibits and Report on Form 8-K. 39
<PAGE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
ASSETS December 31, September 30,
1999 2000
---- ----
Current assets:
<S> <C> <C>
Cash and cash equivalents .................. $ 152,707 $ 147,811
Restricted cash equivalents ................ 17,565 62,667
Accounts and other receivables ............. 202,200 227,100
Refundable income taxes .................... 5,146 11,100
Receivables from affiliates ................ 14,606 4,241
Inventories ................................ 219,618 185,002
Prepaid expenses ........................... 7,221 12,022
Deferred income taxes ...................... 14,330 12,743
---------- ----------
Total current assets ................... 633,393 662,686
---------- ----------
Other assets:
Marketable securities ...................... 266,362 269,995
Investment in affiliates ................... 256,982 238,062
Loans and notes receivable ................. 83,268 82,973
Mining properties .......................... 17,035 12,464
Prepaid pension costs ...................... 23,271 20,776
Goodwill ................................... 356,523 353,107
Deferred income taxes ...................... 2,672 2,163
Other ...................................... 27,177 31,685
---------- ----------
Total other assets ..................... 1,033,290 1,011,225
---------- ----------
Property and equipment:
Land ....................................... 25,952 26,403
Buildings .................................. 167,100 157,809
Equipment .................................. 550,145 506,590
Construction in progress ................... 13,843 29,519
---------- ----------
757,040 720,321
Less accumulated depreciation .............. 188,554 200,998
---------- ----------
Net property and equipment ............. 568,486 519,323
---------- ----------
$2,235,169 $2,193,234
========== ==========
</TABLE>
<PAGE>
See accompanying notes to consolidated financial statements.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, September 30,
1999 2000
---- ----
Current liabilities:
<S> <C> <C>
Notes payable .............................. $ 57,076 $ 22,622
Current maturities of long-term debt ....... 27,846 28,570
Accounts payable ........................... 70,971 62,325
Accrued liabilities ........................ 163,556 183,322
Payables to affiliates ..................... 25,266 21,979
Income taxes ............................... 7,203 17,255
Deferred income taxes ...................... 326 720
----------- -----------
Total current liabilities .............. 352,244 336,793
----------- -----------
Noncurrent liabilities:
Long-term debt ............................. 609,339 631,088
Accrued OPEB costs ......................... 58,756 50,905
Accrued pension costs ...................... 39,612 26,696
Accrued environmental costs ................ 73,062 58,595
Deferred income taxes ...................... 266,752 273,810
Other ...................................... 45,164 42,013
----------- -----------
Total noncurrent liabilities ........... 1,092,685 1,083,107
----------- -----------
Minority interest ............................ 200,826 164,766
----------- -----------
Stockholders' equity:
Common stock ............................... 1,256 1,257
Additional paid-in capital ................. 43,444 44,287
Retained earnings .......................... 538,744 579,840
Accumulated other comprehensive income:
Marketable securities .................... 127,837 131,108
Currency translation ..................... (40,833) (67,577)
Pension liabilities ...................... (5,775) (4,834)
Treasury stock ............................. (75,259) (75,513)
----------- -----------
Total stockholders' equity ............. 589,414 608,568
----------- -----------
$ 2,235,169 $ 2,193,234
=========== ===========
</TABLE>
Commitments and contingencies (Note 1)
<PAGE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- -----------------
1999 2000 1999 2000
---- ---- ---- ----
Revenues and other income:
<S> <C> <C> <C> <C>
Net sales ........................... $ 303,282 $ 308,122 $ 847,592 $ 929,794
Other, net .......................... 15,511 12,649 52,488 90,530
----------- ----------- ----------- -----------
318,793 320,771 900,080 1,020,324
----------- ----------- ----------- -----------
Costs and expenses:
Cost of sales ....................... 228,981 212,155 626,457 643,195
Selling, general and administrative . 45,812 49,627 135,087 152,840
Interest ............................ 18,020 17,443 54,383 52,464
----------- ----------- ----------- -----------
292,813 279,225 815,927 848,499
----------- ----------- ----------- -----------
25,980 41,546 84,153 171,825
Equity in earnings of:
Titanium Metals Corporation ("TIMET") -- (1,486) -- (7,997)
Tremont Corporation* ................ (1,102) -- 3,389 --
Waste Control Specialists* .......... -- -- (8,496) --
Other ............................... -- 554 -- 823
----------- ----------- ----------- -----------
Income before income taxes ........ 24,878 40,614 79,046 164,651
Provision for income taxes (benefit) .. 7,330 17,634 (61,849) 72,698
Minority interest in after-tax earnings 9,341 9,963 68,453 33,481
----------- ----------- ----------- -----------
Income from continuing operations . 8,207 13,017 72,442 58,472
Discontinued operations ............... -- -- 2,000 --
----------- ----------- ----------- -----------
Net income ........................ $ 8,207 $ 13,017 $ 74,442 $ 58,472
=========== =========== =========== ===========
</TABLE>
*Prior to consolidation.
<PAGE>
See accompanying notes to consolidated financial statements.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- ----------------
1999 2000 1999 2000
---- ---- ---- ----
Basic earnings per common share:
<S> <C> <C> <C> <C>
Continuing operations ............................ $ .07 $ .11 $ .63 $ .51
Discontinued operations .......................... -- -- .02 --
----------- ----------- ----------- -----------
Net income ..................................... $ .07 $ .11 $ .65 $ .51
=========== =========== =========== ===========
Diluted earnings per common share:
Continuing operations ............................ $ .07 $ .11 $ .62 $ .50
Discontinued operations .......................... -- -- .02 --
----------- ----------- ----------- -----------
Net income ..................................... $ .07 $ .11 $ .64 $ .50
=========== =========== =========== ===========
Cash dividends per share ........................... $ .05 $ .05 $ .15 $ .15
=========== =========== =========== ===========
Shares used in the calculation of per share amounts:
Basic earnings per common share .................. 115,061 115,159 115,018 115,122
Dilutive impact of outstanding
stock options ................................... 1,190 1,199 1,191 1,143
----------- ----------- ----------- -----------
Diluted earnings per share ....................... 116,251 116,358 116,209 116,265
=========== =========== =========== ===========
</TABLE>
<PAGE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Nine months ended September 30, 1999 and 2000
(In thousands)
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Net income ........................................... $ 74,442 $ 58,472
-------- --------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment:
Unrealized gains arising during the period ....... 4,225 3,407
Less reclassification for gains included
in net income ................................... (443) (136)
-------- --------
3,782 3,271
Currency translation adjustment .................... (12,763) (26,744)
Pension liabilities adjustment ..................... (3,568) 941
-------- --------
Total other comprehensive income (loss), net ..... (12,549) (22,532)
-------- --------
Comprehensive income ........................... $ 61,893 $ 35,940
======== ========
</TABLE>
<PAGE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended September 30, 2000
(In thousands)
Additional Accumulated other comprehensive income Total
Common paid-in Retained Marketable Currency Pension Treasury stockholders'
stock capital earnings securities translation liabilities stock equity
------ --------- -------- ---------- ----------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 ......... $1,256 $43,444 $ 538,744 $127,837 $(40,833) $(5,775) $(75,259) $ 589,414
Net income ........................... -- -- 58,472 -- -- -- -- 58,472
Dividends ............................ -- -- (17,376) -- -- -- -- (17,376)
Other comprehensive income (loss), net -- -- -- 3,271 (26,744) 941 -- (22,532)
Other, net ........................... 1 843 -- -- -- -- (254) 590
------ ------- --------- -------- -------- ------- -------- ---------
Balance at September 30, 2000 ........ $1,257 $44,287 $ 579,840 $131,108 $(67,577) $(4,834) $(75,513) $ 608,568
====== ======= ========= ======== ======== ======= ======== =========
</TABLE>
<PAGE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1999 and 2000
(In thousands)
<TABLE>
<CAPTION>
1999 2000
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income ......................................... $ 74,442 $ 58,472
Depreciation, depletion and amortization ........... 48,091 53,609
Legal settlement, net .............................. -- (43,000)
Securities transactions ............................ (681) (5,763)
Noncash interest expense ........................... 7,261 6,998
Deferred income taxes .............................. (80,610) 38,780
Minority interest .................................. 68,453 33,481
Other, net ......................................... (7,433) (11,119)
Equity in:
TIMET ............................................ -- 7,997
Tremont Corporation .............................. (3,389) --
Waste Control Specialists ........................ 8,496 --
Discontinued operations .......................... (2,000) --
Other ............................................ -- (823)
Distributions from:
Manufacturing joint venture ...................... 12,050 7,550
Tremont Corporation .............................. 655 --
Other ............................................ -- 81
--------- ---------
125,335 146,263
Change in assets and liabilities:
Accounts and other receivables ................... (48,164) (40,455)
Inventories ...................................... 40,337 23,091
Accounts payable and accrued liabilities ......... (7,083) 10,262
Accounts with affiliates ......................... (7,333) 8,758
Income taxes ..................................... 11,747 7,979
Other, net ....................................... (14,289) (8,343)
--------- ---------
Net cash provided by operating activities .... 100,550 147,555
--------- ---------
Cash flows from investing activities:
Capital expenditures ............................... (38,820) (39,571)
Purchases of:
Business units ................................... (53,121) (9,497)
Tremont common stock ............................. (1,945) (37,482)
NL common stock .................................. -- (29,180)
CompX common stock ............................... (624) --
Investment in Waste Control Specialists (prior
to consolidation) ................................. (10,000) --
Change in restricted cash equivalents, net ......... (12,398) (377)
Proceeds from disposal of:
Marketable securities ............................ 6,588 158
Discontinued operations .......................... 2,000 --
Loans to affiliates:
Loans ............................................ (6,000) (21,969)
Collections ...................................... 6,000 21,969
Other, net ......................................... (616) 2,176
--------- ---------
Net cash used by investing activities ........ (108,936) (113,773)
--------- ---------
</TABLE>
<PAGE>
See accompanying notes to consolidated financial statements.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine months ended September 30, 1999 and 2000
(In thousands)
1999 2000
---- ----
Cash flows from financing activities:
Indebtedness:
Borrowings ......................................... $ 97,271 $ 37,797
Principal payments ................................. (94,319) (49,294)
Loans from affiliate:
Loans .............................................. 35,700 6,000
Repayments ......................................... (45,200) (8,082)
Valhi dividends paid ................................. (17,358) (17,376)
Distributions to minority interest ................... (2,278) (7,318)
Other, net ........................................... 854 3,571
--------- ---------
Net cash used by financing activities ............ (25,330) (34,702)
--------- ---------
Cash and cash equivalents - net change from:
Operating, investing and financing activities ...... (33,716) (920)
Currency translation ............................... (2,571) (3,976)
Business units acquired ............................ 4,157 --
Consolidation of Waste Control Specialists ......... 734 --
Cash and equivalents at beginning of period .......... 212,183 152,707
--------- ---------
Cash and equivalents at end of period ................ $ 180,787 $ 147,811
========= =========
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized ............. $ 39,238 $ 37,805
Income taxes, net ................................ 7,375 16,950
Business units acquired - net assets consolidated:
Cash and cash equivalents ........................ $ 4,157 $ --
Goodwill and other intangible assets ............. 15,837 2,561
Other non-cash assets ............................ 52,799 8,458
Liabilities ...................................... (19,672) (1,522)
--------- ---------
Cash paid ...................................... $ 53,121 $ 9,497
========= =========
Consolidation of Waste Control Specialists -
net assets consolidated:
Cash and cash equivalents ........................ $ 734 $ --
Property and equipment ........................... 23,128 --
Other non-cash assets ............................ 9,843 --
Liabilities ...................................... (22,201) --
--------- ---------
Net investment at date of consolidation ........ $ 11,504 $ --
========= =========
<PAGE>
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of presentation:
The consolidated balance sheet of Valhi, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 1999 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at September 30, 2000, and the consolidated
statements of income, comprehensive income, stockholders' equity and cash flows
for the interim periods ended September 30, 1999 and 2000, have been prepared by
the Company, without audit. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
consolidated financial position, results of operations and cash flows have been
made. The results of operations for the interim periods are not necessarily
indicative of the operating results for a full year or of future operations.
Certain prior year amounts have been reclassified to conform to the current year
presentation, and certain information normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States has been condensed or omitted. The accompanying consolidated
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 (the "1999 Annual
Report").
Basic earnings per share of common stock is based upon the weighted
average number of common shares actually outstanding during each period. Diluted
earnings per share of common stock includes the impact of outstanding dilutive
stock options.
The Company (principally NL) generally undertakes planned major
maintenance activities several times each year. Repair and maintenance costs
estimated to be incurred in connection with such planned maintenance activities
are accrued in advance and are included in cost of goods sold.
Commitments and contingencies are discussed in "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Legal
Proceedings" and the 1999 Annual Report.
Contran Corporation holds, directly or through subsidiaries,
approximately 93% of Valhi's outstanding common stock. Substantially all of
Contran's outstanding voting stock is held either by trusts established for the
benefit of certain children and grandchildren of Harold C. Simmons, of which Mr.
Simmons is sole trustee, or by Mr. Simmons directly. Mr. Simmons, the Chairman
of the Board and Chief Executive Officer of Valhi and Contran, may be deemed to
control such companies.
Note 2 - Business segment information:
% owned at
Operations Principal entities September 30, 2000
Chemicals NL Industries, Inc. 60%*
Component products CompX International Inc. 64%
Titanium metals Tremont Corporation 62%*
Waste management Waste Control Specialists 69%
* Tremont is a holding company which owns 39% of TIMET and an additional 20% of
NL. NL owns an additional 17% of Tremont.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ ---------------
1999 2000 1999 2000
---- ---- ---- ----
(In millions)
Net sales:
<S> <C> <C> <C> <C>
Chemicals ............................ $242.7 $242.3 $676.8 $724.4
Component products ................... 55.9 63.0 166.1 194.2
Waste management (after consolidation) 4.7 2.8 4.7 11.2
------ ------ ------ ------
Total net sales .................... $303.3 $308.1 $847.6 $929.8
====== ====== ====== ======
Operating income:
Chemicals ............................ $ 30.0 $ 51.2 $ 95.2 $147.5
Component products ................... 9.8 9.2 29.0 31.6
Waste management (after consolidation) (1.5) (3.0) (1.5) (6.0)
------ ------ ------ ------
Total operating income ............. 38.3 57.4 122.7 173.1
General corporate items:
Legal settlement gain, net ........... -- -- -- 43.0
Interest and dividend income ......... 10.7 9.7 32.2 30.0
Securities transactions .............. .1 .2 .7 5.8
Other expenses, net .................. (5.0) (8.1) (17.0) (27.5)
Interest expense ....................... (18.0) (17.5) (54.4) (52.5)
------ ------ ------ ------
26.1 41.7 84.2 171.9
Equity in:
TIMET ................................ -- (1.5) -- (8.0)
Tremont Corporation .................. (1.1) -- 3.4 --
Waste Control Specialists ............ -- -- (8.5) --
Other ................................ -- .5 -- .8
------ ------ ------ ------
Income before income taxes ......... $ 25.0 $ 40.7 $ 79.1 $164.7
====== ====== ====== ======
</TABLE>
In January 2000, CompX acquired a lock producer for an aggregate of $9
million cash consideration. The Company accounted for this acquisition by the
purchase method. During the first nine months of 2000, (i) NL purchased shares
of its common stock in market transactions for an aggregate of $29.2 million and
(ii) Valhi and NL each purchased shares of Tremont common stock in market
transactions for an aggregate of $37.5 million. The Company accounted for such
increases in its ownership of NL and Tremont by the purchase method (step
acquisitions).
NL (NYSE: NL), CompX (NYSE: CIX), Tremont (NYSE: TRE) 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.
<PAGE>
Note 3 - Marketable securities:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
---- ----
(In thousands)
Noncurrent assets (available-for-sale):
<S> <C> <C>
The Amalgamated Sugar Company LLC .............. $170,000 $170,000
Halliburton Company common stock ............... 91,825 98,076
Other common stocks ............................ 4,537 1,919
-------- --------
$266,362 $269,995
======== ========
</TABLE>
At September 30, 2000, Valhi held 2.7 million shares of Halliburton
common stock (aggregate cost of $22 million) with a quoted market price of
$48.94 per share, or an aggregate market value of $131 million. Valhi's LYONs
are exchangeable at any time, at the option of the LYON holder, for such
Halliburton shares, and the carrying value of the Halliburton stock is limited
to the accreted LYONs obligation. See Note 7. See the 1999 Annual Report and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of the Company's investment in The Amalgamated
Sugar Company LLC. The aggregate cost of other available-for-sale common stocks
is approximately $8 million at September 30, 2000.
Note 4 - Inventories:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
---- ----
(In thousands)
Raw materials:
<S> <C> <C>
Chemicals .................................. $ 54,861 $ 38,738
Component products ......................... 9,038 11,566
-------- --------
63,899 50,304
-------- --------
In process products:
Chemicals .................................. 8,065 7,335
Component products ......................... 8,669 11,790
-------- --------
16,734 19,125
-------- --------
Finished products:
Chemicals .................................. 100,973 78,700
Component products ......................... 9,898 12,149
-------- --------
110,871 90,849
-------- --------
Supplies (primarily chemicals) ............... 28,114 24,724
-------- --------
$219,618 $185,002
======== ========
</TABLE>
<PAGE>
Note 5 - Other noncurrent assets:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
---- ----
(In thousands)
Investment in affiliates:
<S> <C> <C>
TiO2 manufacturing joint venture ............. $157,552 $150,002
TIMET ........................................ 85,772 73,660
Other ........................................ 13,658 14,400
-------- --------
$256,982 $238,062
======== ========
Loans and notes receivable:
Snake River Sugar Company .................... $ 80,000 $ 80,000
Other ........................................ 7,259 4,524
-------- --------
87,259 84,524
Less current portion ......................... 3,991 1,551
-------- --------
Noncurrent portion ........................... $ 83,268 $ 82,973
======== ========
Intangible assets .............................. $ 6,979 $ 6,193
Restricted cash investments .................... 4,710 4,985
Deferred financing costs ....................... 3,668 3,095
Other .......................................... 11,820 17,412
-------- --------
$ 27,177 $ 31,685
======== ========
</TABLE>
At September 30, 2000, Tremont held 12.3 million shares of TIMET common
stock with a quoted market price of $8.19 per share, or an aggregate of $101
million. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for selected financial information concerning TIMET.
As more fully described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," during 2000 the Company amended
the terms of its loan to Snake River Sugar Company whereby, among other things,
the interest rate on the loan was decreased from 12.99% to 6.49% effective April
1, 2000.
Note 6 - Accrued liabilities:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
---- ----
(In thousands)
Current:
<S> <C> <C>
Environmental costs ........................ $ 48,891 $ 63,829
Employee benefits .......................... 45,674 42,921
Interest ................................... 7,210 14,868
Deferred income ............................ 7,924 8,693
Other ...................................... 53,857 53,011
-------- --------
$163,556 $183,322
======== ========
Noncurrent:
Insurance claims and expenses .............. $ 21,690 $ 21,946
Employee benefits .......................... 11,403 11,869
Deferred income ............................ 9,573 6,483
Other ...................................... 2,498 1,715
-------- --------
$ 45,164 $ 42,013
======== ========
</TABLE>
<PAGE>
Note 7 - Notes payable and long-term debt:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
---- ----
(In thousands)
Notes payable -
<S> <C> <C>
Kronos - non-U.S. bank credit agreements ........... $ 57,076 $ 22,622
======== ========
Long-term debt:
Valhi:
Snake River Sugar Company ........................ $250,000 $250,000
LYONs ............................................ 91,825 98,076
Bank credit facility ............................. 21,000 27,000
-------- --------
362,825 375,076
-------- --------
NL Industries:
Senior Secured Notes ............................. 244,000 244,000
Other ............................................ 478 256
-------- --------
244,478 244,256
-------- --------
Other subsidiaries:
CompX bank credit facility ....................... 20,000 31,000
Waste Control Specialists bank term loan ......... 4,304 5,372
Valcor Senior Notes .............................. 2,431 2,431
Other ............................................ 3,147 1,523
-------- --------
29,882 40,326
-------- --------
637,185 659,658
Less current maturities ............................ 27,846 28,570
-------- --------
$609,339 $631,088
======== ========
</TABLE>
Note 8 - Accounts with affiliates:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
---- ----
(In thousands)
Receivables from affiliates:
<S> <C> <C>
Income taxes receivable from Contran ............. $13,124 $ 3,109
TIMET ............................................ 907 789
Other ............................................ 575 343
------- -------
$14,606 $ 4,241
======= =======
Payables to affiliates:
Demand loan from Contran:
Tremont ........................................ $13,743 $13,943
Valhi .......................................... 2,282 --
Louisiana Pigment Company ........................ 8,381 7,602
Other ............................................ 860 434
------- -------
$25,266 $21,979
======= =======
</TABLE>
<PAGE>
Note 9 - Minority interest:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
---- ----
(In thousands)
Minority interest in net assets:
<S> <C> <C>
NL Industries .............................. $ 57,723 $ 58,798
Tremont Corporation ........................ 81,451 39,450
CompX International ........................ 53,487 56,641
Subsidiaries of NL ......................... 3,903 5,483
Subsidiaries of Tremont .................... 4,159 4,394
Subsidiaries of CompX ...................... 103 --
-------- --------
$200,826 $164,766
======== ========
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
September 30,
1999 2000
---- ----
(In thousands)
Minority interest in net earnings (losses):
<S> <C> <C>
NL Industries ............................ $ 59,808 $ 23,500
Tremont Corporation ...................... -- 1,223
CompX International ...................... 6,478 6,871
Subsidiaries of NL ....................... 2,261 1,655
Subsidiaries of Tremont .................. -- 235
Subsidiaries of CompX .................... (94) (3)
-------- --------
$ 68,453 $ 33,481
======== ========
</TABLE>
As previously reported, all of Waste Control Specialists aggregate net
losses to date have accrued to the Company for financial reporting purposes, and
all of Waste Control Specialists future net income or net losses will also
accrue to the Company until Waste Control Specialists reports positive equity
attributable to its other owner. Accordingly, no minority interest in Waste
Control Specialists' net assets or net losses is reported at September 30, 2000.
Note 10 - Other income:
<TABLE>
<CAPTION>
Nine months ended
September 30,
1999 2000
---- ----
(In thousands)
Securities earnings:
<S> <C> <C>
Dividends and interest ..................... $32,191 $29,978
Securities transactions .................... 681 5,763
------- -------
32,872 35,741
Legal settlement gain, net ................... -- 43,000
Noncompete agreement income .................. 3,000 3,000
Currency transactions, net ................... 8,505 4,227
Other, net ................................... 8,111 4,562
------- -------
$52,488 $90,530
======= =======
</TABLE>
<PAGE>
In the second quarter of 2000, NL received 389,691 shares of common
stock pursuant to the demutualization of an insurance company from which NL had
purchased certain insurance policies. The Company recognized a $5.6 million
securities transaction gain based on the insurance company's initial public
offering price of $14.25 per share. NL placed such common stock in a trust, the
assets of which may only be used to pay for certain of NL's retiree benefits.
The Company accounted for the $5.6 million contribution of the insurance
company's common stock to the trust as a reduction of its accrued OPEB costs.
In the second quarter of 2000, NL recognized a $43 million net gain from
a June 2000 settlement with one of its two principal former insurance carriers.
The settlement resolved a court proceeding in which NL sought reimbursement from
the carrier for legal defense expenditures and indemnity coverage for certain of
its environmental remediation expenditures. The $43 million gain is stated net
of $2 million of commissions associated with the settlement. Proceeds from the
settlement were transferred by the carrier in July 2000 to a special purpose
trust formed by NL to pay for certain of its future remediation and other
environmental expenditures. At September 30, 2000, restricted cash equivalents
include $45.6 million held by such special purpose trust.
Note 11 - Provision for income taxes:
<TABLE>
<CAPTION>
Nine months ended
September 30,
1999 2000
---- ----
(In millions)
<S> <C> <C>
Expected tax expense ..................................... $27.7 $57.6
Incremental U.S. tax and rate differences on
equity in earnings of non-tax group companies ........... 13.9 12.9
Change in NL's and Tremont's deferred income tax
valuation allowance, net ................................ (89.9) .9
Settlement of German income tax audits ................... (36.5) --
Change in German income tax law .......................... 24.1 --
No tax benefit for goodwill amortization ................. 3.0 4.0
U.S. state income taxes, net ............................. (.6) 1.5
Non-U.S. tax rates ....................................... (.4) (4.3)
Other, net ............................................... (3.1) .1
----- -----
$(61.8) $72.7
===== =====
Comprehensive provision (benefit)
for income taxes allocated to:
Income from continuing operations ...................... $(61.8) $72.7
Discontinued operations ................................ -- --
Other comprehensive income:
Marketable securities ................................ 1.4 2.0
Currency translation ................................. (7.9) (19.4)
Pension liabilities .................................. (2.3) .6
----- -----
$(70.6) $55.9
===== =====
</TABLE>
<PAGE>
Note 12 - Accounting principles not yet adopted:
The Company will adopt Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended, no later than the first quarter of 2001. Under SFAS No. 133, all
derivatives will be recognized as either assets or liabilities and measured at
fair value. The accounting for changes in fair value of derivatives will depend
upon the intended use of the derivative. The impact on the Company of adopting
SFAS No. 133, if any, has not yet been determined but will be dependent upon the
extent to which the Company is a party to derivative contracts or hedging
activities covered by SFAS No. 133 at the time of adoption, including
derivatives embedded in non-derivative host contracts. As permitted by the
transition requirements of SFAS No. 133, as amended, the Company will exempt
from the scope of SFAS No. 133 all host contracts containing embedded
derivatives which were issued or acquired prior to January 1, 1999.
The Company will adopt the SEC's Staff Accounting Bulletin ("SAB") No.
101, Revenue Recognition, as amended, in the fourth quarter of 2000. SAB No. 101
provides guidance on the recognition, presentation and disclosure of revenue,
including specifying basic criteria that must be met before revenue can be
recognized. The impact on the Company of adopting SAB No. 101, if any, has not
yet been determined, in part because the Company is studying guidance recently
issued by the SEC concerning the exact requirements of SAB No. 101. If the
impact of adopting SAB No. 101 is material, the Company will adopt SAB No. 101
retroactively to the beginning of 2000, and previously-reported results of
operations for the first three quarters of 2000 would be restated.
<PAGE>
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
The Company reported income from continuing operations of $13.0
million, or $.11 per diluted share, in the third quarter of 2000 compared to
income of $8.2 million, or $.07 per diluted share, in the third quarter of 1999.
For the first nine months of 2000, the Company reported income from continuing
operations of $58.5 million, or $.50 per diluted share, compared to income of
$72.4 million, or $.62 per diluted share, in the first nine months of 1999.
Excluding the effects of the non-recurring items discussed in the next
paragraph, the Company would have reported income from continuing operations of
$41.2 million, or $.35 per diluted share, in the first nine months of 2000
compared to income of $20.1 million, or $.17 per diluted share, in the first
nine months of 1999.
The Company's year-to-date results in 2000 include a $43 million second
quarter pre-tax net gain ($17.3 million, or $.15 per diluted share, net of
income taxes and minority interest) related to NL's settlement with one of its
two principal former insurance carriers. See Note 10 to the Consolidated
Financial Statements. The Company's year-to-date results in 1999 include the
previously-reported $90 million second quarter income tax benefit ($52 million,
or $.45 per diluted share, net of minority interest) recognized by NL.
Total operating income in the third quarter of 2000 increased 50%
compared to the third quarter of 1999, and increased 41% in the first nine
months of 2000 compared to the same period in 1999, due principally to higher
chemicals earnings at NL.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts,
including, but not limited to, statements found in this "Management's Discussion
and Analysis of Financial Condition and Results of Operations," are
forward-looking statements that represent management's beliefs and assumptions
based on currently available information. Forward-looking statements can be
identified by the use of words such as "believes," "intends," "may," "should,"
"anticipates," "expected" or comparable terminology, or by discussions of
strategies or trends. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it cannot give any
assurances that these expectations will prove to be correct. Such statements by
their nature involve substantial risks and uncertainties that could
significantly impact expected results, and actual future results could differ
materially from those described in such forward-looking statements. While it is
not possible to identify all factors, the Company continues to face many risks
and uncertainties. Among the factors that could cause actual future results to
differ materially are the risks and uncertainties discussed in this Quarterly
Report and those described from time to time in the Company's other filings with
the Securities and Exchange Commission including, but not limited to, future
supply and demand for the Company's products, the extent of the dependence of
certain of the Company's businesses on certain market sectors (such as the
dependence of TIMET's titanium metals business on the aerospace industry), the
cyclicality of certain of the Company's businesses (such as NL's TiO2 operations
and TIMET's titanium metals operations), the impact of certain long-term
contracts on certain of the Company's businesses (such as the impact of TIMET's
long-term contracts with certain of its customers and such customers'
performance 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), customer inventory levels (such as the extent to which NL's
customers may, from time to time, accelerate purchases of TiO2 in advance of
anticipated price increases or defer purchases of TiO2 in advance of anticipated
price decreases), changes in raw material and other operating costs (such as
energy costs), the possibility of labor disruptions, general global economic
conditions (such as changes in the level of gross domestic product in various
regions of the world and the impact of such changes on demand for, among other
things, TiO2), competitive products and substitute products, customer and
competitor strategies, the impact of pricing and production decisions,
competitive technology positions, fluctuations in currency exchange rates (such
as changes in the exchange rate between the U.S. dollar and each of the Euro and
the Canadian dollar), potential difficulties in integrating completed
acquisitions (such as CompX's acquisitions of two slide producers in 1999 and
its acquisition of a lock producer in January 2000), uncertainties associated
with new product development (such as TIMET's ability to develop new end-uses
for its titanium products), environmental matters (such as those requiring
emission and discharge standards for existing and new facilities), government
laws and regulations and possible changes therein (such as a change in Texas
state law which would allow the applicable regulatory agency to issue a permit
for the disposal of low-level radioactive wastes to a private entity such as
Waste Control Specialists, or changes in government regulations which might
impose various obligations on present and former manufacturers of lead pigment
and lead-based paint, including NL, with respect to asserted health concerns
associated with the use of such products), the ultimate resolution of pending
litigation (such as NL's lead pigment litigation and litigation surrounding
environmental matters of NL, Tremont and TIMET) and possible future litigation.
Should one or more of these risks materialize (or the consequences of such a
development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected. The
Company disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of new information, future events
or otherwise.
Chemicals
NL's titanium dioxide pigments ("TiO2") operations are conducted
through its wholly-owned subsidiary Kronos, Inc.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, % September 30, %
---------------- ---------------
1999 2000 Change 1999 2000 Change
---- ---- ------ ---- ---- ------
(In millions) (In millions)
<S> <C> <C> <C> <C> <C> <C>
Net sales .............. $242.7 $242.3 -0% $676.8 $724.4 +7%
Operating income ....... 30.0 51.2 +71% 95.2 147.5 +55%
</TABLE>
Kronos' operating income in the third quarter and first nine months of
2000 increased compared to the same periods in 1999 due primarily to higher
average TiO2 selling prices and higher TiO2 production volumes. In addition,
chemicals operating income in 1999 includes a $5.3 million second quarter
foreign currency transaction gain related to certain of NL's short-term
intercompany cross-border financings that were settled in July 1999.
Excluding the effect of fluctuations in the value of the U.S. dollar
relative to other currencies, Kronos' average TiO2 selling prices (in billing
currencies) during the third quarter of 2000 were 10% higher than the third
quarter of 1999, with increased prices in all major regions and the greatest
improvement in European and export markets. Compared to the second quarter of
2000, Kronos' average TiO2 selling prices in the third quarter of 2000 increased
5% and 4% in European and export markets, respectively, and were flat in North
America. Kronos' average TiO2 selling prices in the first nine months of 2000
were 5% higher than the same period in 1999, with increases in all major
regions.
Kronos' TiO2 sales volumes in the third quarter of 2000 were near
record levels, but were 4% and 6% lower than the levels NL achieved in the third
quarter of 1999 and the second quarter of 2000, respectively. TiO2 sales volumes
in the first nine months of 2000 were 8% higher than the first nine months of
1999. Kronos' TiO2 production volumes in the third quarter and first nine months
of 2000 were 14% and 10% higher, respectively, than the comparable periods in
1999, with operating rates near full capacity in 2000 compared to about 90%
capacity utilization in 1999.
NL expects its TiO2 sales volumes for all of 2000 will be higher than
its sales volumes in 1999, with NL's volumes in the fourth quarter of 2000 lower
than the record levels NL achieved in the fourth quarter of 1999. NL expects its
average TiO2 selling prices (in billing currencies) in the fourth quarter of
2000 will be slightly higher than its average selling prices in the third
quarter of 2000. NL expects to produce more Ti02 in 2000 than the record 434,000
metric tons NL produced in 1998. As a result of anticipated higher TiO2 average
selling prices, higher Ti02 sales and production volumes and its continued focus
on controlling costs, NL expects its chemicals operating income in 2000 will be
higher than 1999. The extent of the improvement will be determined primarily by
the magnitude of realized price increases.
NL's efforts to debottleneck its production facilities to meet
long-term demand continue to prove successful. NL expects its TiO2 production
capacity will increase by about 25,000 metric tons (primarily at its
chloride-process facilities), with only a moderate amount of capital
expenditures, increasing NL's aggregate production capacity to about 465,000
metric tons by 2002.
NL has substantial operations and assets located outside the United
States (principally Germany, Belgium, Norway and Canada). A significant amount
of NL's sales generated from its non-U.S. operations are denominated in
currencies other than the U.S. dollar, primarily the Euro, other major European
currencies and the Canadian dollar. In addition, a portion of NL's sales
generated from its non-U.S. operations are denominated in the U.S. dollar.
Certain raw materials, primarily titanium-containing feedstocks, are purchased
in U.S. dollars, while labor and other production costs are denominated
primarily in local currencies. Consequently, the translated U.S. dollar value of
NL's foreign sales and operating results are subject to currency exchange rate
fluctuations which may favorably or adversely impact reported earnings and may
affect the comparability of period-to-period operating results. Including the
effect of fluctuations in the value of the U.S. dollar relative to other
currencies, Kronos' average TiO2 selling prices (in billing currencies) in the
third quarter of 2000 increased 4% compared to the third quarter of 1999. Such
average TiO2 selling prices in the first nine months of 2000 decreased 1%
compared to the same period in 1999. Overall, fluctuations in the value of the
U.S. dollar relative to other currencies, primarily the Euro, decreased TiO2
sales in the third quarter and first nine months of 2000 by a net $16 million
and $47 million, respectively, compared to the same periods in 1999.
Fluctuations in the value of the U.S. dollar relative to other currencies
similarly impacted NL's foreign currency-denominated operating expenses. NL's
operating costs that are not denominated in the U.S. dollar, when translated
into U.S. dollars, were lower during the 2000 periods compared to 1999, and
accordingly NL's average cost per metric ton of Ti02 produced in U.S. dollar
terms was lower in 2000. Overall, the net impact of currency exchange rate
fluctuations on NL's operating income comparisons, other than the $5.3 million
second quarter 1999 foreign currency transaction gain discussed above, was not
significant during 2000 compared to 1999.
Chemicals operating income, as presented above, is stated net of
amortization of Valhi's purchase accounting adjustments made in conjunction with
its acquisitions of its interest in NL. Such adjustments result in additional
depreciation, depletion and amortization expense beyond amounts separately
reported by NL. Such additional non-cash expenses reduced chemicals operating
income, as reported by Valhi, by approximately $14.7 million and $14.3 million
in the first nine months of 1999 and 2000, respectively, as compared to amounts
separately reported by NL. As discussed below, the Company commenced
consolidating Tremont's results of operations effective January 1, 2000. Tremont
owns 20% of NL and accounts for its interest in NL by the equity method. Tremont
also has purchase accounting adjustments made in conjunction with the
acquisitions of its interest in NL. Prior to the Company's consolidation of
Tremont's results of operations effective January 1, 2000, amortization of such
purchase accounting adjustments were included in the Company's equity in
earnings of Tremont. In the first nine months of 2000, amortization of such
Tremont purchase accounting adjustments further reduced chemicals operating
income, as reported by Valhi, compared to amounts separately reported by NL by
approximately $4.7 million. Had the Company consolidated Tremont's results of
operations effective January 1, 1999, amortization of Tremont's purchase
accounting adjustments related to NL would have further reduced chemicals
operating income, as presented above, for the first nine months of 1999 by $5.1
million.
Component Products
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, % September 30, %
--------------- ---------------
1999 2000 Change 1999 2000 Change
---- ---- ------ ---- ---- ------
(In millions) (In millions)
<S> <C> <C> <C> <C> <C> <C>
Net sales ................ $ 55.9 $ 63.0 +13% $166.1 $194.2 +17%
Operating income ......... 9.8 9.2 -6% 29.0 31.6 +9%
</TABLE>
Component products sales increased in 2000 compared to 1999 due
primarily to increased sales of security products and precision ball bearing
slide products. Such increased sales of security products and slides were due in
part to the effect of acquisitions. Sales of security products in the third
quarter of 2000 increased 10% compared to the third quarter of 1999, and sales
of slide products increased 25%. Sales of security products and slides were up
18% and 24%, respectively, in the first nine months of 2000 compared to the same
period in 1999. During the first nine months of 2000, sales of CompX's ergonomic
products were comparable to the first nine months of 1999, and were down 10% in
the third quarter of 2000 compared to the third quarter of 1999.
Excluding the effect of acquisitions, component products sales
increased nominally in the third quarter of 2000 compared to the third quarter
of 1999, and increased 5% in the first nine months of 2000 compared to the same
period in 1999, due to higher sales of slides, offset by lower sales of both
ergonomic products and security products. Such increase in sales of slide
products is due to market share gains and increased demand for CompX's slide
products. The decline in sales of ergonomic products and security products is
due in part to slower sales to the computer and related products industry
sector, as well as market share losses related to ergonomic products.
Component products operating income and operating income margins in
2000 were adversely impacted by a change in product mix, with a lower percentage
of sales generated by certain higher-margin products in 2000 compared to 1999,
as well as higher than expected manufacturing costs at one of CompX's
facilities. Operating income margins also declined in 2000 due to the lower
margins associated with the lock operations acquired in January 2000. Excluding
the effect of acquisitions, component products operating income was 10% lower in
the third quarter of 2000 compared to the third quarter of 1999, and was 1%
higher in the first nine months of 2000 compared to the same period in 1999.
CompX has substantial operations and assets located outside the United
States (principally in Canada, The Netherlands and Taiwan). A portion of CompX's
sales generated from its non-U.S. operations are denominated in currencies other
than the U.S. dollar, principally the Canadian dollar, the Dutch guilder and the
Euro. In addition, a portion of CompX's sales generated from its non-U.S.
operations (principally in Canada) are denominated in the U.S. dollar. Most raw
materials, labor and other production costs for such non-U.S. operations are
denominated primarily in local currencies. Consequently, the translated U.S.
dollar value of CompX's foreign sales and operating results are subject to
currency exchange rate fluctuations which may favorably or unfavorably impact
reported earnings and may affect comparability of period-to-period operating
results. During the first nine months of 2000, weakness in the Euro negatively
impacted component products sales and operating income comparisons (principally
with respect to slide products). Excluding the effect of currency and
acquisitions, component products sales increased 3% in the third quarter of 2000
compared to the third quarter of 1999, and operating income declined 8%.
Excluding the effect of currency and acquisitions, component products sales
increased 7% in the first nine months of 2000 compared to the same period in
1999, and operating income increased 4%.
Waste Management
As previously reported, the Company commenced consolidating Waste
Control Specialists' results of operations in the third quarter of 1999. Prior
to consolidation, the Company reported its interest in Waste Control Specialists
by the equity method. During the third quarter and first nine months of 1999,
Waste Control Specialists reported sales of $4.7 million and $13.0 million,
respectively, and operating losses (net loss before interest expense) of $1.5
million and $9.5 million, respectively. The Company's equity in net losses of
Waste Control Specialists during the first six months of 1999 (prior to
consolidation) was $8.5 million. During the third quarter and first nine months
of 2000, Waste Control Specialists reported sales of $2.8 million and $11.2
million, respectively, and operating losses of $3.0 million and $6.0 million,
respectively. The improvement in Waste Control Specialists' results of
operations in the first nine months of 2000 compared to the first nine months of
1999 is due primarily to the favorable effect of certain cost control measures
implemented during the second half of 1999. Waste Control Specialists' operating
loss in the third quarter of 2000 was higher than the third quarter of 1999 due
primarily to lower sales resulting from weak demand for its waste management
services.
The current state law in Texas (where Waste Control Specialists'
disposal facility is located) prohibits the applicable Texas regulatory agency
from issuing a permit for the disposal of low-level radioactive waste to a
private enterprise. During the latest Texas legislative session which ended in
May 1999, Waste Control Specialists was supporting a proposed change in state
law that would allow the regulatory agency to issue a low-level radioactive
waste disposal permit to a private entity. The legislative session ended without
any such change in state law. The completion of the 1999 Texas legislative
session resulted in a significant reduction in the Company's expenditures for
permitting during the last half of 1999 and first nine months of 2000 compared
to the first half of 1999. The next session of the Texas legislature convenes in
January 2001, and Waste Control Specialists expects to again support a similar
proposed change in state law. Waste Control Specialists' expenditures for
permitting during the first half of 2001 are expected to be higher than such
expenditures during the last half of 2000, but lower than such expenditures
during the first half of 1999 during the prior Texas legislative session.
Waste Control Specialists' program to improve operating efficiencies at
its West Texas facility and to curtail certain of its corporate and
administrative costs has also reduced operating costs in the last half of 1999
and the first nine months of 2000 compared to the first half of 1999. Waste
Control Specialists is also continuing its attempts to emphasize its sales and
marketing efforts to increase its sales volumes from waste streams that conform
to Waste Control Specialists' permits currently in place. Waste Control
Specialists has recently hired a new director of sales and marketing who intends
to more aggressively pursue opportunities in the hazardous and toxic side of
Waste Control Specialists' business. The ability of Waste Control Specialists to
achieve increased 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 with its current operating
permits. However, there can be no assurance that Waste Control Specialists'
efforts will prove successful in improving its cash flows. In the event such
efforts are not successful or Waste Control Specialists is not successful in
expanding its disposal capabilities for low-level radioactive wastes, it is
possible that Valhi will consider other strategic alternatives with respect to
Waste Control Specialists.
Tremont Corporation and TIMET
As previously reported, the Company commenced consolidating Tremont's
balance sheet at December 31, 1999, and commenced consolidating Tremont's
results of operations and cash flows effective January 1, 2000. Prior to
December 31, 1999, the Company accounted for its interest in Tremont by the
equity method.
Tremont accounts for its interests in both NL and TIMET by the equity
method. NL's results of operations are discussed above. Tremont's equity in
earnings of TIMET differs from the amounts that would be expected by applying
Tremont's ownership percentage to TIMET's separately-reported earnings because
of the effect of amortization of purchase accounting adjustments made by Tremont
in conjunction with Tremont's acquisitions of its interests in TIMET.
Amortization of such basis differences generally increases earnings (or reduces
losses) attributable to TIMET as reported by Tremont compared to amounts
separately reported by TIMET.
During the third quarter of 2000, TIMET reported sales of $106.7
million, an operating loss of $7.7 million and a net loss of $7.9 million
compared to sales of $112.7 million, an operating loss of $7.8 million and a net
loss of $7.5 million in the third quarter of 1999. During the first nine months
of 2000, TIMET reported sales of $320.3 million, an operating loss of $35.5
million and a net loss of $32.5 million compared to sales of $374.5 million, an
operating loss of $8.2 million and a net loss of $13.9 million in the first nine
months of 1999. TIMET's results in the third quarter and first nine months of
2000 were below those of the same periods in 1999 due principally to lower mill
products average selling prices caused by lower demand in the aerospace market
and competitive pricing pressures in certain product lines. While TIMET's mill
products sales volumes in the third quarter of 2000 were 1% higher than the
third quarter of 1999, TIMET's mill products average selling prices declined 6%.
During the first nine months of 2000, TIMET's mill products sales volumes
declined 2% compared to the first nine months of 1999, and mill products average
selling prices were 7% lower. Sales of ingot and slab represent about 11% of
TIMET's sales. TIMET's sales volumes of ingot and slab increased 71% in the
third quarter of 2000 compared to the third quarter of 1999, while average
selling prices for ingot and slab were unchanged. During the first nine months
of 2000, ingot and slab sales volumes increased 18% compared with the first nine
months of 1999, and average selling prices declined 3%. Compared to the second
quarter of 2000, TIMET's mill products sales volumes in the third quarter of
2000 decreased 2%, while mill products average selling prices were unchanged.
Ingot and slab sales volumes in the third quarter of 2000 increased 5% compared
to the second quarter of 2000, and ingot and slab average selling prices
increased 2%. TIMET's year-to-date results in 2000 also include a net $8.3
million of special items, consisting of restructuring charges, equipment-related
impairment charges and environmental remediation charges aggregating $9.5
million, offset by a $1.2 million gain from the sale of its castings joint
venture. The restructuring charge relates to personnel reductions of about 200
employees.
In September 2000, TIMET entered into a new four-year collective
bargaining agreement with the union representing approximately 250 hourly
production and maintenance workers at TIMET's facility in Nevada. The new
agreement, which expires in October 2004, provides for, among other things,
modest increases in wages and pension benefits over its term.
During the third quarter of 2000, TIMET announced selling price
increases on certain of its products. The price increases do not apply to
TIMET's existing backlog, to orders under TIMET's existing long-term agreements
containing specific provisions governing selling prices or to orders for
industrial products. Accordingly, only about 35% of TIMET's sales volumes are
expected to be eligible for such price increases. The average prices on TIMET's
eligible new orders have thus far been substantially in line with the new price
list. However, the volume of transactions to which such price increases are
applicable has been relatively low given the short time period since the
announcement, and TIMET expects the price increases will not have any
significant effect on TIMET's results of operations in the fourth quarter of
2000. TIMET's firm order backlog at September 30, 2000 was approximately $200
million, compared to $160 million at June 30, 2000 and $260 million at September
30, 1999. The increase in backlog at September 30, 2000 reflects primarily the
normal seasonal order cycle of TIMET's customer base. TIMET currently believes
its sales and operating results in the fourth quarter of 2000 will be similar to
its operating results in the third quarter of this year.
TIMET believes the excess amount of titanium that has been present in
the titanium supply chain during 2000 will have been significantly reduced by
the end of the year, and TIMET currently believes such excess inventory will
have less of an impact on TIMET's results of operations during 2001. According
to the Airline Monitor, a leading aerospace publication, commercial aircraft
build rates are expected to increase from 786 planes in 2000 to 866 planes in
2001 and 918 planes in 2002. TIMET believes worldwide industry titanium mill
product shipments will aggregate approximately 53,000 metric tons in 2001, up
10% from an expected 48,000 metric tons in 2000. Such expected increase in
worldwide titanium mill product shipments is due primarily to an anticipated
increase in demand for aerospace products resulting from the increase in the
number of aircraft forecasted to be produced, as well as a reduction in the
amount of excess titanium in the supply chain discussed above.
TIMET is currently in negotiations with several customers regarding
product requirements and pricing for 2001. These negotiations are on going, and
TIMET is presently unable to determine what sales volumes or selling prices will
actually be realized with such customers. Principally as a result of the
anticipated increase in demand for titanium aerospace products, TIMET currently
expects its sales volumes in 2001 will increase by up to 15% from 2000 levels,
with sales of between $450 million and $500 million, reflecting the anticipated
additional sales volumes, certain price increases and anticipated changes in
product mix. While TIMET currently expects to report operating and net losses in
2001, TIMET believes such losses will be substantially reduced from 2000 levels.
In March 2000, TIMET filed the previously-reported lawsuit against The
Boeing Company seeking damages estimated in excess of $600 million in connection
with TIMET's long-term sales agreement with Boeing. In June 2000, Boeing filed
its answer to TIMET's complaint denying substantially all of TIMET's allegations
and making certain counterclaims against TIMET. TIMET believes such
counterclaims are without merit and intends to vigorously defend against such
claims. Discovery is proceeding, and a court date has been set for January 2002.
Since April 2000, TIMET and Boeing have been in discussions to determine if a
settlement can be reached. Those discussions are on going, and there can be no
assurance that any settlement will be reached.
Tremont periodically evaluates the net carrying value of its long-term
assets, including its investment in TIMET, to determine if there has been any
decline in value below their amortized cost basis that is other than temporary
and would, therefore, require a write-down which would be accounted for as a
realized loss. At December 31, 1999, after considering what it believed to be
all relevant factors, including, among other things, TIMET's consolidated
operating results, financial position, estimated asset values and prospects, the
Company recorded a non-cash charge to earnings to reduce the net carrying value
of its investment in TIMET for an other than temporary impairment. In
determining the amount of the impairment charge, Tremont considered, among other
things, then-recent ranges of TIMET's NYSE market price and estimates of TIMET's
future operating losses which would further reduce Tremont's carrying value of
its investment in TIMET as it records additional equity in losses of TIMET. At
September 30, 2000, Tremont's net carrying value of its investment in TIMET was
$6.00 per share compared to a NYSE market price at that date of $8.19. While
generally accepted accounting principles 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.
General corporate and other items
General corporate. General corporate interest and dividend income
decreased in the third quarter and first nine months of 2000 compared to the
same periods in 1999 due primarily to a slightly lower level of distributions
received from The Amalgamated Sugar Company LLC, as well as a lower interest
rate on the Company's $80 million loan to Snake River Sugar Company effective
April 1, 2000. Dividend distributions from the LLC were $5.4 million and $16.8
million in the third quarter and first nine months of 2000, respectively,
compared to $5.9 million and $17.6 million in the respective periods of 1999.
Aggregate general corporate interest and dividend income is currently expected
to be lower during the fourth quarter of 2000 compared to the fourth quarter of
1999 due primarily to such lower interest rate on the $80 million loan to Snake
River.
Securities transactions in 2000 consist primarily of a $5.6 million
second quarter gain related to common stock received by NL from the
demutualization of an insurance company from which NL had purchased certain
insurance policies. Other securities transactions in both 2000 and 1999 relate
principally to the disposition of a portion of the shares of Halliburton Company
common stock held by the Company when certain holders of the Company's LYONs
debt obligations exercised their right to exchange their LYONs for such
Halliburton shares. See Notes 3, 7 and 10 to the Consolidated Financial
Statements. Any additional exchanges in 2000 or thereafter would similarly
result in additional securities transaction gains.
The $43 million legal settlement gain relates to NL's settlement with a
former insurance carrier discussed above. See also Note 10 to the Consolidated
Financial Statements. General corporate expenses increased in 2000 compared to
the same periods in 1999 due primarily to higher environmental and legal
expenses of NL and the effect of consolidating Tremont's results of operations
effective January 1, 2000.
Interest expense. Interest expense declined slightly in 2000 compared
to the same periods in 1999 due primarily to lower average levels of outstanding
indebtedness at NL, offset in part by the effect of consolidating Tremont's
results of operations effective January 1, 2000 and higher levels of
indebtedness at CompX. Assuming interest rates do not increase significantly
from current levels and that there is not a significant reduction in the amount
of outstanding LYONs indebtedness from exchanges, interest expense in 2000 is
not expected to be significantly different from interest expense in 1999.
Provision for income taxes. The principal reasons for the difference
between the Company's effective income tax rates and the U.S. federal statutory
income tax rates are explained in Note 11 to the Consolidated Financial
Statements. Income tax rates vary by jurisdiction (country and/or state), and
relative changes in the geographic mix of the Company's pre-tax earnings can
result in fluctuations in the effective income tax rate. Certain subsidiaries,
including NL, Tremont and CompX, are currently not members of the consolidated
U.S. tax group of which Valhi is a member, and the Company provides incremental
income taxes on such earnings. In addition, Tremont, NL and TIMET are currently
each in separate U.S. tax groups, and Tremont provides incremental income taxes
on its earnings with respect to both NL and TIMET.
During the first nine months of 2000, NL reduced its deferred income
tax valuation allowance by $2.1 million primarily as a result of utilization of
certain tax attributes for which the benefit had not been previously recognized
under the "more-likely-than-not" recognition criteria. During the first nine
months of 2000, Tremont increased its deferred income tax valuation allowance by
$3.0 million primarily due to its equity in losses of TIMET for which
recognition of a deferred tax benefit is not currently considered appropriate by
Tremont under the "more-likely-than-not" recognition criteria.
In October 2000, a reduction in the German "base" income tax rate from
30% to 25%, to be effective January 1, 2001, was enacted. Such reduction in the
German tax rate is expected to result in an additional net tax expense in the
fourth quarter of 2000 of about $3 million (about $2 million net income impact,
net of minority interest) due to a revaluation of NL's German tax attributes,
including the effect of revaluing certain deferred income tax purchase
accounting adjustments with respect to NL's German assets. The reduction in the
German income tax rate results in an additional income tax expense because the
Company has recognized a net deferred income tax asset with respect to Germany.
NL does not expect its future current income tax expense will be affected by
this reduction.
Minority interest. See Note 9 to the Consolidated Financial Statements.
As discussed above, the Company commenced consolidating Tremont's results of
operations beginning in 2000. Consequently, the Company commenced reporting
minority interest in Tremont's net earnings or losses beginning in 2000.
Minority interest in earnings of Tremont's subsidiaries in 2000 relates to TRECO
L.L.C., a 75%-owned subsidiary of Tremont that holds Tremont's interests in
certain joint ventures. Minority interest in earnings of NL's subsidiaries
relates principally to NL's majority-owned environmental management subsidiary,
NL Environmental Management Services, Inc. ("EMS").
Discontinued operations. Discontinued operations in 1999 represent
additional consideration received by the Company related to its 1997 disposal of
its fast food operations.
Accounting principles not yet adopted. See Note 12 to the Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES:
Consolidated cash flows
Operating activities. Trends in cash flows from operating activities
(excluding the impact of significant asset dispositions and relative changes in
assets and liabilities) are generally similar to trends in the Company's
earnings. Changes in assets and liabilities generally result from the timing of
production, sales, purchases and income tax payments.
Investing and financing activities. Approximately 50% of the Company's
aggregate capital expenditures during the first nine months of 2000 relate to
NL, 42% relate to CompX and substantially all of the remainder relates to Waste
Control Specialists.
During the first nine months of 2000, (i) CompX acquired a lock
producer for $9.5 million using borrowings under its unsecured revolving bank
credit facility, (ii) NL purchased $29.2 million of shares of its common stock
pursuant to its previously-reported share repurchase programs and (iii) NL and
Valhi purchased an aggregate of $37.5 million of shares of Tremont common stock.
During the first nine months of 2000, (i) CompX borrowed a net $11
million under its unsecured revolving bank credit facility, (ii) NL repaid Euro
31 million ($29 million when paid) of its Euro-denominated short-term
indebtedness and (iii) Valhi borrowed a net $6 million under its bank credit
facility and repaid a net $2.3 million of short-term borrowings from Contran.
At September 30, 2000, unused credit available under existing credit
facilities approximated $119 million, which was comprised of $69 million
available to CompX under its revolving credit facility, $38 million available to
NL under non-U.S. credit facilities and $12 million available to Valhi under its
revolving bank credit facility. In October 2000, Valhi extended the maturity
date of its revolving credit facility one year to November 2001, and the size of
the facility was reduced from $50 million to $40 million. The $12 million amount
of available borrowings for Valhi under such revolving credit facility at
September 30, 2000 includes the impact of this $10 million reduction in the size
of the facility.
Chemicals - NL Industries
Certain of NL's U.S. and non-U.S. tax returns are being examined and
tax authorities have or may propose tax deficiencies, including non-income
related items and interest.
NL has received tax assessments from the Norwegian tax authorities
proposing tax deficiencies of NOK 30 million ($3 million at September 30, 2000)
relating to 1994 and 1996. NL is currently litigating the primary issue related
to the 1994 assessment in a Norwegian appeals court, and NL believes the outcome
of the 1996 assessment is dependent upon the eventual outcome of the 1994 case.
NL has granted a lien for both the 1994 and 1996 tax assessments on its
Norwegian Ti02 plant in favor of the Norwegian tax authorities.
No assurance can be given that these tax matters will be resolved in
NL's favor in view of the inherent uncertainties involved in court proceedings.
NL believes that it has provided adequate accruals for additional taxes and
related interest expense which may ultimately result from all such examinations
and believes that the ultimate disposition of such examinations should not have
a material adverse effect on its consolidated financial position, results of
operations or liquidity.
NL has been named as a defendant, potentially responsible party
("PRP"), or both, in a number of legal proceedings associated with environmental
matters, including waste disposal sites, mining locations and facilities
currently or previously owned, operated or used by NL, certain of which are on
the U.S. EPA's Superfund National Priorities List or similar state lists. On a
quarterly basis, NL evaluates the potential range of its liability at sites
where it has been named as a PRP or defendant, including sites for which EMS has
contractually assumed NL's obligation. NL believes it has provided adequate
accruals ($110 million at September 30, 2000) for reasonably estimable costs of
such matters, but NL's ultimate liability may be affected by a number of
factors, including changes in remedial alternatives and costs and the allocation
of such costs among PRPs. It is not possible to estimate the range of costs for
certain sites. The upper end of the range of reasonably possible costs to NL for
sites for which it is possible to estimate costs is approximately $170 million.
NL's estimates of such liabilities have not been discounted to present value,
and other than the $43 million net settlement discussed above with respect to
one of NL's two principal former insurance carriers, NL has not recognized any
insurance recoveries, potential or otherwise. NL will continue to pursue similar
claims with other insurance carriers. No assurance can be given that actual
costs will not exceed accrued amounts or the upper end of the range for sites
for which estimates have been made and no assurance can be given that costs will
not be incurred with respect to sites as to which no estimate presently can be
made. NL is also a defendant in a number of legal proceedings seeking damages
for personal injury and property damage allegedly arising from the sale of lead
pigments and lead-based paints, including cases in which plaintiffs purport to
represent a class and cases brought on behalf of government entities. NL has not
accrued any amounts for the pending lead pigment and lead-based paint
litigation. There is no assurance that NL will not incur future liability in
respect of this pending litigation in view of the inherent uncertainties
involved in court and jury rulings in pending and possible future cases.
However, based on, among other things, the results of such litigation to date,
NL believes that the pending lead pigment and lead-based paint litigation is
without merit. Liability that may result, if any, cannot reasonably be
estimated. In addition, various legislation and administrative regulations have,
from time to time, been enacted or proposed that seek to impose various
obligations on present and former manufacturers of lead pigment and lead-based
paint with respect to asserted health concerns associated with the use of such
products and to effectively overturn court decisions in which NL and other
pigment manufacturers have been successful. Examples of such proposed
legislation include bills which would permit civil liability for damages on the
basis of market share, rather than requiring plaintiffs to prove that the
defendant's product caused the alleged damage, and bills which would revive
actions currently barred by statutes of limitations. NL currently believes the
disposition of all claims and disputes, individually or in the aggregate, should
not have a material adverse effect on its consolidated financial position,
results of operations or liquidity. There can be no assurance that additional
matters of these types will not arise in the future.
NL periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and availability of resources in view of, among other
things, its debt service and capital expenditure requirements and estimated
future operating cash flows. As a result of this process, NL has in the past and
may in the future seek to reduce, refinance, repurchase or restructure
indebtedness, raise additional capital, issue additional securities, repurchase
shares of its common stock, modify its dividend policy, restructure ownership
interests, sell interests in subsidiaries or other assets, or take a combination
of such steps or other steps to manage its liquidity and capital resources. In
the normal course of its business, NL may review opportunities for the
acquisition, divestiture, joint venture or other business combinations in the
chemicals industry or other industries, as well as the acquisition of interests
in related entities. In the event of any such transaction, NL may consider using
its available cash, issuing its equity securities or refinancing or increasing
its indebtedness to the extent permitted by the agreements governing NL's
existing debt. In this regard, the indentures governing NL's publicly-traded
debt contain provisions which limit the ability of NL and its subsidiaries to
incur additional indebtedness or hold noncontrolling interests in business
units.
Component products - CompX International
In January 2000, CompX acquired a lock producer for $9 million cash
consideration using borrowings under its bank credit facility. In November 2000,
CompX's board of directors authorized CompX to purchase up to 1 million shares
of its common stock in open market or privately-negotiated transactions at
unspecified prices over an unspecified period of time.
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 September 30, 2000 CompX had entered into a
series of short-term forward exchange contracts maturing through March 2001 to
exchange an aggregate of $18.2 million for an equivalent amount of Canadian
dollars at exchange rates between approximately Cdn. $1.46 and Cdn. $1.48.
CompX periodically evaluates its liquidity requirements, alternative
uses of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements, capital resources and estimated
future operating cash flows. As a result of this process, CompX 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, joint ventures or other business
combinations in the component products industry. In the event of any such
transaction, CompX may consider using available cash, issuing additional equity
securities or increasing the indebtedness of CompX or its subsidiaries.
Waste management - Waste Control Specialists
At September 30, 2000, Waste Control Specialists' indebtedness consists
principally of (i) a $5.4 million bank term loan due in installments through
November 2004 and (ii) $18.5 million of intercompany borrowings owed to a
wholly-owned subsidiary of Valhi, of which $15 million is due on December 31,
2001 and $3.5 million is payable on demand. Such intercompany borrowings are
eliminated in the Company's consolidated financial statements. Valhi currently
expects to provide additional short-term borrowings to Waste Control Specialists
during the fourth quarter of 2000.
Tremont Corporation and Titanium Metals Corporation
Tremont. Tremont is primarily a holding company which, at September 30,
2000, owned approximately 39% of TIMET and 20% of NL. At September 30, 2000, the
market value of the 12.3 million shares of TIMET and the 10.2 million shares of
NL held by Tremont was approximately $101 million and $216 million,
respectively.
In 1998, Tremont entered into a revolving advance agreement with
Contran. Through September 30, 2000, Tremont had net borrowings of $13.9 million
from Contran under such facility, primarily to fund Tremont's purchases of
shares of NL and TIMET common stock. Tremont expects to reduce the outstanding
balance of such loan from Contran in the fourth quarter of 2000 as the cash
received from its dividends from NL is expected to exceed its other cash
requirements (including its own dividends).
Based upon certain technical provisions of the Investment Company Act
of 1940 (the "1940 Act"), Tremont might arguably be deemed to be an "investment
company" under the 1940 Act, despite the fact that Tremont does not now engage,
nor has it engaged or intended to engage, in the business of investing,
reinvesting, owning, holding or trading of securities. Tremont has taken the
steps necessary to give itself the benefits of a temporary exemption under the
1940 Act and has sought an order from the Securities and Exchange Commission
that Tremont is primarily engaged, through TIMET and NL, in a non-investment
company business.
Tremont periodically evaluates its liquidity requirements, capital
needs and availability of resources in view of, among other things, its
alternative uses of capital, its debt service requirements, the cost of debt and
equity capital and estimated future operating cash flows. As a result of this
process, Tremont has in the past and may in the future seek to obtain financing
from related parties or third parties, raise additional capital, modify its
dividend policy, restructure ownership interests of subsidiaries and affiliates,
incur, refinance or restructure indebtedness, purchase shares of its common
stock, consider the sale of interests in subsidiaries, affiliates, marketable
securities or other assets, or take a combination of such steps or other steps
to increase or manage liquidity and capital resources. In the normal course of
business, Tremont may investigate, evaluate, discuss and engage in acquisition,
joint venture and other business combination opportunities. In the event of any
future acquisition or joint venture opportunities, Tremont may consider using
then-available cash, issuing equity securities or incurring indebtedness.
TIMET. At September 30, 2000, TIMET reported total assets and
stockholders' equity of $759.4 million and $363.9 million, respectively. TIMET's
total assets at such date include current assets of $246.6 million, property and
equipment of $304.2 million and goodwill and other intangible assets of $64.5
million. TIMET's total liabilities at such date include current liabilities of
$110.1 million, long-term debt of $30.6 million, accrued OPEB costs of $19.0
million and convertible preferred securities of $201.3 million.
TIMET's plan to address current market conditions includes more
effective working capital management, particularly inventories and receivables,
both of which were reduced in the first nine months of 2000. Additionally, TIMET
received tax refunds of $7.4 million in the first nine months of 2000.
At September 30, 2000, TIMET had net debt of approximately $52 million
($58 million of notes payable and long-term debt and $6 million of cash and
equivalents). In February 2000, TIMET entered into a new $125 million U.S.
revolving credit agreement which replaced its previous U.S. credit facility.
Borrowings under the new facility are limited to a formula-determined borrowing
base derived from the value of accounts receivable, inventories and equipment.
The new facility limits additional indebtedness of TIMET, prohibits the payment
of common stock dividends and contains other covenants customary in lending
transactions of this type. In addition, in February 2000 TIMET also entered into
a new U.K. credit facility denominated in Pound Sterling which replaced its
prior U.K. credit facility. At September 30, 2000, TIMET had $106 million of
borrowing availability, principally under these new facilities. TIMET believes
these two new credit facilities will provide TIMET with the liquidity necessary
for its current market and operating conditions.
At September 30, 2000, TIMET had $201.3 million outstanding of its
6.625% convertible preferred securities. Such convertible preferred securities
do not require principal amortization, and TIMET has the right to defer dividend
payments for one or more quarters of up to 20 consecutive quarters. TIMET is
prohibited from, among other things, paying dividends on its common stock while
dividends are being deferred on the convertible preferred securities. TIMET
suspended the payment of dividends on its common stock during the fourth quarter
of 1999 in view of, among other things, the continuing weakness in demand for
titanium metals products. TIMET's new U.S. credit facility prohibits the payment
of dividends on TIMET's common stock, and the facility also prohibits the
payment of dividends on the convertible preferred securities under certain
conditions. In April 2000, TIMET exercised its rights under the convertible
preferred securities and commenced deferring future dividend payments on these
securities. Although the dividend payments are deferred, interest will continue
to accrue at the coupon rate on the principal and unpaid dividends. TIMET has
stated that its goal is to resume dividends on the convertible preferred
securities when the outlook for its results of operations improves
substantially.
In October 1998, TIMET purchased for cash $80 million of Special Metals
Corporation 6.625% convertible preferred stock (the "SMC Preferred Stock"), in
conjunction with, and concurrent with, SMC's acquisition of a business unit from
Inco Limited. Dividends on the SMC Preferred Stock are being accrued but,
through September 30, 2000, have not been paid (with the exception of one
quarterly payment received in each of April, July and October 2000) due to
limitations imposed by SMC's bank credit agreement. As a result, TIMET has
classified its accrued dividends on the SMC preferred securities ($8.1 million
at September 30, 2000) as a non-current asset. There can be no assurance that
TIMET will receive additional dividends during the remainder of 2000.
A preliminary study of environmental issues at TIMET's Nevada facility
was completed late in the first quarter of 2000. TIMET accrued $3.3 million
based on the estimated cost of groundwater remediation activities described in
the study. The undiscounted environmental remediation charges are expected to be
paid over a period of up to thirty years.
TIMET periodically evaluates its liquidity requirements, capital needs
and availability of resources in view of, among other things, its alternative
uses of capital, its debt service requirements, the cost of debt and equity
capital, and estimated future operating cash flows. As a result of this process,
TIMET has in the past and may in the future seek to raise additional capital,
modify its common and preferred dividend policies, restructure ownership
interests, incur, refinance or restructure indebtedness, repurchase shares of
capital stock, sell assets, or take a combination of such steps or other steps
to increase or manage its liquidity and capital resources. In the normal course
of business, TIMET investigates, evaluates, discusses and engages in
acquisition, joint venture, strategic relationship and other business
combination opportunities in the titanium and related 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.
General corporate - Valhi
Valhi's operations are conducted primarily through its subsidiaries
(NL, CompX, Tremont and Waste Control Specialists). Accordingly, Valhi's
long-term ability to meet its parent company level corporate obligations is
dependent in large measure on the receipt of dividends or other distributions
from its subsidiaries. NL increased its quarterly dividend from $.035 per share
to $.15 per share in the first quarter of 2000, and NL further increased its
quarterly dividend to $.20 per share in the fourth quarter of 2000. At the
current $.20 per share quarterly rate, and based on the 30.1 million NL shares
held by Valhi at September 30, 2000, Valhi would receive aggregate annual
dividends from NL of approximately $24.1 million. Tremont's quarterly dividend
is currently $.07 per share. At that rate, and based upon the 3.8 million
Tremont shares owned by Valhi at September 30, 2000, Valhi would receive
aggregate annual dividends from Tremont of approximately $1.1 million. CompX
commenced quarterly dividends of $.125 per share in the fourth quarter of 1999.
At this current rate and based on the 10.4 million CompX shares held by Valhi
and Valcor, Valhi/Valcor would receive annual dividends from CompX of $5.2
million. Various credit agreements to which certain subsidiaries or affiliates
are parties contain customary limitations on the payment of dividends, typically
a percentage of net income or cash flow; however, such restrictions have not
significantly impacted Valhi's ability to service its parent company level
obligations. Valhi has not guaranteed any indebtedness of its subsidiaries or
affiliates. At September 30, 2000, Valhi had $7 million of parent level cash and
cash equivalents, including a portion held by Valcor which could be distributed
to Valhi, and had $27 million of outstanding borrowings under its revolving bank
credit agreement. In addition, Valhi had $12 million of borrowing availability
under its bank credit facility. In October 2000, Valhi extended the maturity
date of its revolving credit facility one year to November 2001, and the size of
the facility was reduced from $50 million to $40 million. The amount shown as
available borrowings for Valhi under such revolving credit facility at September
30, 2000 includes the impact of this $10 million reduction in the size of the
facility.
Valhi's LYONs do not require current cash debt service. At September
30, 2000, Valhi held 2.7 million shares of Halliburton common stock, which
shares are held in escrow for the benefit of holders of the LYONs. Valhi
continues to receive regular quarterly Halliburton dividends (currently $.125
per share) on the escrowed shares. The LYONs are exchangeable at any time, at
the option of the holder, for the Halliburton shares owned by Valhi. Exchanges
of LYONs for Halliburton stock result in the Company reporting income related to
the disposition of the Halliburton stock for both financial reporting and income
tax purposes, although no cash proceeds are generated by such exchanges. Valhi's
potential cash income tax liability that would have been triggered at September
30, 2000, assuming exchanges of all of the outstanding LYONs for Halliburton
stock at such date, was approximately $29 million.
At September 30, 2000, the LYONs had an accreted value equivalent to
approximately $36.60 per Halliburton share, and the market price of the
Halliburton common stock was $48.94 per share (October 31, 2000 market price of
Halliburton - $37.06 per share). Such September 30, 2000 market price of
Halliburton is equal to the equivalent accreted LYONs obligation in November
2003. The LYONs, which mature in October 2007, are redeemable at the option of
the LYON holder in October 2002 for an amount equal to $636.27 per $1,000
principal amount at maturity. Such October 2002 redemption price is equivalent
to about $44.10 per Halliburton share. Assuming the market value of Halliburton
common stock exceeds such equivalent redemption value of the LYONS in October
2002, the Company does not expect a significant amount of LYONs would be
tendered to the Company for redemption at that date.
Valhi received approximately $73 million cash in early 1997 at the
transfer of control of its refined sugar operations previously conducted by the
Company's wholly-owned subsidiary, The Amalgamated Sugar Company, to Snake River
Sugar Company, an agricultural cooperative formed by certain sugarbeet growers
in Amalgamated's area of operation. 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. As part of the
transaction, Snake River made certain loans to Valhi aggregating $250 million in
January 1997. Such loans bear interest (which is paid monthly) at a weighted
average fixed interest rate of 9.4%, are presently nonrecourse to Valhi and are
collateralized by the Company's investment in the LLC ($170 million carrying
value at September 30, 2000). Snake River's sources of funds for its loans to
Valhi, as well as for the $14 million it contributed to The Amalgamated Sugar
Company LLC for its voting interest in the LLC, included cash capital
contributions by the grower members of Snake River and $192 million in debt
financing provided by Valhi in January 1997, of which $100 million was
subsequently prepaid in 1997 when Snake River obtained $100 million of
third-party term loan financing. In addition, another $12 million of loans from
Valhi were prepaid during 1997. After these prepayments, $80 million of Valhi's
loans to Snake River Sugar Company remain outstanding. See Notes 3, 5 and 7 to
the Consolidated Financial Statements.
The terms of the LLC provide for annual "base level" of cash dividend
distributions (sometimes referred to distributable cash) by the LLC of $26.7
million, from which the Company is entitled to a 95% preferential share.
Distributions from the LLC are dependent, in part, upon the operations of the
LLC. The Company records dividend distributions from the LLC as income upon
receipt, which is the same month in which they are declared by the LLC. To the
extent the LLC's distributable cash is below this base level in any given year,
the Company is entitled to an additional 95% preferential share of any future
annual LLC distributable cash in excess of the base level until such shortfall
is recovered.
The Company 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. Over the past year, the refined sugar industry has been
experiencing, among other things, downward pressure on selling prices due
principally to relative supply/demand relationships. Snake River's board of
directors is authorized to require the sugarbeet growers to make capital
contributions to Snake River in the form of "unit retains." Such unit retain
capital contributions are deducted from the payments made to the growers for
supplying the LLC with sugarbeets, thereby decreasing the LLC's raw material
costs and increasing its profitability. During each of 1998, 1999 and 2000,
Snake River's board of directors authorized and withheld such unit retains in
order to, among other things, increase the profitability and cash flows of the
LLC.
In part because of the current depressed market conditions for refined
sugar, the Company and Snake River held discussions during 2000 in an attempt to
reach an agreement whereby, among other things, the Company would provide (i)
relief from the level of dividend distributions required to be paid by the LLC
to the Company and (ii) modification of certain terms of the Company's $80
million loan to Snake River. In June 2000, the Company and Snake River reached
an agreement in principle, and in October 2000 formal agreements were executed,
whereby, among other things, (i) the specified levels of cumulative unpaid LLC
distributions which allow the Company to temporarily take control of the LLC
were increased effective April 2000, (ii) the interest rate on the Company's $80
million loan to Snake River was reduced from 12.99% to 6.49% effective April 1,
2000, (iii) the amount of interest forgone as a result of such reduction in the
interest rate on the $80 million loan will be recouped and paid via additional
future LLC distributions upon achievement of specified levels of future LLC
profitability, (iv) Snake River granted to the Company a lien on substantially
all of Snake River's assets to collateralize such $80 million loan, such lien
becoming effective generally upon the repayment of Snake River's third-party
senior lender and (v) Snake River agreed that the sum of the annual amount of
LLC distributions paid by the LLC to the Company and the annual amount of 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 the Company to
Snake River on its $250 million in loans from Snake River. Through September 30,
2000, the Company's cumulative distributions from the LLC had not fallen below
such amended specified levels, and the Company does not currently have the
ability to temporarily take control of the LLC.
Certain covenants contained in Snake River's third-party senior debt
limit the amount of debt service payments (principal and interest) which Snake
River is permitted to remit to Valhi under Valhi's $80 million loan to Snake
River, and such loan is subordinated to Snake River's third-party senior debt.
Due to these covenants, Snake River was limited in the amount of debt service it
could pay on the $80 million loan to $3 million in 1998, $7.2 million in 1999
and $950,000 in the first nine months of 2000. At September 30, 2000, the
accrued and unpaid interest on the $80 million loan to Snake River aggregated
$16.2 million (including the effect of reducing the interest rate on such loan
from 12.99% to 6.49% effective April 1, 2000). The Company currently believes it
will ultimately realize both the $80 million principal amount and the accrued
and unpaid interest, whether through cash generated from the future operations
of Snake River and the LLC or otherwise (including any liquidation of Snake
River/LLC).
Redemption of the Company's interest in the LLC would result in the
Company reporting income related to the disposition of its LLC interest for both
financial reporting and income tax purposes. The cash proceeds that would be
generated from such a disposition would likely be less than the specified
redemption price due to Snake River's ability to simultaneously call its $250
million loans to Valhi. As a result, the net cash proceeds generated by
redemption of the Company's interest in the LLC could be less than the income
taxes that would become payable as a result of the disposition.
The Company routinely compares its liquidity requirements and
alternative uses of capital against the estimated future cash flows to be
received from its subsidiaries, and the estimated sales value of those units. As
a result of this process, the Company has in the past and may in the future seek
to raise additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify its dividend policies, consider
the sale of interests in subsidiaries, affiliates, business units, marketable
securities or other assets, or take a combination of such steps or other steps,
to increase liquidity, reduce indebtedness and fund future activities. Such
activities have in the past and may in the future involve related companies.
The Company and related entities routinely evaluate acquisitions of
interests in, or combinations with, companies, including related companies,
perceived by management to be undervalued in the marketplace. These companies
may or may not be engaged in businesses related to the Company's current
businesses. The Company intends to consider such acquisition activities in the
future and, in connection with this activity, may consider issuing additional
equity securities and increasing the indebtedness of the Company, its
subsidiaries and related companies. From time to time, the Company and related
entities also evaluate the restructuring of ownership interests among their
respective subsidiaries and related companies. In this regard, the indentures
governing the publicly-traded debt of NL contain provisions which limit the
ability of NL and its subsidiaries to incur additional indebtedness or hold
noncontrolling interests in business units.
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the 1999 Annual Report and prior 2000 periodic
reports for descriptions of certain legal proceedings.
In August 2000, defendants filed an answer denying all of the
allegations in the previously-reported Envirocare of Utah, Inc., et al. v. Waste
Control Specialists LLC, et al. Waste Control Specialists believes the complaint
is without merit and intends to defend against the action vigorously.
City of New York, et al. v. Lead Industries Association, et al. (No.
89-4617). In September 2000, the First Department denied plaintiffs' appeal of
the trial court's denial of plaintiffs' motion for summary judgment on the
market share issue.
Brenner, et al. v. American Cyanamid, et al. (No. 12596-93). Plaintiffs
have filed a notice of appeal.
Sabater, et al. v. Lead Industries Association, et al. (No. 25533/98).
In October 2000, defendants filed a third-party complaint against the Federal
Home Loan Mortgage Corporation ("FHLMC), and FHLMC removed the case to federal
court in the Southern District of New York.
Cofield, et al. v. Lead Industries Association, et al. (No.
24-C-99004491). In August 2000, the federal court dismissed the fraud,
indemnification, and nuisance claims, and remanded the case to Maryland state
court.
Spring Branch Independent School District v. Lead Industries
Association, et al. (No. 2000-31175) and Houston Independent School District v.
Lead Industries Association, et al. (No. 2000-33725). In October 2000, NL filed
answers in both cases denying all allegations of wrongdoing and liability.
Lewis et al. v. Lead Industries Association, et al. (No. 00CH09800). In
October 2000, defendants moved to dismiss all claims. Briefing is not yet
completed.
In October 2000, NL was served with a complaint filed in California
state court in Carletta Justice, et al. v. Sherwin-Williams Company, et al.
(Superior Court of California, County of San Francisco, No. 314686). Plaintiffs
are two minors who seek general, special and punitive damages for injuries
alleged to be due to ingestion of paint containing lead in their residence.
Defendants are NL, the Lead Industries Association, and nine other companies
sued as former manufacturers of lead paint. Plaintiffs allege claims for
negligence, strict products liability, concert of action, market share
liability, and intentional tort. NL intends to deny all allegations of
wrongdoing and liability and to defend the case vigorously.
Batavia, New York Landfill. In September 2000, NL finalized the
previously-reported consent decree allocating cleanup costs at this site among
the PRPs. NL's expected costs pursuant to the consent decree are within
previously-accrued amounts.
In October 2000, NL was served with a complaint in Pulliam, et al. vs.
NL Industries, Inc., et al. (Superior Court of Marion County, Indiana, No.
49DO20010CT001423) filed on behalf of an alleged class of all persons and
entities who own or have owned property or have resided within a one-mile radius
of an industrial facility formerly owned by NL in Indianapolis, Indiana.
Plaintiffs allege that they and their property have been injured by lead dust
and particulates from the facility and seek unspecified actual and punitive
damages and a removal of all alleged lead contamination. The time for NL to file
its answer has not yet expired. NL intends to deny all allegations of wrongdoing
and to defend the case vigorously.
In August and September 2000, NL and one of its subsidiaries, NLO,
Inc., were named as defendants in each of the four lawsuits listed below that
were filed in federal court in the Western District of Kentucky against the
Department of Energy ("DOE") and a number of other defendants alleging that
nuclear material supplied by, among others, the Feed Material Production Center
("FMPC") in Fernald, Ohio, owned by the DOE and formerly managed under contract
by NLO, caused injury to employees and others at the DOE's Paducah, Kentucky
Gaseous Diffusion Plant ("PGDP"). With respect to each of the four cases listed
below, NL believes that the DOE is obligated to provide defense and
indemnification pursuant to its contract with NLO, and pursuant to its statutory
obligation to do so, as the DOE has done in several previous cases relating to
management of the FMPC. NL has so advised the DOE. Answers in the four cases
have not been filed, and NL and NLO intend to deny all allegations of wrongdoing
and to defend the cases vigorously.
o In Rainer, et al. v. E.I. du Pont de Nemours, et al., ("Rainer I") No.
5:00CV-223-J, plaintiffs purport to represent a class of former
employees at the PGDP and members of their households and seek actual
and punitive damages of $5 billion each for alleged negligence,
infliction of emotional distress, ultra-hazardous activity/strict
liability and strict products liability.
o In Rainer, et al. v. Bill Richardson, et al., No. 5:00CV-220-J,
plaintiffs purport to represent the same classes regarding the same
matters alleged in Rainer I, and allege a violation of constitutional
rights and seek the same recovery sought in Rainer I.
o In Dew, et al. v. Bill Richardson, et al., No. 5:00CV00221R, plaintiffs
purport to represent classes of all PGDP employees who sustained
pituitary tumors or cancer as a result of exposure to radiation and
seek actual and punitive damages of $2 billion each for alleged
violation of constitutional rights, assault and battery, fraud and
misrepresentation, infliction of emotional distress, negligence,
ultra-hazardous activity/strict liability, strict products liability,
conspiracy, concert of action, joint venture and enterprise liability,
and equitable estoppel.
o In Shaffer, et al. v. Atomic Energy Commission, et al., No.
5:00CV00307M, plaintiffs purport to represent classes of PGDP employees
and household members, subcontractors at PGDP, and landowners near the
PGDP and seek actual and punitive damages of $1 billion each and
medical monitoring for the same counts alleged in Dew.
In September 2000, TIMET was named in an action filed by the U.S. Equal
Employment Opportunity Commission in federal district court in Las Vegas, Nevada
(U.S. Equal Employment Opportunity Commission v. Titanium Metals Corporation,
CV-S-00-1172DWH-RJJ). The complaint alleges that several female employees at
TIMET's Nevada plant were the subject of sexual harassment. TIMET intends to
vigorously defend this action, and TIMET does not presently anticipate that any
adverse outcome in this case would be material to TIMET's financial condition,
results of operations or liquidity.
<PAGE>
Item 6. Exhibits and Report on Form 8-K.
(a) Exhibits
10.1 - Master Agreement Regarding Amendments to The
Amalgamated Sugar Company Documents dated October 19,
2000.
10.2 - Third Amendment to the Company Agreement of The
Amalgamated Sugar Company LLC dated October 19, 2000.
10.3 - Third Amendment to the Subordinated Loan Agreement
between Snake River Sugar Company and Valhi, Inc.
dated October 19, 2000.
10.4 - 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.
10.5 - 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.
10.6 - 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.
10.7 - First Amendment to the Subordination Agreement
between Valhi, Inc. and Snake River Sugar Company
dated October 19, 2000.
10.8 - 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.
10.9 - 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.
27.1 - Financial Data Schedule for the nine-month period
ended September 30, 2000.
(b) Report on Form 8-K
Report on Form 8-K for the three-month period ended September 30,
2000.
July 26, 2000 - Reported Items 5 and 7.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALHI, INC.
---------------------------------
(Registrant)
Date November 10, 2000 By /s/ Bobby D. O'Brien
--------------------- ------------------------------
Bobby D. O'Brien
(Vice President and Treasurer,
Principal Financial Officer)
Date November 10, 2000 By /s/ Gregory M. Swalwell
--------------------- ------------------------------
Gregory M. Swalwell
(Vice President and Controller,
Principal Accounting Officer)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALHI, INC.
---------------------------------
(Registrant)
Date November 10, 2000 By
--------------------- -----------------------------
Bobby D. O'Brien
(Vice President and Treasurer,
Principal Financial Officer)
Date November 10, 2000 By
--------------------- -----------------------------
Gregory M. Swalwell
(Vice President and Controller,
Principal Accounting Officer)
<PAGE>
