SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 - For the fiscal year ended December 31, 2005
Commission file number 1-5467
VALHI, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 87-0110150
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common stock ($.01 par value per share) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark:
If the Registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. Yes No X
If the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes No X
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 (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
If disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. Yes X No
Whether the Registrant is a large accelerated filer, an accelerated filer
or a non-accelerated filer (as defined in Rule 12b-2 of the Act). Large
accelerated filer Accelerated filer X non-accelerated filer .
Whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes No X .
The aggregate market value of the 9.4 million shares of voting common stock held
by nonaffiliates of Valhi, Inc. as of June 30, 2005 (the last business day of
the Registrant's most recently-completed second fiscal quarter) approximated
$164.5 million.
As of February 28, 2006, 115,919,578 shares of the Registrant's common stock
were outstanding.
Documents incorporated by reference
The information required by Part III is incorporated by reference from the
Registrant's definitive proxy statement to be filed with the Commission pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
[INSIDE FRONT COVER]
A chart showing, as of December 31, 2005, (i) Valhi's 83% ownership of NL
Industries, Inc., 57% ownership of Kronos Worldwide, Inc., 100% ownership of
Waste Control Specialists LLC, 100% ownership of Tremont LLC and 4% ownership of
Titanium Metals Corporation ("TIMET"), (ii) NL's 36% ownership of Kronos
Worldwide and 70% ownership of CompX International Inc., (iii) Tremont's 35%
ownership of TIMET and (x) TIMET's 18% ownership of CompX.
PART I
ITEM 1. BUSINESS
As more fully described on the condensed organizational chart on the
opposite page, Valhi, Inc. (NYSE: VHI), has operations through majority-owned
subsidiaries or less than majority-owned affiliates in the chemicals, component
products, waste management and titanium metals industries. Information regarding
the Company's business segments and the companies conducting such businesses is
set forth below. Business and geographic segment financial information is
included in Note 2 to the Company's Consolidated Financial Statements, which
information is incorporated herein by reference. The Company is based in Dallas,
Texas.
Chemicals Kronos is a leading global producer
Kronos Worldwide, Inc. and marketer of value-added
titanium dioxide pigments ("TiO2"),
which are used for imparting
whiteness, brightness and opacity
to a diverse range of customer
applications and end-use markets,
including coatings, plastics, paper
and other industrial and consumer
"quality-of-life" products. Kronos
has production facilities in Europe
and North America. Sales of TiO2
represent about 90% of Kronos'
total sales in 2005, with sales of
other products that are
complementary to Kronos' TiO2
business comprising the remainder.
Component Products CompX is a leading manufacturer of
CompX International Inc. precision ball bearing slides,
security products and ergonomic
computer support systems used in
office furniture, computer-related
applications and a variety of other
industries. CompX has production
facilities in North America and
Asia.
Waste Management Waste Control Specialists owns and
Waste Control Specialists LLC operates a facility in West Texas
for the processing, treatment,
storage and disposal of hazardous,
toxic and certain types of
low-level and mixed low-level
radioactive wastes. Waste Control
Specialists is seeking additional
regulatory authorizations to expand
its treatment, storage and disposal
capabilities for low-level and
mixed low-level radioactive wastes.
Titanium Metals Titanium Metals Corporation
Titanium Metals Corporation ("TIMET") is a leading global
producer of titanium sponge, melted
products (ingot and slab) and mill
products for commercial and
military aerospace, industrial and
other markets, including new
applications for titanium in the
automotive and other emerging
markets. TIMET is the only producer
with major titanium production
facilities in both the U.S. and
Europe, the world's principal
markets for titanium consumption.
Valhi, a Delaware corporation, is the successor of the 1987 merger of LLC
Corporation and another entity. Contran Corporation holds, directly or through
subsidiaries, approximately 92% of Valhi's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is the sole trustee, or is held by Mr. Simmons or
persons or other entities related to Mr. Simmons. Consequently, Mr. Simmons may
be deemed to control such companies. NL (NYSE: NL), Kronos (NYSE: KRO), CompX
(NYSE: CIX) and TIMET (NYSE: TIE) each currently file periodic reports with the
Securities and Exchange Commission ("SEC"). The information set forth below with
respect to such companies has been derived from such reports.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Annual Report on Form 10-K relating to matters that are not historical facts,
including, but not limited to, statements found in this Item 1 - "Business,"
Item 1A - "Risk Factors," Item 3 - "Legal Proceedings," Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Item 7A - "Quantitative and Qualitative Disclosures About Market Risk," are
forward-looking statements that represent management's beliefs and assumptions
based on currently available information. Forward-looking statements can be
identified by the use of words such as "believes," "intends," "may," "should,"
"could," "anticipates," "expected" or comparable terminology, or by discussions
of strategies or trends. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it cannot give any
assurances that these expectations will prove to be correct. Such statements by
their nature involve substantial risks and uncertainties that could
significantly impact expected results, and actual future results could differ
materially from those described in such forward-looking statements. While it is
not possible to identify all factors, the Company continues to face many risks
and uncertainties. Among the factors that could cause actual future results to
differ materially from those described herein are the risks and uncertainties
discussed in this Annual Report and those described from time to time in the
Company's other filings with the SEC including, but not limited to, the
following:
o Future supply and demand for the Company's products,
o The extent of the dependence of certain of the Company's businesses on
certain market sectors (such as the dependence of TIMET's titanium
metals business on the commercial aerospace industry),
o The cyclicality of certain of the Company's businesses (such as
Kronos' TiO2 operations and TIMET's titanium metals operations),
o The impact of certain long-term contracts on certain of the Company's
businesses (such as the impact of TIMET's long-term contracts with
certain of its customers and such customers' performance thereunder
and the impact of TIMET's long-term contracts with certain of its
vendors on its ability to reduce or increase supply or achieve lower
costs),
o Customer inventory levels (such as the extent to which Kronos'
customers may, from time to time, accelerate purchases of TiO2 in
advance of anticipated price increases or defer purchases of TiO2 in
advance of anticipated price decreases, or the relationship between
inventory levels of TIMET's customers and such customers' current
inventory requirements and the impact of such relationship on their
purchases from TIMET),
o Changes in raw material and other operating costs (such as energy
costs),
o The possibility of labor disruptions,
o General global economic and political conditions (such as changes in
the level of gross domestic product in various regions of the world
and the impact of such changes on demand for, among other things,
TiO2),
o Competitive products and substitute products,
o Possible disruption of business or increases in the cost of doing
business resulting from terrorist activities or global conflicts,
o Customer and competitor strategies,
o The impact of pricing and production decisions,
o Competitive technology positions,
o The introduction of trade barriers,
o Fluctuations in currency exchange rates (such as changes in the
exchange rate between the U.S. dollar and each of the euro, the
Norwegian kroner and the Canadian dollar),
o Operating interruptions (including, but not limited to, labor
disputes, leaks, natural disasters, fires, explosions, unscheduled or
unplanned downtime and transportation interruptions),
o The timing and amounts of insurance recoveries,
o The ability of the Company to renew or refinance credit facilities,
o Uncertainties associated with new product development (such as TIMET's
ability to develop new end-uses for its titanium products),
o The ultimate outcome of income tax audits, tax settlement initiatives
or other tax matters,
o The ultimate ability to utilize income tax attributes, the benefit of
which has been recognized under the "more-likely-than-not" recognition
criteria (such as Kronos' ability to utilize its German net operating
loss carryforwards),
o Environmental matters (such as those requiring compliance with
emission and discharge standards for existing and new facilities, or
new developments regarding environmental remediation at sites related
to former operation of the Company),
o Government laws and regulations and possible changes therein (such as
changes in government regulations which might impose various
obligations on present and former manufacturers of lead pigment and
lead-based paint, including NL, with respect to asserted health
concerns associated with the use of such products),
o The ultimate resolution of pending litigation (such as NL's lead
pigment litigation and litigation surrounding environmental matters of
NL and Tremont), and
o Possible future litigation.
Should one or more of these risks materialize (or the consequences of such a
development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those currently forecasted or
expected. The Company disclaims any intention or obligation to update or revise
any forward-looking statement whether as a result of changes in information,
future events or otherwise.
CHEMICALS - KRONOS WORLDWIDE, INC.
General. Kronos is a leading global producer and marketer of value-added
TiO2, inorganic chemical products used for imparting whiteness, brightness and
opacity to a diverse range of customer applications and end-use markets,
including coatings, plastics, paper, fibers, food, ceramics and cosmetics. TiO2
is considered a "quality-of-life" product with demand affected by gross domestic
product in various regions of the world. TiO2, the largest commercially used
whitening pigment by volume, derives its value from its whitening properties and
opacifying ability (commonly referred to as hiding power). As a result of TiO2's
high refractive index rating, it can provide more hiding power than any other
commercially produced white pigment. In addition, TiO2 demonstrates excellent
resistance to chemical attack, good thermal stability and resistance to
ultraviolet degradation. TiO2 is supplied to customers in either a powder or
slurry form.
Approximately one-half of Kronos' 2005 TiO2 sales volumes were to Europe,
with about 38% to North America and the balance to export markets. Kronos
believes it is the second-largest producer of TiO2 in Europe, with an estimated
20% share of European TiO2 sales volumes in 2005. Kronos has an estimated 15%
share of North American TiO2 sales volumes.
Per capita consumption of Ti02 in the United States and Western Europe far
exceeds that in other areas of the world and these regions are expected to
continue to be the largest consumers of TiO2. Significant markets for TiO2
consumption could emerge in Eastern Europe, the Far East or China, as the
economies in these regions continue to develop to the point that quality-of-life
products, including TiO2, experience greater demand.
Products and operations. TiO2 is produced in two crystalline forms: rutile
and anatase. Both the chloride and sulfate production processes (discussed
below) produce rutile TiO2. Chloride process rutile is preferred for the
majority of customer applications. From a technical standpoint, chloride process
rutile has a bluer undertone and higher durability than sulfate process rutile
TiO2. Although many end-use applications can use either form of TiO2, chloride
process rutile TiO2 is the preferred form for use in coatings and plastics, the
two largest end-use markets. Anatase TiO2, which is produced only through the
sulfate production process, represents a much smaller percentage of annual
global TiO2 production and is preferred for use in selected paper, ceramics,
rubber tires, man-made fibers, food and cosmetics.
Kronos believes that there are no effective substitutes for TiO2.
Extenders, such as kaolin clays, calcium carbonate and polymeric opacifiers, are
used in a number of end-use markets as white pigments, however the opacity in
these products is not able to duplicate the performance characteristics of TiO2,
and Kronos believes these products are unlikely to replace TiO2.
Kronos currently produces over 40 different TiO2 grades, sold under the
Kronos trademark, which provide a variety of performance properties to meet
customers' specific requirements. Kronos' major customers include domestic and
international paint, plastics and paper manufacturers.
Kronos and its distributors and agents sell and provide technical services
for its products to over 4,000 customers in over 100 countries with the majority
of sales in Europe and North America. TiO2 is distributed by rail and truck in
either dry or slurry form. Kronos and its predecessors have produced and
marketed TiO2 in North America and Europe for over 80 years. Kronos believes
that it has developed considerable expertise and efficiency in the manufacture,
sale, shipment and service of its products in domestic and international
markets.
Sales of TiO2 represented about 90% of Kronos' total sales in 2005. Sales
of other products, complementary to Kronos' TiO2 business, are comprised of the
following:
o Kronos owns an ilmenite mine in Norway operated pursuant to a
governmental concession with an unlimited term. Ilmenite is a raw
material used directly as a feedstock by some sulfate-process TiO2
plants, including all of Kronos' European sulfate-process plants. The
mine has estimated reserves that are expected to last at least 50
years. Ilmenite sales to third-parties represented approximately 5% of
chemicals sales in 2005.
o Kronos manufactures and sells iron-based chemicals, which are
by-products and processed by-products of the TiO2 pigment production
process. These co-product chemicals are marketed through Kronos'
Ecochem division, and are used primarily as treatment and conditioning
agents for industrial effluents and municipal wastewater as well as in
the manufacture of iron pigments, cement and agricultural products.
Sales of iron based products were about 4% of chemical sales in 2005.
o Kronos manufactures and sells certain titanium chemical products
(titanium oxychloride and titanyl sulfate), which are side-stream
products from the production of TiO2. Titanium oxychloride is used in
specialty applications in the formulation of pearlescent pigments,
production of electroceramic capacitors for cell phones and other
electronic devices. Titanyl sulfate products are used primarily in
pearlescent pigments. Sales of these products were about 1% of
chemical sales in 2005.
Manufacturing process, properties and raw materials. Kronos manufactures
TiO2 using both the chloride process and the sulfate process. Approximately 73%
of Kronos' current production capacity is based on the chloride process. The
chloride process is a continuous process in which chlorine is used to extract
rutile Ti02. The chloride process typically has lower manufacturing costs than
the sulfate process due to higher yield and production of less waste and lower
energy requirements and labor costs. Because much of the chlorine is recycled
and feedstock bearing a higher titanium content is used, the chloride process
produces less waste than the sulfate process. The sulfate process is a batch
chemical process that uses sulfuric acid to extract TiO2. Sulfate technology can
produce either anatase or rutile pigment. Once an intermediate TiO2 pigment has
been produced by either the chloride or sulfate process, it is "finished" into
products with specific performance characteristics for particular end-use
applications through proprietary processes involving various chemical surface
treatments and intensive micronizing (milling). Due to environmental factors and
customer considerations, the proportion of TiO2 industry sales represented by
chloride-process pigments has increased relative to sulfate-process pigments,
and, in 2005, industry-wide chloride-process production facilities represented
approximately 64% of industry capacity.
During 2005, Kronos operated four TiO2 facilities in Europe (one in each of
Leverkusen, Germany, Nordenham, Germany, Langerbrugge, Belgium and Fredrikstad,
Norway). In North America, Kronos operates a Ti02 facility in Varennes, Quebec
and, through a manufacturing joint venture discussed below, has a one-half
interest in a Ti02 plant in Lake Charles, Louisiana. TiO2 is produced using the
chloride process at the Leverkusen, Langerbrugge, Varennes and Lake Charles
facilities and is produced using the sulfate process in Nordenham, Leverkusen,
Fredrikstad and Varennes. Kronos owns an ilmenite mine in Norway operated
pursuant to a governmental concession with an unlimited term, and Kronos also
owns a Ti02 slurry facility in Louisiana and leases various corporate and
administrative offices in the U.S. and various sales offices in the U.S. and
Europe. Kronos' co-products are produced at its Norwegian, Belgian and German
facilities, and its titanium chemicals are produced at its Belgian and Canadian
facilities.
All of Kronos' principal production facilities are owned, except for the
land under the Leverkusen and Fredrikstad facilities. The Fredrikstad plant is
located on public land and is leased until 2013, with an option to extend the
lease for an additional 50 years. Kronos leases the land under its Leverkusen
Ti02 production facility pursuant to a lease expiring in 2050. The Leverkusen
facility, which is owned by Kronos and which represents about one-third of
Kronos' current TiO2 production capacity, is located within an extensive
manufacturing complex owned by Bayer AG. Rent for such land lease associated
with the Leverkusen facility is periodically established by agreement with Bayer
AG for periods of at least two years at a time. Under a separate supplies and
services agreement expiring in 2011, Bayer provides some raw materials,
including chlorine, auxiliary and operating materials, utilities and services
necessary to operate the Leverkusen facility.
Kronos believes the transportation access to its facilities, which are
generally maintained by the applicable local government, are adequate for
Kronos' purposes.
Kronos produced a new company record 492,000 metric tons of TiO2 in 2005,
compared to the prior records of 484,000 metric tons in 2004 and 476,000 metric
tons in 2003. Such production amounts include Kronos' one-half interest in the
joint-venture owned Louisiana plant discussed below. Kronos' average production
capacity utilization rates in all three years were near full capacity. Kronos'
production capacity has increased by approximately 30% over the past ten years
due to debottlenecking programs, with only moderate capital expenditures. Kronos
believes its annual attainable production capacity for 2006 is approximately
510,000 metric tons, with some slight additional capacity available in 2007
through its continued debottlenecking efforts.
The primary raw materials used in the TiO2 chloride production process are
titanium-containing feedstock, chlorine and coke. Chlorine and coke are
available from a number of suppliers. Titanium-containing feedstock suitable for
use in the chloride process is available from a limited, but increasing, number
of suppliers around the world, principally in Australia, South Africa, Canada,
India and the United States. Kronos purchased approximately 430,000 metric tons
of chloride feedstock in 2005, of which the vast majority was slag. Kronos
purchased chloride process grade slag in 2005 from a subsidiary of Rio Tinto plc
UK - Richards Bay Iron and Titanium Limited of South Africa under a long-term
supply contract that expires at the end of 2007. Natural rutile ore is purchased
primarily from Iluka Resources, Limited (Australia) under a long-term supply
contract that expires at the end of 2009. Kronos does not expect to encounter
difficulties obtaining long-term extensions to existing supply contracts prior
to the expiration of the contracts. Raw materials purchased under these
contracts and extensions thereof are expected to meet Kronos' chloride process
feedstock requirements over the next several years.
The primary raw materials used in the TiO2 sulfate production process are
titanium-containing feedstock, derived primarily from rock and beach sand
ilmenite, and sulfuric acid. Sulfuric acid is available from a number of
suppliers. Titanium-containing feedstock suitable for use in the sulfate process
is available from a limited number of suppliers around the world. Currently, the
principal active sources are located in Norway, Canada, Australia, India and
South Africa. As one of the few vertically-integrated producers of
sulfate-process pigments, Kronos owns and operates a rock ilmenite mine in
Norway which provided all of Kronos' feedstock for its European sulfate-process
pigment plants in 2005. Kronos produced approximately 816,000 metric tons of
ilmenite in 2005, of which approximately 317,000 metric tons were used
internally by Kronos, with the remainder sold to third parties. For its Canadian
sulfate-process plant, Kronos also purchases sulfate grade slag (approximately
29,000 metric tons in 2005), primarily from Q.I.T. Fer et Titane Inc. of Canada,
a subsidiary of Rio Tinto plc UK, under a long-term supply contract that expires
at the end of 2009. Raw materials purchased under these contracts and extensions
thereof are expected to meet Kronos' sulfate process feedstock requirements over
the next several years.
Kronos' raw material contracts contain fixed quantities that Kronos is
required to purchase, although these contracts allow for an upward or downward
adjustment in the quantity purchased. The quantities under these contracts do
not require Kronos to purchase feedstock in excess of amounts that Kronos would
reasonably consume in any given year. The pricing under these agreements is
generally negotiated annually.
The number of sources of, and availability of, certain raw materials is
specific to the particular geographic region in which a facility is located. As
noted above, Kronos purchases titanium-bearing ore from three different
suppliers in different countries under multiple-year contracts. Political and
economic instability in certain countries from which Kronos purchases its raw
material supplies could adversely affect the availability of such feedstock.
Should Kronos' vendors not be able to meet their contractual obligations or
should Kronos be otherwise unable to obtain necessary raw materials, Kronos may
incur higher costs for raw materials or may be required to reduce production
levels, which may have a material adverse effect on Kronos' consolidated
financial position, results of operations or liquidity.
The following table summarizes our raw materials procured or mined in 2005.
Quantities of Raw Materials
Production Process/Raw Material Procured or Mined
------------------------------- ---------------------------
(In thousands of metric tons)
Chloride process plants -
purchased slag or natural rutile ore 433
Sulfate process plants:
Raw ilmenite ore mined internally 317
Purchased slag 29
TiO2 manufacturing joint venture. Subsidiaries of Kronos and Huntsman
Holdings LLC each own a 50%-interest in a manufacturing joint venture. The joint
venture owns and operates a chloride-process TiO2 plant in Lake Charles,
Louisiana. Production from the plant is shared equally by Kronos and Huntsman
pursuant to separate offtake agreements.
A supervisory committee composed of four members, two of whom are appointed
by each of Kronos and Huntsman, directs the business and affairs of the joint
venture, including production and output decisions. Two general managers, one
appointed and compensated by each of Kronos and Huntsman, manage the operations
of the joint venture acting under the direction of the supervisory committee.
Kronos is required to purchase one-half of the Ti02 produced by the joint
venture. Because Kronos does not control the joint venture, the joint venture is
not consolidated in Kronos' financial statements. Kronos accounts for its
interest in the joint venture by the equity method. The manufacturing joint
venture operates on a break-even basis, and accordingly Kronos does not report
any equity in earnings of the joint venture. With the exception of raw material
costs and packaging costs for the pigment grades produced, Kronos and Huntsman
share all costs and capital expenditures of the joint venture equally. Kronos'
share of the net costs of the joint venture is reported as cost of sales as the
related TiO2 acquired from the joint venture is sold. See Note 7 to the
Consolidated Financial Statements.
Competition. The TiO2 industry is highly competitive. Kronos competes
primarily on the basis of price, product quality and technical service, and the
availability of high performance pigment grades. Although certain TiO2 grades
are considered specialty pigments, the majority of Kronos' grades and
substantially all of Kronos' production are considered commodity pigments with
price generally being the most significant competitive factor. Kronos believes
that it is the leading seller of TiO2 in several countries, including Germany,
with an estimated 12% share of worldwide Ti02 sales volumes in 2005. Overall,
Kronos is the world's fifth-largest producer of Ti02.
Kronos' principal competitors are E.I. du Pont de Nemours & Co. ("DuPont"),
Millennium Chemicals, Inc., Huntsman, Tronox Incorporated, and Ishihara Sangyo
Kaisha, Ltd. These five largest competitors have estimated individual shares of
TiO2 production capacity ranging from 4% to 24%, and an estimated aggregate 70%
share of worldwide TiO2 production volumes. DuPont has about one-half of total
North American TiO2 production capacity and is Kronos' principal North American
competitor.
Worldwide capacity additions in the TiO2 market resulting from construction
of greenfield plants require significant capital expenditures and substantial
lead time (typically three to five years in Kronos' experience). Kronos is not
aware of any greenfield plant under construction in the United States, Europe or
any other part of the world. However, a competitor has announced its intention
to build a greenfield facility in China, but it is not clear when construction
will begin and it is not likely that any product would be available until 2010,
at the earliest. During 2004, certain competitors either idled or shut down
facilities. However, Kronos does expect that industry capacity will increase as
Kronos and its competitors continue to debottleneck their existing facilities.
Based on the factors described above, Kronos expects that the average annual
increase in industry capacity from announced debottlenecking projects will be
less than the average annual demand growth for TiO2 during the next three to
five years. However, no assurance can be given that future increases in the TiO2
industry production capacity and future average annual demand growth rates for
TiO2 will conform to Kronos' expectations. If actual developments differ from
Kronos' expectations, Kronos' and the TiO2 industry's performances could be
unfavorably affected.
Research and development. Kronos' expenditures for research and
development, process technology and quality assurance activities were
approximately $7 million in 2003, $8 million in 2004 and $9 million in 2005.
Research and development activities are conducted principally at Kronos'
Leverkusen, Germany facility. Such activities are directed primarily towards
improving both the chloride and sulfate production processes, improving product
quality and strengthening Kronos' competitive position by developing new pigment
applications.
Kronos continually seeks to improve the quality of its grades, and has been
successful at developing new grades for existing and new applications to meet
the needs of customers and increase product life cycle. Since 1999, 13 new
grades have been added for plastics, coatings, fiber and paper laminate
applications.
Patents and trademarks. Patents held for products and production processes
are important to Kronos and its continuing business activities. Kronos seeks
patent protection for its technical developments, principally in the United
States, Canada and Europe, and from time to time enters into licensing
arrangements with third parties. Kronos' existing patents generally have a term
of 20 years from the date of filing, and have remaining terms ranging from one
to 20 years. Kronos seeks to protect its intellectual property rights, including
its patent rights, and from time to time Kronos is engaged in disputes relating
to the protection and use of intellectual property relating to its products.
Kronos' major trademarks, including Kronos, are protected by registration
in the United States and elsewhere with respect to those products it
manufactures and sells. Kronos also relies on unpatented proprietary know-now
and continuing technological innovation and other trade secrets to develop and
maintain its competitive position. Kronos' proprietary chloride production
process is an important part of Kronos' technology, and Kronos' business could
be harmed if Kronos should fail to maintain confidentiality of its trade secrets
used in this technology.
Customer base and annual seasonality. Kronos believes that neither its
aggregate sales nor those of any of its principal product groups are
concentrated in or materially dependent upon any single customer or small group
of customers. Kronos' ten largest customers accounted for approximately 26% of
its sales during 2005. Neither Kronos' business as a whole nor that of any of
its principal product groups is seasonal to any significant extent. Due in part
to the increase in paint production in the spring to meet spring and summer
painting season demand, TiO2 sales are generally higher in the first half of the
year than in the second half of the year.
Employees. As of December 31, 2005, Kronos employed approximately 2,415
persons (excluding employees of the Louisiana joint venture), with 50 employees
in the United States, 420 employees in Canada and 1,945 employees in Europe.
Hourly employees in production facilities worldwide, including the TiO2
joint venture, are represented by a variety of labor unions, with labor
agreements having various expiration dates. In Europe, Kronos' union employees
are covered by master collective bargaining agreements in the chemicals industry
that are renewed annually. In Canada, Kronos' union employees are covered by a
collective bargaining agreement that expires in June 2007. Kronos believes its
labor relations are good.
Regulatory and environmental matters. Kronos' operations are governed by
various environmental laws and regulations. Certain of Kronos' operations are,
or have been, engaged in the handling, manufacture or use of substances or
compounds that may be considered toxic or hazardous within the meaning of
applicable environmental laws and regulations. As with other companies engaged
in similar businesses, certain past and current operations and products of
Kronos have the potential to cause environmental or other damage. Kronos has
implemented and continues to implement various policies and programs in an
effort to minimize these risks. Kronos' policy is to maintain compliance with
applicable environmental laws and regulations at all of its facilities and to
strive to improve its environmental performance. It is possible that future
developments, such as stricter requirements of environmental laws and
enforcement policies thereunder, could adversely affect Kronos' production,
handling, use, storage, transportation, sale or disposal of such substances as
well as Kronos' consolidated financial position, results of operations or
liquidity.
Kronos' U.S. manufacturing operations are governed by federal environmental
and worker health and safety laws and regulations, principally the Resource
Conservation and Recovery Act ("RCRA"), the Occupational Safety and Health Act,,
the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act, the Toxic
Substances Control Act ("TSCA"), and the Comprehensive Environmental Response,
Compensation and Liability Act, as amended by the Superfund Amendments and
Reauthorization Act ("CERCLA"), as well as the state counterparts of these
statutes. Kronos believes that the Louisiana Ti02 plant owned by the joint
venture and a Louisiana Ti02 slurry facility owned by Kronos are in substantial
compliance with applicable requirements of these laws or compliance orders
issued thereunder. Kronos has no other U.S. plants.
While the laws regulating operations of industrial facilities in Europe
vary from country to country, a common regulatory framework is provided by the
European Union ("EU"). Germany and Belgium are members of the EU and follow its
initiatives. Norway, although not a member of the EU, generally patterns its
environmental regulations after the EU. Kronos believes it has obtained all
required permits and is in substantial compliance with applicable EU
requirements.
At Kronos' sulfate plant facilities in Germany, Kronos recycles weak
sulfuric acid either through contracts with third parties or using its own
facilities. At Kronos' Norwegian plant, Kronos ships its spent acid to a third
party location where it is treated and disposed. Kronos' Canadian sulfate plant
neutralizes its spent acid and sells its gypsum byproduct to a local wallboard
manufacturer. Kronos has a contract with a third party to treat certain
sulfate-process effluents at its German sulfate process plants. With regard to
the German plants, either party may terminate the contract after giving three or
four years advance notice, depending on the contract.
From time to time, Kronos' facilities may be subject to environmental
regulatory enforcement under U.S. and foreign statutes. Resolution of such
matters typically involves the establishment of compliance programs.
Occasionally, resolution may result in the payment of penalties, but to date
such penalties have not involved amounts having a material adverse effect on
Kronos' consolidated financial position, results of operations or liquidity.
Kronos believes that all of its plants are in substantial compliance with
applicable environmental laws.
Kronos' capital expenditures related to its ongoing environmental
compliance, protection and improvement programs in 2005 were approximately $4
million, and are currently expected to approximate $6 million in 2006.
COMPONENT PRODUCTS - COMPX INTERNATIONAL INC.
General. CompX is a leading manufacturer of precision ball bearing slides,
security products (cabinet locks and other locking mechanisms) and ergonomic
computer support systems used in office furniture, computer-related applications
and a variety of other industries. CompX's products are principally designed for
use in medium- to high-end product applications, where design, quality and
durability are critical to CompX's customers. CompX believes that it is among
the world's largest producers of precision ball bearing slides, security
products and ergonomic computer support systems. In 2005, precision ball bearing
slides, security products and ergonomic computer support systems accounted for
approximately 42%, 43% and 15%,respectively, of sales related to its continuing
operations.
In January 2005, CompX completed the disposition of all of the net assets
of its Thomas Regout operations conducted in the Netherlands. Thomas Regout's
results of operations are classified as discontinued operations in the Company's
Consolidated Financial Statements. In August 2005, CompX completed the
acquisition of a components products business for aggregate cash consideration
of $7.3 million, net of cash acquired. See Notes 3 and 22 to the Consolidated
Financial Statements.
Products, product design and development. Precision ball bearing slides
manufactured to stringent industry standards are used in such applications as
office furniture, computer-related equipment, tool storage cabinets, imaging
equipment, file cabinets, desk drawers, automated teller machines, refrigerators
and other applications. These products include CompX's patented Integrated Slide
Lock in which a file cabinet manufacturer can reduce the possibility of multiple
drawers being opened at the same time, the adjustable patented Ball Lock which
reduces the risk of heavily-filled drawers, such as auto mechanic tool boxes,
from opening while in movement, and the and the Self-Closing Slide, which is
designed to assist in closing a drawer and is used in applications such as
bottom mount freezers.
Security products are used in various applications including ignition
systems, office furniture, vending and gaming machines, parking meters,
electrical circuit panels, storage compartments, security devices for laptop and
desktop computers as well as mechanical and electronic locks for the toolbox,
medical and other industries. Some of these products may include CompX's KeSet
high security system, which has the ability to change the keying on a single
lock 64 times without removing the lock from its enclosure and its patented high
security TuBar locking system. CompX believes that it is a North American market
leader in the manufacture and sale of cabinet locks and other locking
mechanisms.
Ergonomic computer support systems include articulating computer keyboard
support arms (designed to attach to desks in the workplace and home office
environments to alleviate possible strains and stress and maximize usable
workspace), CPU storage devices which minimize adverse effects of dust and
moisture and a number of complimentary accessories, including ergonomic wrist
rest aids, mouse pad supports and flat screen computer monitor support arms.
These products include CompX's Leverlock keyboard arm, which is designed to make
the adjustment of an ergonomic keyboard arm easier. In addition, CompX offers
its engineering and design capabilities for the design and manufacture of
products on a proprietary basis for key customers.
CompX's precision ball bearing slides are sold under the CompX Precision
Slides, CompX Waterloo, Waterloo Furniture Components, CompX DurISLide and CompX
Dynaslide brand names. Security products are sold under the CompX Security
Products, National Cabinet Lock, Fort Lock, Timberline Lock, Chicago Lock, STOCK
LOCKS, KeSet and TuBar brand names. Ergonomic products are sold under the CompX
ErgonomX brand name. CompX believes that its brand names are well recognized in
the industry.
Sales, marketing and distribution. CompX sells components to original
equipment manufacturers ("OEMs") and to distributors through a dedicated sales
force. The majority of CompX's sales are to OEMs, while the balance represents
standardized products sold through distribution channels. Sales to large OEM
customers are made through the efforts of factory-based sales and marketing
professionals and engineers working in concert with field salespeople and
independent manufacturers' representatives. Manufacturers' representatives are
selected based on special skills in certain markets or relationships with
current or potential customers.
A significant portion of CompX's sales are made through distributors. CompX
has a significant market share of cabinet lock sales to the locksmith
distribution channel. CompX supports its distributor sales with a line of
standardized products used by the largest segments of the marketplace. These
products are packaged and merchandised for easy availability and handling by
distributors and the end users. Based on CompX's successful STOCK LOCKS
inventory program, similar programs have been implemented for distributor sales
of ergonomic computer support systems and to some extent precision ball bearing
slides. CompX also operates a small tractor/trailer fleet associated with its
Canadian facilities to provide an industry-unique service response to major
customers for those Canadian manufactured products.
CompX does not believe it is dependent upon one or a few customers, the
loss of which would have a material adverse effect on its operations. In 2005,
the ten largest customers accounted for about 43% of component products sales
(2004 - 43%; 2003 - 44%). In 2004 and 2005, one customer accounted for 11% and
10%, respectively, of CompX's sales. No single customer accounted for more than
10% of CompX's sales in 2003.
Manufacturing and operations. At December 31, 2005, CompX operated six
manufacturing facilities in North America related to its continuing operations
(two in Illinois and one in each of South Carolina, Michigan, Wisconsin and
Canada) and two facilities in Taiwan. Precision ball bearing slides are
manufactured in the facilities located in Canada, Michigan and Taiwan. Security
products are manufactured in the facilities located in South Carolina and
Illinois. Ergonomic products are manufactured in the facility located in Canada.
Other component products are manufactured at the Wisconsin facility acquired in
2005. All of such facilities are owned by CompX except for one of the facilities
in Taiwan, which is leased. CompX also leases a distribution center in
California. CompX believes that all its facilities are well maintained and
satisfactory for their intended purposes.
Raw materials. Coiled steel is the major raw material used in the
manufacture of precision ball bearing slides and ergonomic computer support
systems. Plastic resins for injection molded plastics are also an integral
material for ergonomic computer support systems. Purchased components and zinc,
are the principal raw materials used in the manufacture of security products.
These raw materials are purchased from several suppliers and are readily
available from numerous sources.
CompX occasionally enters into raw material purchase arrangements to
mitigate the short-term impact of future increases in raw material costs. While
these arrangements do not commit CompX to a minimum volume of purchases, they
generally provide for stated unit prices based upon achievement of specified
volume purchase levels. This allows CompX to stabilize raw material purchase
prices, provided the specified minimum monthly purchase quantities are met.
Materials purchased outside of these arrangements are sometimes subject to
unanticipated and sudden price increases. Due to the competitive nature of the
markets served by CompX's products, it is often difficult to recover such
increases in raw material costs through increased product selling prices or raw
material surcharges. Consequently, overall operating margins can be affected by
such raw material cost pressures.
Competition. The office furniture and security products markets are highly
competitive. CompX competes primarily on the basis of product design, including
ergonomic and aesthetic factors, product quality and durability, price, on-time
delivery, service and technical support. CompX focuses its efforts on the
middle- and high-end segments of the market, where product design, quality,
durability and service are placed at a premium.
CompX competes in the precision ball bearing slide market primarily on the
basis of product quality and price with two large manufacturers and a number of
smaller domestic and foreign manufacturers. CompX competes in the security
products market with a variety of relatively small domestic and foreign
competitors. CompX competes in the ergonomic computer support system market
primarily on the basis of product quality, features and price with one major
producer and a number of smaller domestic manufacturers, and primarily on the
basis of price with a number of foreign manufacturers. Although CompX believes
that it has been able to compete successfully in its markets to date, price
competition from foreign-sourced products continues to intensify and there can
be no assurance that CompX will be able to continue to successfully compete in
all of its existing markets in the future.
Patents and trademarks. CompX holds a number of patents relating to its
component products, certain of which are believed to be important to CompX and
its continuing business activity. CompX's patents generally have a term of 20
years, and have remaining terms ranging from less than 3 years to 18 years at
December 31, 2005. CompX's major trademarks and brand names, including CompX,
CompX Precision Slides, CompX Security Products, CompX Waterloo, CompX ErgonomX,
National Cabinet Lock, KeSet, Fort Lock, Timberline Lock, Chicago Lock, ACE II,
TuBar, STOCK LOCKS, ShipFast, Waterloo Furniture Components Limited, CompX
DurISLide, and CompX Dynaslide, are protected by registration in the United
States and elsewhere with respect to the products CompX manufactures and sells.
CompX believes such trademarks are well recognized in the component products
industry.
Regulatory and environmental matters. CompX's operations are subject to
federal, state, local and foreign laws and regulations relating to the use,
storage, handling, generation, transportation, treatment, emission, discharge,
disposal and remediation of, and exposure to, hazardous and non-hazardous
substances, materials and wastes. CompX's operations are also subject to
federal, state, local and foreign laws and regulations relating to worker health
and safety. CompX believes that it is in substantial compliance with all such
laws and regulations. The costs of maintaining compliance with such laws and
regulations have not significantly impacted CompX to date, and CompX has no
significant planned costs or expenses relating to such matters. There can be no
assurance, however, that compliance with future laws and regulations will not
require CompX to incur significant additional expenditures, or that such
additional costs would not have a material adverse effect on CompX's
consolidated financial condition, results of operations or liquidity.
Employees. As of December 31, 2005, CompX employed approximately 1,230
persons, including 750 in the United States, 330 in Canada and 150 in Taiwan.
Approximately 70% of CompX's employees in Canada are represented by a labor
union covered by a collective bargaining agreement which provides for annual
wage increases from 1% to 2.5% over the term of the contract. A new collective
bargaining agreement was ratified in December 2005 that expires in January 2009.
Wage increases for these Canadian employees historically have also been in line
with overall inflation indices. CompX believes that its labor relations are
satisfactory.
WASTE MANAGEMENT - WASTE CONTROL SPECIALISTS LLC
General. Waste Control Specialists LLC, formed in 1995, completed
construction in early 1997 of the initial phase of its facility in West Texas
for the processing, treatment, storage and disposal of certain hazardous and
toxic wastes, and the first of such wastes were received for disposal in 1997.
Subsequently, Waste Control Specialists has expanded its permitting
authorizations to include the processing, treatment and storage of low-level and
mixed low-level radioactive wastes and the disposal of certain types of exempt
low-level radioactive wastes.
Facility, operations, services and customers. Waste Control Specialists has
been issued permits by the Texas Commission on Environmental Quality ("TCEQ"),
formerly the Texas Natural Resource Conservation Commission, and the U.S.
Environmental Protection Agency ("EPA") to accept hazardous and toxic wastes
governed by RCRA and TSCA. The ten-year RCRA and TSCA permits, which initially
expired in November 2004, were administratively extended while the agencies
complete their review for renewal. The final renewal will be for a new ten-year
period and are subject to additional renewals by the agencies assuming Waste
Control Specialists remains in compliance with the provisions of the permits.
In November 1997, the Texas Department of State Health Services ("TDSHS"),
formerly the Texas Department of Health, issued a license to Waste Control
Specialists for the treatment and storage, but not disposal, of low-level and
mixed low-level radioactive wastes. The current provisions of this license
generally enable Waste Control Specialists to accept such wastes for treatment
and storage from U.S. commercial and federal facility generators, including the
Department of Energy ("DOE") and other governmental agencies. Waste Control
Specialists accepted the first shipments of such wastes in 1998. Waste Control
Specialists has also been issued a permit by the TCEQ to establish a research,
development and demonstration facility in which third parties could use the
facility to develop and demonstrate new technologies in the waste management
industry, including possibly those involving low-level and mixed low-level
radioactive wastes. Waste Control Specialists has also obtained additional
authority that allows Waste Control Specialists to dispose of certain categories
of low-level radioactive materials, including naturally-occurring radioactive
material ("NORM") and exempt-level materials (radioactive materials that do not
exceed certain specified radioactive concentrations and which are exempt from
licensing). Although there are other categories of low-level and mixed low-level
radioactive wastes which continue to be ineligible for disposal under the
increased authority, Waste Control Specialists intends to pursue additional
regulatory authorizations to expand its storage, treatment and disposal
capabilities for low-level and mixed low-level radioactive wastes. There can be
no assurance that any such additional permits or authorizations will be
obtained.
The facility is located on a 1,338-acre site in West Texas owned by Waste
Control Specialists. The 1,338 acres are permitted for 5.4 million cubic yards
of airspace landfill capacity for the disposal of RCRA and TSCA wastes. Waste
Control Specialists owns approximately 13,500 additional acres of land
surrounding the permitted site, a small portion of which is located in New
Mexico. This presently undeveloped additional acreage is available for future
expansion assuming appropriate permits could be obtained. The 1,338-acre site
has, in Waste Control Specialists' opinion, superior geological characteristics
which make it an environmentally-desirable location. The site is located in a
relatively remote and arid section of West Texas. The ground is composed of
triassic red bed clay for which the possibility of leakage into any underground
water table is considered highly remote. In addition, based in part on extensive
drilling by the oil and gas industry in the area and its own test wells, Waste
Control Specialists does not believe there are any underground aquifers or other
usable sources of water below the site.
While the West Texas facility operates as a final repository for wastes
that cannot be further reclaimed and recycled, it also serves as a staging and
processing location for material that requires other forms of treatment prior to
final disposal as mandated by the U.S. EPA or other regulatory bodies. The
20,000 square foot treatment facility provides for waste
treatment/stabilization, warehouse storage, treatment facilities for hazardous,
toxic and mixed low-level radioactive wastes, drum to bulk, and bulk to drum
materials handling and repackaging capabilities. Treatment operations involve
processing wastes through one or more chemical or other treatment methods,
depending upon the particular waste being disposed and regulatory and customer
requirements. Chemical treatment uses chemical oxidation and reduction, chemical
precipitation of heavy metals, hydrolysis and neutralization of acid and
alkaline wastes, and results in the transformation of wastes into inert
materials through one or more chemical processes. Certain of such treatment
processes may involve technology which Waste Control Specialists may acquire,
license or subcontract from third parties.
Once treated and stabilized, wastes are either (i) placed in Waste Control
Specialists' landfill disposal site, (ii) stored onsite in drums or other
specialized containers or (iii) shipped to third-party facilities for final
disposition. Only wastes which meet certain specified regulatory requirements
can be disposed of by placing them in the landfill, which is fully-lined and
includes a leachate collection system.
Waste Control Specialists takes delivery of wastes collected from customers
and transported on behalf of customers, via rail or highway, by independent
contractors to the West Texas site. Such transportation is subject to
regulations governing the transportation of hazardous wastes issued by the U.S.
Department of Transportation.
Waste Control Specialists' target customers are industrial companies,
including chemical, aerospace and electronics businesses and governmental
agencies, including the DOE, which generate hazardous, mixed low-level
radioactive and other wastes. Waste Control Specialists employs its own
salespeople to market its services to potential customers.
Competition. The hazardous waste industry (other than low-level and mixed
low-level radioactive waste) currently has excess industry capacity caused by a
number of factors, including a relative decline in the number of environmental
remediation projects generating hazardous wastes and efforts on the part of
generators to reduce the volume of waste and/or manage it onsite at their
facilities. These factors have led to reduced demand and increased price
pressure for non-radioactive hazardous waste management services. While Waste
Control Specialists believes its broad range of permits for the treatment and
storage of low-level and mixed-level radioactive waste streams provides certain
competitive advantages, a key element of Waste Control Specialists' long-term
strategy to provide "one-stop shopping" for hazardous, low-level and mixed
low-level radioactive wastes includes obtaining additional regulatory
authorizations for the disposal of a broad range of low-level and mixed
low-level radioactive wastes.
Competition within the hazardous waste industry is diverse. Competition is
based primarily on pricing and customer service. Price competition is expected
to be intense with respect to RCRA- and TSCA-related wastes. Principal
competitors are Energy Solutions, LLC, American Ecology Corporation and
Perma-Fix Environmental Services, Inc. These competitors are well established
and have significantly greater resources than Waste Control Specialists, which
could be important competitive factors. However, Waste Control Specialists
believes it may have certain competitive advantages, including its
environmentally-desirable location, broad level of local community support, a
rail transportation network leading to the facility and capability for future
site expansion.
Employees. At December 31, 2005, Waste Control Specialists employed
approximately 120 persons.
Regulatory and environmental matters. While the waste management industry
has benefited from increased governmental regulation, the industry itself has
become subject to extensive and evolving regulation by federal, state and local
authorities. The regulatory process requires businesses in the waste management
industry to obtain and retain numerous operating permits covering various
aspects of their operations, any of which could be subject to revocation,
modification or denial. Regulations also allow public participation in the
permitting process. Individuals as well as companies may oppose the grant of
permits. In addition, governmental policies and the exercise of broad discretion
by regulators are by their nature subject to change. It is possible that Waste
Control Specialists' ability to obtain any desired applicable permits on a
timely basis, and to retain those permits, could in the future be impaired. The
loss of any individual permit could have a significant impact on Waste Control
Specialists' financial condition, results of operations or liquidity, especially
because Waste Control Specialists owns and operates only one disposal site. For
example, adverse decisions by governmental authorities on permit applications
submitted by Waste Control Specialists could result in the abandonment of
projects, premature closing of the facility or operating restrictions. Waste
Control Specialists' RCRA and TSCA permits and its license from the TDSHS, as
amended, are expected to expire in 2015, and such permits and licenses can be
renewed subject to compliance with the requirements of the application process
and approval by the TCEQ or TDSHS, as applicable.
Prior to June 2003, the state law in Texas (where Waste Control
Specialists' disposal facility is located) prohibited the applicable Texas
regulatory agency from issuing a license for the disposal of a broad range of
low-level and mixed low-level radioactive waste to a private enterprise
operating a disposal facility in Texas. In June 2003, a new Texas state law was
enacted that allows the Texas Commission on Environmental Quality ("TCEQ") to
issue a low-level radioactive waste disposal license to a private entity, such
as Waste Control Specialists. Waste Control Specialists has applied for such a
disposal license with the TCEQ, and Waste Control Specialists was the only
entity to submit an application for such a disposal license. The application was
declared administratively complete by the TCEQ in February 2005. The
regulatorially required merit review has been completed, and the TCEQ began its
technical review of the application in May 2005. The length of time that it will
take to complete the review and act upon the license application is uncertain,
although Waste Control Specialists does not currently expect the agency will
issue any final decision on the license application before late 2007. There can
be no assurance that Waste Control Specialists will be successful in obtaining
any such license.
In June 2004, Waste Control Specialists applied to the TDSHS for a license
to dispose of byproduct 11.e(2) waste material. Waste Control Specialists can
currently treat and store byproduct material, but may not dispose of it. The
length of time that TDSHS will take to review and act upon the license
application is uncertain, but Waste Control Specialists currently expects the
TDSHS will issue a final decision on the license application sometime during
2006. There can be no assurance that Waste Control Specialists will be
successful in obtaining any such license.
Federal, state and local authorities have, from time to time, proposed or
adopted other types of laws and regulations with respect to the waste management
industry, including laws and regulations restricting or banning the interstate
or intrastate shipment of certain wastes, imposing higher taxes on out-of-state
waste shipments compared to in-state shipments, reclassifying certain categories
of hazardous wastes as non-hazardous and regulating disposal facilities as
public utilities. Certain states have issued regulations which attempt to
prevent waste generated within that particular state from being sent to disposal
sites outside that state. The U.S. Congress has also, from time to time,
considered legislation which would enable or facilitate such bans, restrictions,
taxes and regulations. Due to the complex nature of the waste management
industry regulation, implementation of existing or future laws and regulations
by different levels of government could be inconsistent and difficult to
foresee. Waste Control Specialists will attempt to monitor and anticipate
regulatory, political and legal developments which affect the waste management
industry, but there can be no assurance that Waste Control Specialists will be
able to do so. Nor can Waste Control Specialists predict the extent to which
legislation or regulations that may be enacted, or any failure of legislation or
regulations to be enacted, may affect its operations in the future.
The demand for certain hazardous waste services expected to be provided by
Waste Control Specialists is dependent in large part upon the existence and
enforcement of federal, state and local environmental laws and regulations
governing the discharge of hazardous wastes into the environment. The waste
management industry could be adversely affected to the extent such laws or
regulations are amended or repealed or their enforcement is lessened.
Because of the high degree of public awareness of environmental issues,
companies in the waste management business may be, in the normal course of their
business, subject to judicial and administrative proceedings. Governmental
agencies may seek to impose fines or revoke, deny renewal of, or modify any
applicable operating permits or licenses. In addition, private parties and
special interest groups could bring actions against Waste Control Specialists
alleging, among other things, a violation of operating permits.
TITANIUM METALS - TITANIUM METALS CORPORATION
General. TIMET is a leading global producer of titanium sponge, melted
products (ingot and slab) and mill products. TIMET is the only producer with
major titanium production facilities in both the United States and Europe, the
world's principal markets for titanium consumption. TIMET estimates that in 2005
it accounted for approximately 18% of worldwide industry shipments of titanium
mill products and approximately 8% of worldwide titanium sponge production.
Demand for titanium is also increasing in emerging markets with such diverse
uses as offshore oil and gas production installations, automotive, geothermal
facilities and architectural applications.
Titanium was first manufactured for commercial use in the 1950s. Titanium's
unique combination of corrosion resistance, elevated-temperature performance and
high strength-to-weight ratio makes it particularly desirable for use in
commercial and military aerospace applications where these qualities are
essential design requirements for certain critical parts such as wing supports
and jet engine components. While aerospace applications have historically
accounted for a substantial portion of the worldwide demand for titanium, the
number of non-aerospace end-use markets for titanium has expanded substantially.
Today, numerous industrial uses for titanium include chemical plants, industrial
power plants, desalination plants and pollution control equipment. TIMET is
currently the only major producer of titanium sponge, a key raw material, in the
United States.
Industry conditions. The titanium industry historically has derived a
substantial portion of its business from the aerospace industry. Demand for
titanium products within the commercial aerospace sector is derived from both
jet engine components (e.g., blades, discs, rings and engine cases) and airframe
components (e.g., bulkheads, tail sections, landing gear, wing supports and
fasteners). The commercial aerospace sector has a significant influence on
titanium companies, particularly mill product producers such as TIMET.
The following table illustrates TIMET's estimates of titanium industry mill
product shipments during 2004 and 2005:
Year ended December 31,
--------------------------
2004 2005 % change
---- ---- --------
(metric tons)
Mill product shipments to:
Commercial aerospace sector 20,900 24,000 +15%
Military sector 4,700 6,200 +32%
Industrial sector 32,300 35,600 +10%
Emerging markets sector 2,300 2,700 +17%
------- -------
Aggregate mill product shipments
to all sectors 60,200 68,500 +14%
======= =======
TIMET's business is more dependent on commercial aerospace demand than is
the overall titanium industry, as approximately 59% of TIMET's mill product
shipment volume in 2005 was to the commercial aerospace sector, whereas, as
indicated by the above table, approximately 35% of the overall titanium
industry's shipment volume in 2005 was to the commercial aerospace sector.
The cyclical nature of the commercial aerospace industry has been the
principal driver of the historical fluctuations in the performance of most
titanium companies. Over the past 20 years, the titanium industry had cyclical
peaks in mill product shipments in 1989, 1997 and 2001 and cyclical lows in
1983, 1991, 1999 and 2003. Prior to 2004, demand for titanium reached its
highest level in 1997 when industry mill product shipments reached approximately
60,700 metric tons. However, since 1997, industry mill product shipments have
fluctuated significantly, primarily due to a continued change in demand for
titanium from the commercial aerospace sector. TIMET estimates that industry
shipments approximated 60,200 metric tons in 2004 and 68,500 metric tons in
2005. TIMET currently expects total industry mill product shipments will
increase by only 5% to 10% in 2006 as compared to 2005, due to tightness of raw
material supply.
The Airline Monitor, a leading aerospace publication, traditionally issues
forecasts for commercial aircraft deliveries each January and July. According to
The Airline Monitor, large commercial aircraft deliveries for the 1996 to 2005
period peaked in 1999 with 889 aircraft, including 254 wide body aircraft that
use substantially more titanium than their narrow body counterparts. Large
commercial aircraft deliveries totaled 650 (including 152 wide bodies) in 2005.
The following table summarizes The Airline Monitor's most recently issued
forecast (January 2006) for large commercial aircraft deliveries over the next
five years:
% increase (decrease)
Forecasted deliveries over previous year
----------------------------- ---------------------
Year Total Wide bodies Total Wide bodies
---- ----- ----------- ----- -----------
2006 840 193 29% 27%
2007 920 217 9% 12%
2008 985 259 7% 19%
2009 1,030 294 5% 13%
2010 1,030 314 - 7%
The latest forecast from The Airline Monitor reflects a significant
increase from earlier forecasts, in large part due to record levels of new
orders placed for Boeing and Airbus models during 2005. Total order bookings for
Boeing and Airbus in 2005 aggregated 2,109 planes. Expectations are that new
orders in 2006 will be significantly lower than 2005. However, the strong
bookings in 2005 have increased the order backlog for both Boeing and Airbus in
support of this increased forecast.
Deliveries of titanium generally precede aircraft deliveries by about one
year, although this varies considerably by titanium product. This correlates to
TIMET's cycle, which historically precedes the cycle of the aircraft industry
and related deliveries. Although persistently high oil prices have had an
adverse impact on the commercial airline industry, global commercial airline
traffic increased in 2005 compared to 2004. TIMET estimates that industry mill
product shipments into the commercial aerospace sector will increase 15% to 20%
as compared to 2005.
Wide body planes tend to use a higher percentage of titanium in their
airframes, engines and parts than narrow body planes. Newer models of planes
tend to use a higher percentage of titanium than older models. Newer wide body
models such as the Airbus A380 superjumbo jet and the Boeing 787 Dreamliner are
expected to use an even greater quantity of titanium than previous wide body
models.
Titanium shipments into the military sector are largely driven by
government defense spending in North America and Europe. Military aerospace
programs were the first to utilize titanium's unique properties on a large
scale, beginning in the 1950s. Titanium shipments to military aerospace markets
reached a peak in the 1980s before falling to historical lows in the early 1990s
after the end of the Cold War. In recent years, titanium has become an accepted
use in ground combat vehicles as well as in Naval applications. The importance
of military markets to the titanium industry is expected to continue to rise in
coming years as defense spending budgets increase in reaction to terrorist
activities and global conflicts.
Several of today's active U.S. military programs, including the C-17,
F/A-18, F-16 and F-15 are expected to continue in production through the end of
the current decade. However, a recent Quadrennial Defense Review (QDR)
recommends that the U.S. Air Force stop procurement of the C-17 with the 180
planes it now has on order, but this recommendation still must go through the
federal budget process. Without further orders, the C-17 production line will
close in 2008.
In addition to these established U.S. programs, new U.S. programs offer
growth opportunities for increased titanium consumption. The F/A-22 Raptor was
given full-rate production approval in April 2005. According to The Teal Group,
a leading independent aerospace publication, the U.S. Air Force would like to
purchase 381 aircraft, but the Department of Defense is now planning for only
179. However, additional F/A-22 Raptors may be manufactured for sale to foreign
nations.
In October 2001, Lockheed-Martin Corporation was awarded the contract for
construction of the F-35 Joint Strike Fighter ("JSF"). The JSF is expected to
enter low-rate initial production in late 2006, with delivery of the first
production aircraft in 2009. Although no specific delivery patterns have been
established, procurement is expected to extend over the next 30 to 40 years and
to include as many as 3,000 to 4,000 planes, including sales to foreign nations.
European military programs also have active aerospace programs offering the
possibility for increased titanium consumption. Production levels for the Saab
Gripen, Eurofighter Typhoon, Dassault Rafale and Dassault Mirage 2000 are all
forecasted to remain steady through the end of the decade.
Utilization of titanium on military ground combat vehicles for armor
applique and integrated armor or structural components continues to gain
acceptance within the military market segment. Titanium armor components provide
the necessary ballistic performance while achieving a mission critical vehicle
performance objective of reduced weight. In order to counteract increased threat
levels, titanium is being utilized on vehicle upgrade programs in addition to
new builds. Based on active programs, as well as programs currently under
evaluation, TIMET believes there will be additional usage of titanium on ground
combat vehicles that will provide continued growth in the military market
sector. In armor and armament, TIMET sells plate and sheet products for
fabrication into applique plate for protection application of the entire ground
combat vehicle as well as the primary vehicle structure.
Since titanium's initial applications, the number of end-use markets for
titanium has significantly expanded. Established industrial uses for titanium
include chemical plants, power plants, desalination plants and pollution control
equipment. Rapid growth of the Chinese and other Southeast Asian economies has
brought unprecedented demand for titanium-intensive industrial equipment. In
November 2005, TIMET entered into a joint venture with XI'AN BAOTIMET VALINOX
TUBES CO. LTD. to produce welded titanium tubing in the Peoples Republic of
China. BAOTIMET's production facilities will be located in, China, and
production is expected to begin in early 2007.
Titanium continues to gain acceptance in many emerging market applications,
including automotive, energy (including oil and gas) and architecture. Although
titanium is generally higher cost than other competing metals, in many cases
customers find the physical properties of titanium to be attractive from the
standpoint of weight, performance, longevity, design alternatives, life cycle
value and other factors. TIMET continues to explore opportunities in these
emerging market applications through marketing initiatives, research and
development and proprietary alloys designed to provide more cost effective
alternatives for these markets.
Although TIMET estimates that emerging market demand presently represents
only about 4% of the 2005 total industry demand for titanium mill products,
TIMET believes emerging market demand, in the aggregate, could grow at
double-digit rates over the next several years. TIMET continues to actively
pursue these markets and was able to grow its mill product shipments into
emerging markets by more than 50% during 2005 as compared to 2004. Beginning in
2005, TIMET no longer includes armor and armament related sales as part of its
emerging markets sector, as titanium usage has become widely accepted for such
applications.
The automotive market continues to be an attractive emerging market due to
its potential for sustainable long-term growth. TIMET Automotive is focused on
developing and marketing proprietary alloys and processes specifically suited
for automotive applications. Titanium is now used in several consumer car
applications as well as in numerous motorcycles. At the present time, titanium
is primarily used for exhaust systems, suspension springs, engine valves,
connecting rods and turbocharger compressor wheels in consumer and commercial
vehicles. In exhaust systems, titanium provides for significant weight savings,
while its corrosion resistance provides life-of-vehicle durability. In
suspension spring applications, titanium's low modulus of elasticity allows the
spring's height to be reduced by 20% to 40% compared to a steel spring, which,
when combined with the titanium's low density, permits 30% to 60% weight savings
over steel spring suspension systems. Titanium engine components provide
mass-reduction benefits that directly improve vehicle performance and fuel
economy. The application of titanium to turbocharger compressor wheels is part
of a solution to meet U.S. and European Union government-regulated diesel engine
emissions requirements. TIMET proprietary alloys provide cost effective
optimized performance for the various target applications. The decision to
select titanium components for consumer car, truck and motorcycle components
remains highly cost sensitive; however, TIMET believes titanium's acceptance in
consumer vehicles will expand as the automotive industry continues to better
understand the benefits titanium offers.
The oil and gas market utilizes titanium for down-hole logging tools,
critical riser components, fire water systems and saltwater-cooling systems.
Additionally, as offshore development of new oil and gas fields moves into the
ultra deep-water depths, market demand for titanium's light-weight,
high-strength and corrosion-resistance properties is creating new opportunities
for the material. TIMET has a group dedicated to developing the expansion of
titanium use in this market and in other non-aerospace applications.
Products and operations. TIMET is a vertically integrated titanium
manufacturer whose products include (i) titanium sponge, the basic form of
titanium metal used in titanium products, (ii) melted products (ingot,
electrodes and slab), the result of melting sponge and titanium scrap, either
alone or with various other alloys, (iii) mill products that are forged and
rolled from ingot or slab, including long products (billet and bar), flat
products (plate, sheet and strip) and pipe and (iv) fabrications (spools,
pipefittings, manifolds, vessels, etc.) that are cut, formed, welded and
assembled from titanium mill products.
Titanium sponge (so called because of its appearance) is the commercially
pure, elemental form of titanium metal. The first step in TIMET's sponge
production involves the chlorination of titanium-containing rutile ores (derived
from beach sand) with chlorine and petroleum coke to produce titanium
tetrachloride. Titanium tetrachloride is purified and then reacted with
magnesium in a closed system, producing titanium sponge and magnesium chloride
as co-products. TIMET's titanium sponge production facility in Nevada
incorporates vacuum distillation process ("VDP") technology, which removes the
magnesium and magnesium chloride residues by applying heat to the sponge mass
while maintaining a vacuum in the chamber. The combination of heat and vacuum
boils the residues from the sponge mass, and then the mass is mechanically
pushed out of the distillation vessel, sheared and crushed, while the residual
magnesium chloride is electrolytically separated and recycled.
Titanium ingot is a cylindrical solid shape that, in TIMET's case, weighs
up to 8 metric tons. Titanium slab is a rectangular solid shape that, in TIMET's
case, weighs up to 16 metric tons. Each ingot or slab is formed by melting
titanium sponge, scrap or both, usually with various other alloys such as
vanadium, aluminum, molybdenum, tin and zirconium. The melting process for ingot
and slab is closely controlled and monitored utilizing computer control systems
to maintain product quality and consistency and to meet customer specifications.
In most cases, TIMET uses its ingot, electrodes and slab as the starting
material for further processing into mill products. However, it also sells ingot
and slab to third parties. Titanium scrap is a by-product of the forging,
rolling, milling and machining operations, and significant quantities of scrap
are generated in the production process for finished titanium products and
components.
TIMET sends certain products either to TIMET's service centers or to
outside vendors for further processing before being shipped to customers.
TIMET's customers either process TIMET's products for their ultimate end-use or
for sale to third parties.
During the production process and following the completion of
manufacturing, TIMET performs extensive testing on its products. The inspection
process is critical to ensuring that TIMET's products meet the high quality
requirements of its customers, particularly in aerospace component production.
TIMET certifies that its products meet customer specification at the time of
shipment for substantially all customer orders.
TIMET currently is reliant on several outside processors (one of which is
owned by a competitor) to perform certain rolling, finishing and other
processing steps in the U.S., and certain melting and forging steps in France.
In France, the processor is also a joint venture partner in TIMET's 70%-owned
subsidiary. During the past several years, TIMET has made significant strides
toward reducing the reliance on competitor-owned sources for these services, so
that any interruption in these functions should not have a material adverse
effect on TIMET's business, results of operations, financial position or
liquidity.
Distribution. TIMET sells its products through its own sales force based in
the U.S. and Europe and through independent agents and distributors worldwide.
TIMET's distribution system also includes eight TIMET-owned service centers
(five in the U.S. and three in Europe), which sell TIMET's products on a
just-in-time basis. The service centers primarily sell value-added and
customized mill products including bar, sheet, plate, tubing and strip. TIMET
believes its service centers provide a competitive advantage because of their
ability to foster customer relationships, customize products to suit specific
customer requirements and respond quickly to customer needs.
Raw materials. The principal raw materials used in the production of
titanium ingot, slab and mill products are titanium sponge, titanium scrap and
alloys. During 2005, TIMET's raw material usage requirements in the production
of its melted and mill products were provided by internally produced sponge
(29%), purchased sponge (25%), titanium scrap (40%) and other alloys (6%).
The primary raw materials used in the production of titanium sponge are
titanium-containing rutile ore, chlorine, magnesium and petroleum coke. Rutile
ore is currently available from a limited number of suppliers around the world,
principally located in Australia, South Africa and Sri Lanka. TIMET purchases
the majority of its supply of rutile ore from Australia. TIMET believes the
availability of rutile ore will be adequate for the foreseeable future and does
not anticipate any interruptions of its rutile supplies. However, there can be
no assurance that TIMET will not experience interruptions.
Chlorine is currently obtained from a single supplier near TIMET's sponge
plant in Nevada. While TIMET does not presently anticipate any chlorine supply
problems, there can be no assurances the chlorine supply will not be
interrupted. In the event of supply disruption, TIMET has taken steps to
mitigate this risk, including establishing the feasibility of certain equipment
modifications to enable it to utilize material from alternative chlorine
suppliers or to purchase and utilize an intermediate product which will allow
TIMET to eliminate the purchase of chlorine if needed. Magnesium and petroleum
coke are generally available from a number of suppliers.
During 2005, TIMET was the only major U.S. producer of titanium sponge and
one of only six major worldwide producers (the others are located in Russia,
Kazakhstan, the Ukraine and two in Japan). Additionally, there are two smaller
sponge producers located in China. However, TIMET cannot supply all of its needs
for all grades of titanium sponge internally and is dependent, therefore, on
third parties for a substantial portion of its sponge requirements. Titanium
melted and mill products require varying grades of sponge and/or scrap depending
on the customers' specifications and expected end use. Presently, TIMET and
certain companies in Japan are the only producers of premium quality sponge that
currently have complete approval for all significant demanding aerospace
applications. Over the past few years, sponge producers in Russia and Kazakhstan
have progressed in their efforts to obtain approval for the use of their sponge
into all aerospace applications. This qualification process is likely to
continue for several more years. Historically, TIMET has purchased sponge
predominantly from producers in Kazakhstan and Japan. In 2002, TIMET entered
into a sponge supply agreement, effective through 2007, which requires minimum
annual purchases by TIMET. TIMET has no other long-term sponge supply
agreements. Since 2000, TIMET has also purchased sponge from the U.S. Defense
Logistics Agency ("DLA") stockpile; however, the DLA stockpile became fully
depleted during 2005. TIMET expects to continue to purchase sponge from a
variety of sources during 2006.
TIMET utilizes titanium scrap at its melting locations that is either
generated internally, purchased from certain of its customers under various
buyback arrangements or purchased externally on the open market. Such scrap
consists of alloyed and commercially pure solids and turnings. Internally
produced scrap is generated in TIMET's factories during both melting and mill
product processing. Scrap obtained through customer buyback arrangements
provides a "closed loop" arrangement resulting in greater supply and cost
stability. Externally purchased scrap comes from a wide range of sources,
including customers, collectors, processors and brokers. TIMET anticipates that
30% to 35% of the scrap it will utilize during 2006 will be purchased from
external suppliers, as compared to 35% to 40% for 2005, due to TIMET's
successful efforts to increase its closed loop arrangements. TIMET also
occasionally sells scrap, usually in a form or grade it cannot economically
recycle.
Market forces can significantly impact the supply or cost of externally
produced scrap. The amount of scrap generated in the supply chain varies during
the titanium business cycles. During the middle of the cycle, scrap generation
and consumption are in relative equilibrium, minimizing disruptions in supply or
significant changes in available supply and market prices for scrap. Increasing
or decreasing cycles tend to cause significant changes in both the supply and
market price of scrap. Early in the titanium cycle, when the demand for titanium
melted and mill products begins to increase, TIMET's requirements (and those of
other titanium manufacturers) precede the increase in scrap generation by
downstream customers and the supply chain, placing upward pressure on the market
price of scrap. The opposite situation occurs when demand for titanium melted
and mill products begins to decline, resulting in greater availability or supply
and placing downward pressure on the market price of scrap. As a net purchaser
of scrap, TIMET is susceptible to price increases during periods of increasing
demand. This phenomenon normally results in higher selling prices for melted and
mill products, which tends to offset the increased material costs.
All of TIMET's major competitors utilize scrap as a raw material in their
melt operations. In addition to use by titanium manufacturers, titanium scrap is
used in steel-making operations during production of interstitial-free steels,
stainless steels and high-strength-low-alloy steels. Recent strong demand for
these steel products, especially from China, has produced a significant increase
in demand for titanium scrap at a time when titanium scrap generation rates are
at low levels, partly due to lower commercial aircraft build rates over the past
few years. These events created a significantly tightened supply of titanium
scrap during 2004 and 2005, and TIMET expects this trend to continue during
2006. For TIMET, this will translate to lower availability and higher cost for
externally purchased scrap in the near-term.
In 2005, TIMET was somewhat limited in its ability to raise prices for the
portion of its business that is subject to long-term pricing agreements. TIMET's
ability to offset these increased material costs with higher selling prices
should improve in 2006, as many of TIMET's long-term agreements have either
expired or have been renegotiated for 2006 with price adjustments that take into
account raw material cost fluctuations. Additionally, the expected increase in
commercial aircraft build rates over the next several years, as previously
discussed, could have the effect of lessening the shortage of titanium scrap.
Further, several titanium producers, including TIMET, have recently announced
plans to expand their respective sponge producing capabilities. Although these
expansions should help reduce the current imbalance of global supply and demand
for raw materials, TIMET does not believe the raw material shortage will be
fully relieved at any time in the near future and therefore expects relatively
high prices for raw materials to continue for at least the near term.
Various alloys used in the production of titanium products are also
available from a number of suppliers. However, the recent high level of global
demand for steel products has also resulted in a significant increase in the
costs for several alloys, such as vanadium and molybdenum. The cost of these
alloys during 2005 was significantly higher than at any point during the past 10
years. Vanadium and molybdenum costs peaked in the spring of 2005 and finished
the year well below those levels. Although availability is not expected to be a
concern and TIMET has negotiated certain price and cost protection with
suppliers and customers, there is no assurance that such alloy costs will not
continue to fluctuate significantly in the near future.
Properties. TIMET currently has manufacturing facilities in the United
States in Nevada, Ohio, Pennsylvania and California, and also has two facilities
in the United Kingdom and one facility in France. TIMET's sponge is produced at
the Nevada facility while ingot, slab and mill products are produced at all of
the facilities. The facilities in Nevada, Ohio and Pennsylvania, and one of the
facilities in the United Kingdom, are owned, and all of the remainder are
leased.
In addition to its U.S. sponge capacity discussed below, TIMET's worldwide
melting capacity presently aggregates approximately 44,650 metric tons
(estimated 22% of world capacity), and its mill product capacity aggregates
approximately 22,600 metric tons (estimated 18% of world capacity). Of TIMET's
worldwide melting capacity, 35% is represented by electron beam cold hearth
melting furnaces, 63% by vacuum arc remelting ("VAR") furnaces and 2% by a
vacuum induction melting furnace.
TIMET has operated its major production facilities at varying levels of
practical capacity during the past three years. Overall in 2005, the plants
operated at approximately 80% of practical capacity, as compared to 73% in 2004
and 56% in 2003. In 2006, TIMET's plants are expected to operate at
approximately 88% of practical capacity. However, practical capacity and
utilization measures can vary significantly based upon the mix of products
produced.
TIMET's VDP sponge facility is expected to operate at its full annual
practical capacity of 8,600 metric tons during 2006, which is comparable with
2005. VDP sponge is used principally as a raw material for TIMET's melting
facilities in the U.S. and Europe. The raw materials processing facility in
Morgantown, Pennsylvania primarily processes scrap used as melting feedstock,
either in combination with sponge or separately. In May 2005, TIMET announced
plans to expand its existing titanium sponge facility in Nevada. This expansion,
which TIMET currently expects to complete by the first quarter of 2007, will
provide the capacity to produce an additional 4,000 metric tons of sponge
annually, an increase of approximately 42% over current Nevada sponge production
capacity levels. TIMET currently estimates the capital cost for the project will
approximate $38 million.
TIMET's U.S. melting facilities in Nevada, Pennsylvania and California
produce ingot and slab, which are either used as feedstock for TIMET's mill
products operations or sold to third parties. These melting facilities are
expected to operate at approximately 82%, 92% and 55%, respectively, of
aggregate annual practical capacity in 2006, compared to 70%, 91% and 59%,
respectively, in 2005.
Titanium mill products are produced by TIMET in the U.S. at its forging and
rolling facility in Ohio, which receives ingot or slab principally from TIMET's
U.S. melting facilities. TIMET's U.S. forging and rolling facility is expected
to operate at approximately 82% of annual practical capacity in 2006, up from
68% in 2005. Capacity utilization will vary depending on mix across TIMET's
individual mill product lines.
One of TIMET's facilities in the United Kingdom produces VAR ingot used
primarily as feedstock at the same facility. The forging operations process the
ingot into billet product for sale to third parties or into an intermediate
product for further processing into bar or plate at its other facility in the
United Kingdom. TIMET's United Kingdom melting and mill products production in
2006 is expected to operate at approximately 91% and 85%, respectively, of
annual practical capacity, compared to 73% and 69%, respectively, in 2005.
The capacity of TIMET's facility in France is to a certain extent dependent
upon the level of activity in the other owner of such business, which may from
time to time provide TIMET with capacity in excess of that which the other owner
is contractually required to provide. During 2005, TIMET utilized 119% of the
maximum annual capacity the other owner was contractually required to provide in
2005, and TIMET expects this amount to approximate 102% for 2006.
Customer agreements. TIMET has long-term agreements with certain major
aerospace customers, including, among others, The Boeing Company, Rolls-Royce
plc and its German and U.S. affiliates, United Technologies Corporation ("UTC,"
Pratt & Whitney and related companies), Societe Nationale d<180>Etude et de
Construction de Moteurs d'Aviation ("Snecma"), Wyman-Gordon Company, a unit of
Precision Castparts Corporation ("PCC") and VALTIMET SAS. These agreements
expire at various times from 2007 through 2012, are subject to certain
conditions, and generally provide for (i) minimum market shares of the
customers' titanium requirements or firm annual volume commitments, (ii)
formula-determined prices (although some contain elements based on market
pricing) and (iii) price adjustments for certain raw material and energy cost
fluctuations. Generally, the agreements require TIMET's service and product
performance to meet specified criteria and contain a number of other terms and
conditions customary in transactions of these types. Certain provisions of these
agreements have been amended in the past and may be amended in the future to
meet changing business conditions. During 2005, 49% of TIMET's sales were to
customers under long-term agreements.
In certain events of nonperformance by TIMET or the customer, the
agreements may be terminated early. Although it is possible that some portion of
the business would continue on a non-agreement basis, the termination of one or
more of the agreements could result in a material effect on TIMET's business,
results of operations, financial position or liquidity. The agreements were
designed to limit selling price volatility to the customer, while providing
TIMET with a committed base of volume throughout the aerospace business cycles.
During 2003, TIMET and Wyman-Gordon agreed to terminate the 1998 purchase
and sale agreement associated with the formation of the titanium castings joint
venture previously owned by the two parties. TIMET paid Wyman-Gordon a total of
$6.8 million, which included the termination of certain favorable purchase
terms. Concurrently, TIMET entered into new long-term purchase and sale
agreements with Wyman-Gordon that expires in 2008.
Prior to July 1, 2005, under the terms of the previous agreement between
TIMET and Boeing, in 2002 through 2007, Boeing would have been required to
advance TIMET $28.5 million annually less $3.80 per pound of titanium product
purchased by Boeing subcontractors under the Boeing agreement during the
preceding year. Effectively, TIMET collected $3.80 less from Boeing than the
agreement selling price for each pound of titanium product sold directly to
Boeing and reduced the related customer advance recorded by TIMET. For titanium
products sold to Boeing subcontractors, TIMET collected the full agreement
selling price, but gave Boeing credit by reducing the next year's annual advance
by $3.80 per pound. The Boeing customer advance was also reduced as TIMET
recognized income under the take-or-pay provisions of the agreement. Under a
separate agreement, TIMET must establish and hold buffer inventory for Boeing at
TIMET's facilities, for which Boeing will be invoiced by TIMET at long-term
agreement pricing when such material is processed into a mill product by TIMET.
Effective July 1, 2005, TIMET entered into a new agreement with Boeing. The
new agreement expires on December 31, 2010 and provides for, among other things,
(i) mutual annual purchase and supply commitments by both parties, (ii)
continuation of the existing buffer inventory program currently in place for
Boeing and (iii) certain improved product pricing, including certain adjustments
for raw material cost fluctuations. Beginning in 2006, the new agreement also
replaces the take-or-pay provisions of the previous agreement with an annual
makeup payment early in the following year in the event Boeing purchases less
than its annual volume commitment in any year.
TIMET's agreement with VALTIMET, a manufacturer of welded stainless steel
and titanium tubing that is principally sold into the industrial markets, was
entered into in 1997 and expires in 2007. VALTIMET is a 44%-owned affiliate of
TIMET. Under the agreement, TIMET has agreed to provide a certain percentage of
VALTIMET's titanium requirements at formula-determined selling prices, subject
to certain conditions. Certain provisions of this contract have been amended in
the past and may be amended in the future to meet changing business conditions.
Markets and customer base. During 2005, approximately 56% of TIMET's sales
were to customers located in North America, with 36% in Europe. Substantially
all of TIMET's sales and operating income are derived from operations based in
the U.S., the U.K., France and Italy. TIMET generates more than half of its
sales revenue from sales to the commercial aerospace industry (57% in 2005).
TIMET has long-term agreements with certain major aerospace customers, including
Boeing, Rolls-Royce, UTC, Snecma and Wyman-Gordon. During 2005, approximately
49% of TIMET's total sales were attributable to such long-term agreements.
TIMET's ten largest customers accounted for 45% of its sales in 2005 (2004 -
48%; 2003- 44%), including Rolls-Royce and suppliers under the Rolls-Royce
long-term agreement (12% of TIMET's sales in 2005). Such concentration of
customers may impact TIMET's overall exposure to credit and other risks, either
positively or negatively, in that such customers may be similarly affected by
economic or other conditions.
The primary market for titanium products in the commercial aerospace sector
consists of two major manufacturers of large (over 100 seats) commercial
airframes - Boeing Commercial Airplanes Group (a unit of Boeing) and Airbus (80%
owned by European Aeronautic Defence and Space Company and 20% owned by BAE
Systems). In addition to the airframe manufacturers, the following four
manufacturers of large civil aircraft engines are also significant titanium
users - Rolls-Royce, General Electric Aircraft Engines, Pratt & Whitney and
Snecma. TIMET's sales are made both directly to these major manufacturers to
companies (including forgers such as Wyman-Gordon) that use TIMET's titanium to
produce parts and other materials for such manufacturers. If any of the major
aerospace manufacturers were to significantly reduce aircraft and/or jet engine
build rates from those currently expected, there could be a material adverse
effect, both directly and indirectly, on TIMET's business, results of operating
and liquidity.
The backlogs for Boeing and Airbus reflect orders for aircraft to be
delivered over several years. Changes in the economic environment and the
financial condition of airlines can result in rescheduling or cancellation of
contractual orders. Accordingly, aircraft manufacturer backlogs are not
necessarily a reliable indicator of near-term business activity, but may be
indicative of potential business levels over a longer-term horizon. The
following table shows the estimated firm order backlogs for Boeing and Airbus,
as reported by The Airline Monitor in January 2006:
At December 31,
------------------------------------------
2003 2004 2005
---- ---- ----
Firm order backlog - all planes:
Airbus 1,454 1,500 2,177
Boeing 1,101 1,089 1,783
----- ----- -----
2,555 2,589 3,960
===== ===== =====
Firm order backlog - wide body planes:
Airbus 471 466 500
Boeing 230 287 671
----- ----- -----
701 753 1,171
===== ===== =====
Wide body planes as % of total firm
order backlog 27% 29% 30%
===== ===== =====
Wide body planes (e.g., Boeing 747, 777 and 787 and Airbus A330, A340 and
A380) tend to use a higher percentage of titanium in their airframes, engines
and parts than narrow body planes (e.g., Boeing 737 and 757 and Airbus A318,
A319 and A320). Newer models of planes tend to use a higher percentage of
titanium than older models. Additionally, Boeing generally uses a higher
percentage of titanium in its airframes than Airbus. For example, TIMET
estimates that approximately 59 metric tons, 45 metric tons and 18 metric tons
of titanium are purchased for the manufacture of each Boeing 777, 747 and 737,
respectively, including both the airframes and engines. TIMET estimates that
approximately 25 metric tons, 18 metric tons and 12 metric tons of titanium are
purchased for the manufacture of each Airbus A340, A330 and A320, respectively,
including both the airframes and engines.
At December 31, 2005, a total of 159 firm orders had been placed for the
Airbus A380, a program officially launched in 2000 with anticipated first
deliveries in 2006. Current estimates are that approximately 76 metric tons of
titanium (50 metric tons for the airframe and 26 metric tons for the engines)
will be purchased for each A380 manufactured. Additionally, at year-end 2005, a
total of 291 firm orders have been placed for the Boeing 787, a program
officially launched in April 2004 with anticipated first deliveries in 2008.
Although the 787 will contain more composite materials than a typical Boeing
airplane, TIMET estimates that approximately 91 metric tons of titanium (80
metric tons for the airframe and 11 metric tons for the engines) will be
purchased for each 787 manufactured. TIMET believes significant additional
titanium will be required in the early years of 787 manufacturing until the
program reaches maturity.
During 2005, Airbus officially launched the A350 program, which is a major
derivative of the Airbus A330 with first deliveries scheduled for 2010. As of
December 31, 2005, firm booked orders received by Airbus for the A350 totaled 87
airplanes. These A350s will use composite materials and new engines similar to
the ones used on the Boeing 787 and are expected to require significantly more
titanium as compared with earlier Airbus models. TIMET preliminary estimates are
that approximately 51 metric tons (40 metric tons for the airframe and 11 metric
tons for the engines) will be purchased for each A350 manufactured. However, the
final titanium buy weight may change as the A350 is still in the design phase.
Outside of commercial aerospace and military sectors, TIMET manufactures a
wide range of products for customers in the chemical process, oil and gas,
consumer, sporting goods, automotive and power generation industries.
Approximately 15% of TIMET's sales revenue in 2005 was generated by sales into
industrial and emerging markets, including sales to VALTIMET for the production
of welded tubing. For the oil and gas industry, TIMET provides seamless pipe for
downhole casing, risers, tapered stress joints and other offshore oil and gas
production equipment, along with firewater piping systems.
In addition to melted and mill products, which are sold into the commercial
aerospace, military, industrial and emerging markets sectors, TIMET sells
certain other products such as titanium fabrications, titanium scrap and
titanium tetrachloride. Sales of these other products represented 15% of TIMET's
sales revenue in 2005.
TIMET's backlog of unfilled orders was approximately $870 million at
December 31, 2005, compared to $450 million at December 31, 2004 and $205
million at December 31, 2003. Over 90% of the 2005 year-end backlog is scheduled
for shipment during 2006. TIMET's order backlog may not be a reliable indicator
of future business activity.
TIMET has explored and will continue to explore strategic arrangements in
the areas of product development, production and distribution. TIMET will also
continue to work with existing and potential customers to identify and develop
new or improved applications for titanium that take advantage of its unique
qualities.
Competition. The titanium metals industry is highly competitive on a
worldwide basis. Producers of melted and mill products are located primarily in
the United States, Japan, France, Germany, Italy, Russia, China and the United
Kingdom. In addition, producers of other metal products, such as steel and
aluminum, maintain forging, rolling and finishing facilities that could be used
or modified without substantial capital expenditures to process titanium
products. There are currently six major, and several minor, producers of
titanium sponge in the world. TIMET is currently the only sponge producer in the
U.S. Four of the major producers have announced plans to increase sponge
capacity. TIMET believes that entry as a new producer of titanium sponge would
require a significant capital investment and substantial technical expertise.
TIMET's principal competitors in the aerospace titanium market are
Allegheny Technologies Incorporated and RTI International Metals, Inc.("RTI"),
both based in the United States, and Verkhnaya Salda Metallurgical Production
Organization ("VSMPO"), based in Russia. UNITI, (a joint venture between
Allegheny and VSMPO), RTI and certain Japanese producers are TIMET's principal
competitors in the industrial and emerging markets. TIMET competes primarily on
the basis of price, quality of products, technical support and the availability
of products to meet customers' delivery schedules.
In the U.S. market, the increasing presence of non-U.S. participants has
become a significant competitive factor. Until 1993, imports of foreign titanium
products into the U.S. had not been significant. This was primarily attributable
to relative currency exchange rates and, with respect to Japan, Russia,
Kazakhstan and Ukraine, import duties (including antidumping duties). However,
since 1993, imports of titanium sponge, ingot and mill products, principally
from Russia and Kazakhstan, have increased and have had a significant
competitive impact on the U.S. titanium industry. To the extent TIMET is able to
take advantage of this situation by purchasing sponge from such countries for
use in its own operations, the negative effect of these imports on TIMET can be
somewhat mitigated.
Generally, imports of titanium products into the U.S. are subject to a 15%
"normal trade relations" tariff. For tariff purposes, titanium products are
broadly classified as either wrought (billet, bar, sheet, strip, plate and
tubing) or unwrought (sponge, ingot and slab). Because a significant portion of
end-use products made from titanium products are ultimately exported, TIMET,
along with its principal competitors and many customers, actively utilize the
duty-drawback mechanism to recover most of the tariff paid on imports.
From time-to-time, the U.S. government has granted preferential trade
status to certain titanium products imported from particular countries (notably
wrought titanium products from Russia, which carried no U.S. import duties from
approximately 1993 until 2004). It is possible that such preferential status
could be granted again in the future.
The Japanese government has raised the elimination or harmonization of
tariffs on titanium products, including titanium sponge, for consideration in
multi-lateral trade negotiations through the World Trade Organization (the
so-called "Doha Round"). As part of the Doha Round, the United States has
proposed the staged elimination of all industrial tariffs, including those on
titanium. The Japanese government has specifically asked that titanium in all it
forms be included in the tariff elimination program. TIMET has urged that no
change be made to these tariffs, either on wrought or unwrought products. The
negotiations are currently scheduled to conclude at the end of 2006 for
implementation beginning in 2007.
TIMET has successfully resisted, and will continue to resist, efforts to
eliminate duties on sponge and unwrought titanium products, although no
assurances can be made that TIMET will continue to be successful in these
activities. Further reductions in, or the complete elimination of, any or all of
these tariffs could lead to increased imports of foreign sponge, ingot and mill
products into the U.S. and an increase in the amount of such products on the
market generally, which could adversely affect pricing for titanium sponge,
ingot and mill products and thus TIMET's business, results of operations,
financial position or liquidity.
Research and development. TIMET's research and development activities are
directed toward expanding the use of titanium and titanium alloys in all market
sectors. Key research activities include the development of new alloys,
development of technology required to enhance the performance of TIMET's
products in the traditional industrial and aerospace markets and applications
development for automotive and other emerging markets. TIMET conducts the
majority of its research and development activities at its Henderson Technical
Laboratory in Henderson, Nevada, with additional activities at its Witton,
England facility. TIMET incurred research and development costs of $2.8 million
in 2003, $2.9 million in 2004 and $3.2 million in 2005.
Patents and trademarks. TIMET holds U.S. and non-U.S. patents applicable to
certain of its titanium alloys and manufacturing technology, which expire at
various times from 2007 through 2013. TIMET continually seeks patent protection
with respect to its technical base and has occasionally entered into
cross-licensing arrangements with third parties. TIMET believes the trademarks
TIMET and TIMETAL, which are protected by registration in the U.S. and other
countries, are important to its business. Additionally, TIMET has been granted
certain patents and has certain other patent applications pending relating to
various aspects of its manufacturing technology. However, the majority of
TIMET's titanium alloys and manufacturing technologies do not benefit from
patent or other intellectual property protection.
Employees. The cyclical nature of the aerospace industry and its impact on
TIMET's business is the principal reason for significant changes in TIMET's
employment levels. At December 31, 2005, TIMET employed approximately 1,475
persons in the U.S. and 900 persons in Europe. TIMET currently expects
employment to increase throughout 2006 as production continues to increase and
its sponge plant expansion project in Nevada nears completion.
TIMET's production, maintenance, clerical and technical workers in Toronto,
Ohio, and its production and maintenance workers in Henderson, Nevada
(approximately 50% of TIMET's total U.S. employees) are represented by the
United Steelworkers of America under contracts expiring in July 2008 and January
2008, respectively. Employees at TIMET's other U.S. facilities are not covered
by collective bargaining agreements. Approximately 85% of the salaried and
hourly employees at TIMET's European facilities are represented by various
European labor unions. TIMET recently extended its labor agreement with its U.K.
production and maintenance employees through 2008, and TIMET's labor agreement
with its French and Italian employees are renewed annually.
TIMET currently considers its employee relations to be satisfactory.
However, it is possible that there could be future work stoppages or other labor
disruptions that could materially and adversely affect TIMET's business, results
of operations, financial position or liquidity.
Regulatory and environmental matters. TIMET's operations are governed by
various federal, state, local and foreign environmental and worker safety laws
and regulations. In the U.S., such laws include the Occupational, Safety and
Health Act, the Clean Air Act, the Clean Water Act and the CERCLA. TIMET uses
and manufactures substantial quantities of substances that are considered
hazardous, extremely hazardous or toxic under environmental and worker safety
and health laws and regulations. TIMET has used and manufactured such substances
throughout the history of its operations. Although TIMET has substantial
controls and procedures designed to reduce continuing risk of environmental,
health and safety issues, TIMET could incur substantial cleanup costs, fines and
civil or criminal sanctions, third party property damage or personal inujury
claims as a result of violations or liabilities under these laws or
non-compliance with environmental permits required at our facilities. In
addition, government environmental requirements or the enforcement thereof may
become more stringent in the future. There can be no assurance that some, or
all, of the risks discussed under this heading will not result in liabilities
that would be material to TIMET's business, results of operations, financial
position or liquidity.
TIMET believes that its operations are in compliance in all material
respects with applicable requirements of environmental and worker health and
safety laws. TIMET's policy is to continually strive to improve environmental,
health and safety performance. TIMET incurred capital expenditures related to
health, safety and environmental compliance and improvement of approximately
$1.9 million in 2003, $5.1 million in 2004 and $25.1 million in 2005. Such
amounts include an aggregate $28.1 million related to the construction of a
wastewater treatment facility at its Henderson, Nevada location. TIMET's capital
budget provides for approximately $4.6 million for environmental, health and
safety capital expenditures in 2006.
From time to time, TIMET may be subject to health, safety or environmental
regulatory enforcement under various statutes, resolution of which typically
involves the establishment of compliance programs. Occasionally, resolution of
these matters may result in the payment of penalties. However, the imposition of
more strict standards or requirements under environmental, health or safety laws
and regulations could result in expenditures in excess of amounts currently
estimated to be required for such matters.
OTHER
NL Industries, Inc. In addition to its 70% ownership of CompX (principally
through CompX Group) and its 36% ownership of Kronos at December 31, 2005, NL
also holds certain marketable securities and other investments. In addition, NL
owns 100% of EWI Re., Inc., an insurance brokerage and risk management services
company. See Note 17 to the Consolidated Financial Statements.
Tremont LLC. Tremont is primarily a holding company which at December 31,
2005 owns 35% of TIMET. Tremont also owns indirect ownership interests in Basic
Management, Inc. ("BMI"), which provides utility services to, and owns property
(the "BMI Complex") adjacent to, TIMET's facility in Nevada, and The Landwell
Company L.P. ("Landwell"), which is engaged in efforts to develop certain land
holdings for commercial, industrial and residential purposes surrounding the BMI
Complex. Tremont also directly owns certain land which could be developed for
commercial or industrial purposes.
Foreign operations. Through its subsidiaries and affiliate, the Company has
substantial operations and assets related to continuing operations located
outside the United States, principally chemicals operations in Germany, Belgium
and Norway, titanium metals operations in the United Kingdom and France,
chemicals and component products operations in Canada and component products
operations in Taiwan. See Note 2 to the Consolidated Financial Statements for
certain geographic financial information concerning the Company. Approximately
71% of Kronos' 2005 TiO2 sales were to non-U.S. customers, including 8% to
customers in areas other than Europe and Canada. Approximately 20% of CompX's
2005 sales were to non-U.S. customers located principally in Canada. About 44%
of TIMET's 2005 sales were to non-U.S. customers, primarily in Europe. Foreign
operations are subject to, among other things, currency exchange rate
fluctuations and the Company's results of operations have in the past been both
favorably and unfavorably affected by fluctuations in currency exchange rates.
See Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Item 7A - "Quantitative and Qualitative Disclosures
About Market Risk."
CompX and Kronos have, from time to time, entered into currency forward
contracts to mitigate exchange rate fluctuation risk for a portion of their
receivables related to their Canadian operations denominated in currencies other
than the Canadian dollar (principally the U.S. dollar) or for similar risks
associated with future sales. Kronos and CompX may, from time to time, enter
into currency forward contracts to mitigate exchange rate fluctuation risk
associated with specific transactions, such as intercompany dividends or the
acquisition of a significant amount of assets. See Note 21 to the Consolidated
Financial Statements. Otherwise, the Company does not generally engage in
currency derivative transactions.
Political and economic uncertainties in certain of the countries in which
the Company operates may expose the Company to risk of loss. The Company does
not believe that there is currently any likelihood of material loss through
political or economic instability, seizure, nationalization or similar event.
The Company cannot predict, however, whether events of this type in the future
could have a material effect on its operations. The Company's manufacturing and
mining operations are also subject to extensive and diverse environmental
regulations in each of the foreign countries in which they operate, as discussed
in the respective business sections elsewhere herein.
Regulatory and environmental matters. Regulatory and environmental matters
are discussed in the respective business sections contained elsewhere herein and
in Item 3 - "Legal Proceedings." In addition, the information included in Note
18 to the Consolidated Financial Statements under the captions "Legal
proceedings - NL lead pigment litigation" and - "Environmental matters and
litigation" is incorporated herein by reference.
Insurance. The Company maintains insurance for its businesses and
operations, with customary levels of coverage, deductibles and limits. See also
Item 3 - "Legal Proceedings - Insurance coverage claims" and Note 17 to the
Consolidated Financial Statements.
Acquisition and restructuring activities. The Company routinely compares
its liquidity requirements and alternative uses of capital against the estimated
future cash flows to be received from its subsidiaries and unconsolidated
affiliates, and the estimated sales value of those units. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify its dividend policy, consider
the sale of interests in subsidiaries, business units, marketable securities or
other assets, or take a combination of such steps or other steps, to increase
liquidity, reduce indebtedness and fund future activities. Such activities have
in the past and may in the future involve related companies. From time to time,
the Company and related entities also evaluate the restructuring of ownership
interests among its subsidiaries and related companies and expects to continue
this activity in the future.
The Company and other entities that may be deemed to be controlled by or
affiliated with Mr. Harold C. Simmons routinely evaluate acquisitions of
interests in, or combinations with, companies, including related companies,
perceived by management to be undervalued in the marketplace. These companies
may or may not be engaged in businesses related to the Company's current
businesses. In a number of instances, the Company has actively managed the
businesses acquired with a focus on maximizing return-on-investment through cost
reductions, capital expenditures, improved operating efficiencies, selective
marketing to address market niches, disposition of marginal operations, use of
leverage and redeployment of capital to more productive assets. In other
instances, the Company has disposed of the acquired interest in a company prior
to gaining control. The Company intends to consider such activities in the
future and may, in connection with such activities, consider issuing additional
equity securities and increasing the indebtedness of Valhi, its subsidiaries and
related companies.
Website and other available information. Valhi files reports, proxy and
information statements and other information with the SEC. Valhi maintains a
website on the internet at www.valhi.net. Copies of this Annual Report on Form
10-K for the year ended December 31, 2005, copies of the Company's Quarterly
Reports on Form 10-Q for 2005 and 2006 and any Current Reports on Form 8-K for
2005 and 2006, and amendments thereto, are or will be available free of charge
at such website as soon as reasonably practical after they have been filed with
the SEC. Additional information regarding the Company, including the Company's
Audit Committee charter, the Company's Code of Business Conduct and Ethics and
the Company's Corporate Governance Guidelines, can also be found at this
website. Information contained on the Company's website is not part of this
Annual Report. The Company will also provide to anyone without charge copies of
such documents upon written request to the Company. Such requests should be
directed to the attention of the Corporate Secretary at the Company's address on
the cover page of this Form 10-K.
The general public may read and copy any materials the Company files with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington,
DC 20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The Company is an
electronic filer, and the SEC maintains an Internet website at www.sec.gov that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC, including the Company.
ITEM 1A. RISK FACTORS
Listed below are certain risk factors associated with the Company and its
businesses. In addition to the potential effect of these risk factors discussed
below, any risk factor which could result in reduced earnings or operating
losses, or reduced liquidity, could in turn adversely affect our ability to
service our liabilities or pay dividends on our common stock or adversely affect
the quoted market prices for our securities.
Our assets consist primarily of investments in our operating subsidiaries,
and we are dependent upon distributions from our subsidiaries. A majority of our
cash flows are generated by our operating subsidiaries, and our ability to
service Valhi's liabilities and to pay dividends on our common stock depends to
a large extent upon the cash dividends or other distributions we receive from
our subsidiaries. Our subsidiaries are separate and distinct legal entities and
they have no obligation, contingent or otherwise, to pay such cash dividends or
other distributions to us. In addition, the payment of dividends or other
distributions from our subsidiaries could be subject to restrictions on or
taxation of dividends or repatriation of earnings under applicable law, monetary
transfer restrictions, foreign currency exchange regulations in jurisdictions in
which our subsidiaries operate and any other restrictions imposed by current or
future agreements to which our subsidiaries may be a party, including debt
instruments. Events beyond our control, including changes in general business
and economic conditions, could adversely impact the ability of our subsidiaries
to pay dividends or make other distributions to us. If our subsidiaries would
become unable to make sufficient cash dividends or other distributions to Valhi,
our ability to service our liabilities and to pay dividends on our common stock
could be adversely affected. In addition, a significant portion of our assets
consists of ownership interests in our subsidiaries and affiliates. If we were
required to liquidate any of such securities in order to generate funds to
satisfy our liabilities, we may be required to sell such securities at a time or
times at which we would not be able to realize what we believe to be the actual
value of such assets.
Subject to specified limitations, the agreements covering the indebteness
of our subsidiaries permit our subsidiaries to incur additional debt, including
secured debt. At December 31, 2005, the outstanding indebtedness of our
subsidiaries aggregated $467.4 million, substantially all of which relates to
KII's Senior Secured Notes. In addition, as of such date our subsidiaries have
unused borrowing availability of approximately $186.0 million under our
subsidiaries' credit facilities, subject to certain tests. Any borrowing or
other liabilities or our subsidiaries are structurally senior to any liabilities
of Valhi, and a substantial portion of our subsidiaries' assets collateralize
the indebtedness of our subsidiaries. If any new debt were to be added to our
subsidiaries' current debt levels, then the related risks that we and they now
face, as more fully described herein, could intensify.
Demand for, and prices of, certain of our products are cyclical and we may
experience prolonged depressed market conditions for our products, which may
result in reduced earnings or operating losses. A significant portion of our
revenues is attributable to sales of TiO2. Pricing within the global TiO2
industry over the long term is cyclical, and changes in industry economic
conditions, especially in Western industrialized nations, can significantly
impact our earnings and operating cash flows. This may result in reduced
earnings or operating losses.
Historically, the markets for many of our products have experienced
alternating periods of tight supply, causing prices and profit margins to
increase, followed by periods of capacity additions, and demand reductions
resulting in oversupply and declining prices and profit margins. Selling prices
(in billing currencies) for TiO2 were generally: increasing during the first
quarter of 2003, flat during the second quarter of 2003, decreasing during the
last half of 2003 and the first quarter of 2004, flat during the second quarter
of 2004 and increasing in the last half of 2004 and the first six months of 2005
and decreasing during the second half of 2005.
Our overall average TiO2 selling prices in billing currencies:
o were 3% higher in 2003 as compared to 2002;
o were 2% lower in 2004 as compared to 2003; and
o were 8% higher in 2005 as compared to 2004.
Future growth in demand for TiO2 may not be sufficient to alleviate any
future conditions of excess industry capacity, and such conditions may not be
sustained or may be further aggravated by anticipated or unanticipated capacity
additions or other events. The demand for TiO2 during a given year is also
subject to annual seasonal fluctuations. TiO2 sales are generally higher in the
first half of the year than in the second half of the year due in part to the
increase in paint production in the spring to meet the spring and summer
painting season demand.
The titanium industry in general, and TIMET specifically, has historically
derived a substantial portion of its business from the commercial aerospace
sector. Consequently, the cyclical nature of the commercial aerospace sector has
been the principal driver of the historical fluctuations in TIMET's performance.
Over the past 25 years, the titanium industry had cyclical peaks in mill product
shipments in 1989, 1997 and 2001 and cyclical lows in 1983, 1991, 1999 and 2002.
Prior to 2004, demand for titanium reached its highest level in 1997, when
industry mill product shipments reached approximately 60,700 metric tons.
However, since that peak, industry mill product shipments have fluctuated
significantly, primarily due to a continued change in demand for titanium from
the commercial aerospace sector but also due to geopolitical instability and the
economic impact of terrorist threats and attacks. Sales of TIMET's products to
the commercial aerospace sector accounted for about 57% of its total sales
revenue in each of the last three years. Events that could adversely affect the
commercial aerospace sector, such as future terrorist attacks, world health
crises or reduced orders from commercial airlines resulting from continued
operating losses at the airlines, could significantly decrease TIMET's results
of operations, and TIMET's business and financial condition could significantly
decline.
As a global business, we are exposed to local business risks in different
countries, which could result in operating losses. Kronos, CompX and TIMET
conduct some of their businesses in several jurisdictions outside of the United
States and are subject to risks normally associated with international
operations, which include trade barriers, tariffs, exchange controls, national
and regional labor strikes, social and political risks, general economic risks,
seizures, nationalizations, compliance with a variety of foreign laws, including
tax laws, and the difficulty in enforcing agreements and collecting receivables
through foreign legal systems. For example, we have substantial net operating
loss carryforwards in Germany, and any change in German tax law that adversely
impacts our ability to fully utilize such carryforwards could adversely affect
us.
We may incur losses from fluctuations in currency exchange rates. Kronos,
CompX and TIMET operate their businesses in several different countries, and
sell their products worldwide. Therefore, we are exposed to risks related to the
prices that we receive for our products and the need to convert currencies that
we may receive for some of our products into the currencies required to pay some
of our debt, or into currencies in which we may purchase certain raw materials
or pay for certain services, all of which could result in future losses
depending on fluctuations in foreign currency exchange rates.
We sell several of our products in mature and highly competitive industries
and face price pressures in the markets in which we operate, which may result in
reduced earnings or operating losses. The global markets in which Kronos, CompX,
TIMET and Waste Control Specialists operate their businesses are highly
competitive. Competition is based on a number of factors, such as price, product
quality and service. Some of our competitors may be able to drive down prices
for our products because their costs are lower than our costs. In addition, some
of our competitors' financial, technological and other resources may be greater
than our resources, and such competitors may be better able to withstand changes
in market conditions. Our competitors may be able to respond more quickly than
we can to new or emerging technologies and changes in customer requirements.
Further, consolidation of our competitors or customers in any of the industries
in which we compete may result in reduced demand for our products. In addition,
in some of our businesses new competitors could emerge by modifying their
existing production facilities so they could manufacture products that compete
with our products. The occurrence of any of these events could result in reduced
earnings or operating losses.
Higher costs or limited availability of our raw materials may decrease our
liquidity. The number of sources for, and availability of, certain raw materials
is specific to the particular geographical region in which a facility is
located. For example, titanium-containing feedstocks suitable for use in our
TiO2 and titanium metal facilities are available from a limited number of
suppliers around the world. While chlorine is generally widely available, TIMET
obtains its chlorine requirements for its Nevada production facility from a
single supplier near such plant. In addition, TIMET cannot supply internally all
of its needs for all grades of titanium sponge and scrap, and TIMET is dependent
on third parties for a substantial portion of its raw material requirements. All
of TIMET's major competitors utilize sponge and scrap as raw materials in their
melt operations. In addition to use by titanium manufacturers, titanium scrap is
used in certain steel-making operations. Current demand for these steel
products, especially from China, have produced a significant increase in demand
for titanium scrap at a time when titanium scrap generation rates are at low
levels because of the lower commercial aircraft build rates. Political and
economic instability in the countries from which we purchase certain raw
material supplies could adversely affect their availability. Should our
worldwide vendors not be able to meet their contractual obligations, should we
be otherwise unable to obtain necessary raw materials or should we be required
to pay more for our raw materials and other operating costs, we may incur higher
costs for raw materials or other operating costs or may be required to reduce
production levels, either of which may decrease our liquidity as we may be
unable to offset such higher costs with increased selling prices for our
products.
We are subject to many environmental and safety regulations with respect to
our operating facilities that may result in unanticipated costs or liabilities.
Our facilities are subject to extensive laws, regulations, rules and ordinances
relating to the protection of the environment, including those governing the
discharge of pollutants in the air and water and the generation, management and
disposal of hazardous substances and wastes or other materials. We may incur
substantial costs, including fines, damages and criminal penalties or civil
sanctions, or experience interruptions in our operations for actual or alleged
violations or compliance requirements arising under environmental laws. Our
operations could result in violations under environmental laws, including spills
or other releases of hazardous substances to the environment. Some of our
operating facilities are in densely populated urban areas or in industrial areas
adjacent to other operating facilities. In the event of an accidental release or
catastrophic incident, we could incur material costs as a result of addressing
such an event and in implementing measures to prevent such incidents. Given the
nature of our business, violations of environmental laws may result in
restrictions imposed on our operating activities or substantial fines,
penalties, damages or other costs, including as a result of private litigation.
Our production facilities have been used for a number of years to
manufacture products or conduct mining operations. We may incur additional costs
related to compliance with environmental laws applicable to our historic
operations and these facilities. In addition, we may incur significant
expenditures to comply with existing or future environmental laws. Costs
relating to environmental matters will be subject to evolving regulatory
requirements and will depend on the timing of promulgation and enforcement of
specific standards that impose requirements on our operations. Costs beyond
those currently anticipated may be required under existing and future
environmental laws.
We could incur significant costs related to legal and environmental
remediation matters. NL formerly manufactured lead pigments for use in paint. NL
and others have been named as defendants in various legal proceedings seeking
damages for personal injury, property damage and governmental expenditures
allegedly caused by the use of lead-based paints. These lawsuits seek recovery
under a variety of theories, including public and private nuisance, negligent
product design, negligent failure to warn, strict liability, breach of warranty,
conspiracy/concert of action, aiding and abetting, enterprise liability, market
share or risk contribution liability, intentional tort, fraud and
misrepresentation, violations of state consumer protection statutes, supplier
negligence and similar claims. The plaintiffs in these actions generally seek to
impose on the defendants responsibility for lead paint abatement and health
concerns associated with the use of lead-based paints, including damages for
personal injury, contribution and/or indemnification for medical expenses,
medical monitoring expenses and costs for educational programs. As with all
legal proceedings, the outcome is uncertain. Any liability NL might incur in the
future could be material. See also Item 3 - "Legal proceedings - NL lead pigment
litigation."
Certain properties and facilities used in our former businesses are the
subject of litigation, administrative proceedings or investigations arising
under various environmental laws. These proceedings seek cleanup costs, personal
injury or property damages and/or damages for injury to natural resources. Some
of these proceedings involve claims for substantial amounts. Environmental
obligations are difficult to assess and estimate for numerous reasons, and we
may incur costs for environmental remediation in the future in excess of amounts
currently estimated. Any liability we might incur in the future could be
material. See also Item 3 - "Legal Proceedings - Environmental matters and
litigation".
If our patents are declared invalid or our trade secrets become known to
competitors, our ability to compete may be adversely affected. Protection of our
proprietary processes and other technology is important to our competitive
position. Consequently, we rely on judicial enforcement for protection of our
patents, and our patents may be challenged, invalidated, circumvented or
rendered unenforceable. Furthermore, if any pending patent application filed by
us does not result in an issued patent, or if patents are issued to us but such
patents do not provide meaningful protection of our intellectual property, then
the use of any such intellectual property by our competitors could result in
decreasing our cash flows. Additionally, our competitors or other third parties
may obtain patents that restrict or preclude our ability to lawfully produce or
sell our products in a competitive manner, which could have the same effects.
We also rely on certain unpatented proprietary know-how and continuing
technological innovation and other trade secrets to develop and maintain our
competitive position. Although it is our practice to enter into confidentiality
agreements to protect our intellectual property, because these confidentiality
agreements may be breached, such agreements may not provide sufficient
protection for our trade secrets or proprietary know-how, or adequate remedies
may not be available in the event of an unauthorized use or disclosure of such
trade secrets and know-how. In addition, others could obtain knowledge of such
trade secrets through independent development or other access by legal means.
Loss of key personnel or our ability to attract and retain new qualified
personnel could hurt our businesses and inhibit our ability to operate and grow
successfully. Our success in the highly competitive markets in which we operate
will continue to depend to a significant extent on the leadership teams of our
businesses and other key management personnel. We generally do not have binding
employment agreements with any of these managers. This increases the risks that
we may not be able to retain our current management personnel and we may not be
able to recruit qualified individuals to join our management team, including
recruiting qualified individuals to replace any of our current personnel that
may leave in the future.
Our relationships with our union employees could deteriorate. At December
31, 2005, we employed approximately 6,100 persons worldwide in our various
businesses. A significant number of our employees are subject to collective
bargaining or similar arrangements. We may not be able to negotiate labor
agreements with respect to these employees on satisfactory terms or at all. If
our employees were to engage in a strike, work stoppage or other slowdown, we
could experience a significant disruption of our operations or higher ongoing
labor costs.
Adverse changes to or interruptions in TIMET's relationships with its major
aerospace customers could reduce its revenues, profitability and liquidity. In
2005, approximately 54% TIMET's revenues represented sales to the commercial
aerospace industry. Sales under long-term agreements with certain customers in
the aerospace industry accounted for a significant portion of TIMET's revenues.
If we would be unable to maintain our relationships with TIMET's major aerospace
customers, including The Boeing Company, Rolls Royce, Snecma, UTC and Wyman
Gordon Company, under the long-term agreements that we have with these
customers, TIMET's sales could decrease substantially, resulting in lower equity
in earnings and net income to us.
TIMET's failure to develop new markets would result in our continued
dependence on the cyclical aerospace industry and our operating results would,
accordingly, remain cyclical. In an effort to reduce our dependence on the
commercial aerospace market and to increase our participation in other markets,
TIMET has been devoting resources to developing new markets and applications for
its products, principally in the automotive, oil and gas and other emerging
markets for titanium. Developing these emerging market applications involves
substantial risk and uncertainties due to the fact that titanium must compete
with less expensive alternative materials in these potential markets or
applications. We may not be successful in developing new markets or applications
for our products, significant time may be required for such development and
uncertainty exists as to the extent to which we will face competition in this
regard.
Reductions in, or the complete elimination of, any or all tariffs on
imported titanium products into the United States could lead to increased
imports of foreign sponge, ingot and mill products into the U.S. and an increase
in the amount of such products on the market generally, which could decrease
pricing for our titanium products. In the U.S. titanium market, the increasing
presence of non-U.S. participants has become a significant competitive factor.
Until 1993, imports of foreign titanium products into the U.S. had not been
significant. This was primarily attributable to relative currency exchange rates
and, with respect to Japan, Russia, Kazakhstan and Ukraine, import duties
(including antidumping duties). However, since 1993, imports of titanium sponge,
ingot and mill products, principally from Russia and Kazakhstan, have increased
and have had a significant competitive impact on the U.S. titanium industry.
Generally, imports of titanium products into the U.S. are subject to a 15%
"normal trade relations" tariff. For tariff purposes, titanium products are
broadly classified as either wrought (billet, bar, sheet, strip, plate and
tubing) or unwrought (sponge, ingot and slab).
From time-to-time, the U.S. government has granted preferential trade
status to certain titanium products imported from particular countries (notably
wrought titanium products from Russia, which carried no U.S. import duties from
approximately 1993 until 2004). It is possible that such preferential status
could be granted again in the future.
TIMET may not be successful in resisting efforts to eliminate duties or
tariffs on titanium products.
Our leverage may impair our financial condition or limit our ability to
operate our businesses. We currently have a significant amount of debt. As of
December 31, 2005, our total consolidated debt was approximately $717 million,
substantially all of which relates to KII's Senior Secured Notes and our loans
from Snake River Sugar Company. Our level of debt could have important
consequences to our stockholders and creditors, including:
o making it more difficult for us to satisfy our obligations with
respect to our liabilities;
o increasing our vulnerability to adverse general economic and industry
conditions;
o requiring that a portion of our cash flow from operations be used for
the payment of interest on our debt, therefore reducing our ability to
use our cash flow to fund working capital, capital expenditures,
dividends on our common stock, acquisitions and general corporate
requirements;
o limiting our ability to obtain additional financing to fund future
working capital, capital expenditures, acquisitions and general
corporate requirements;
o limiting our flexibility in planning for, or reacting to, changes in
our business and the industry in which we operate; and
o placing us at a competitive disadvantage relative to other less
leveraged competitors.
In addition to our indebtedness, we are party to various lease and other
agreements pursuant to which we are committed to pay approximately $316.6
million in 2006. Our ability to make payments on and refinance our debt, and to
fund planned capital expenditures, depends on our future ability to generate
cash flow. To some extent, this is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. In addition, our ability to borrow funds under our subsidiaries' credit
facilities in the future will in some instances depend in part on these
subsidiaries' ability to maintain specified financial ratios and satisfy certain
financial covenants contained in the applicable credit agreement. Our business
may not generate cash flows from operating activities sufficient to enable us to
pay our debts when they become due and to fund our other liquidity needs. As a
result, we may need to refinance all or a portion of our debt before maturity.
We may not be able to refinance any of our debt on favorable terms, if at all.
Any inability to generate sufficient cash flows or to refinance our debt on
favorable terms could have a material adverse effect on our financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Valhi leases office space for its principal executive offices in a building
located at 5430 LBJ Freeway, Dallas, Texas, 75240-2697. The principal properties
used in the operations of the Company, including certain risks and uncertainties
related thereto, are described in the applicable business sections of Item 1 -
"Business." The Company believes that its facilities are generally adequate and
suitable for their respective uses.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings. In addition to
information that is included below, certain information called for by this Item
is included in Note 18 to the Consolidated Financial Statements, which
information is incorporated herein by reference.
NL lead pigment litigation.
NL's former operations included the manufacture of lead pigments for use in
paint and lead-based paint. NL, other former manufacturers of lead pigments for
use in paint and lead-based paint, and the Lead Industries Association ("LIA,"
which discontinued business operations in 2002) have been named as defendants in
various legal proceedings seeking damages for personal injury, property damage
and governmental expenditures allegedly caused by the use of lead-based paints.
Certain of these actions have been filed by or on behalf of states, large U.S.
cities or their public housing authorities and school districts, and certain
others have been asserted as class actions. These lawsuits seek recovery under a
variety of theories, including public and private nuisance, negligent product
design, negligent failure to warn, strict liability, breach of warranty,
conspiracy/concert of action, aiding and abetting, enterprise liability, market
share or risk contribution liability, intentional tort, fraud and
misrepresentation, violations of state consumer protection statutes, supplier
negligence and similar claims.
The plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and health concerns associated with the
use of lead-based paints, including damages for personal injury, contribution
and/or indemnification for medical expenses, medical monitoring expenses and
costs for educational programs. A number of cases are inactive or have been
dismissed or withdrawn. Most of the remaining cases are in various pre-trial
stages. Some are on appeal following dismissal or summary judgment rulings in
favor of either the defendants or the plaintiffs. In addition, various other
cases are pending (in which NL is not a defendant) seeking recovery for injury
allegedly caused by lead pigment and lead-based paint. Although NL is not a
defendant in these cases, the outcome of these cases may have an impact on
additional cases being filed against NL in the future.
NL believes these actions are without merit, intends to continue to deny
all allegations of wrongdoing and liability and to defend against all actions
vigorously. NL has never settled any of these cases, nor have any final adverse
judgments against NL been entered. NL has not accrued any amounts for pending
lead pigment and lead-based paint litigation. Liability that may result, if any,
cannot currently be reasonably estimated. However, see the discussion below in
the State of Rhode Island case. See also Note 18 to the Consolidated Financial
Statements. There can be no assurance that NL will not incur liability in the
future in respect of this pending litigation in view of the inherent
uncertainties involved in court and jury rulings in pending and possible future
cases. If any such future liability were to be incurred, it could have a
material adverse effect on the Company's consolidated financial statements,
results of operations and liquidity.
In August 1992, NL was served with an amended complaint in Jackson, et al.
v. The Glidden Co., et al., Court of Common Pleas, Cuyahoga County, Cleveland,
Ohio (Case No. 236835). Plaintiffs seek compensatory and punitive damages for
personal injury caused by the ingestion of lead, and an order directing
defendants to abate lead-based paint in buildings. Plaintiffs purport to
represent a class of similarly situated persons throughout the State of Ohio.
The trial court denied plaintiffs' motion for class certification. In 2003,
defendants filed a motion for summary judgment on all claims, which was granted
in January 2006. In February 2006, plaintiffs filed a notice of appeal.
In September 1999, an amended complaint was filed in Thomas v. Lead
Industries Association, et al. (Circuit Court, Milwaukee, Wisconsin, Case No.
99-CV-6411) adding as defendants the former pigment manufacturers to a suit
originally filed against plaintiff's landlords. Plaintiff, a minor, alleges
injuries purportedly caused by lead on the surfaces of premises in homes in
which he resided. Plaintiff seeks compensatory and punitive damages, and NL has
denied liability. In January 2003, the trial court granted defendants' motion
for summary judgment, dismissing all counts of the complaint. The plaintiff
appealed the dismissal, and in July 2004 the appellate court affirmed the
dismissal. In July 2005, the Wisconsin Supreme Court affirmed the appellate
court's dismissal of plaintiff's civil conspiracy and enterprise liability
claims and reversed and remanded the appellate court's dismissal of plaintiff's
risk of contribution claim. The matter is proceeding in the trial court.
In October 1999, NL was served with a complaint in State of Rhode Island v.
Lead Industries Association, et al. (Superior Court of Rhode Island, No.
99-5226). The State seeks compensatory and punitive damages for medical and
educational expenses, and public and private building abatement expenses that
the State alleges were caused by lead paint, and for funding of a public
education campaign and health screening programs. Plaintiff seeks judgments of
joint and several liability against the former pigment manufacturers and the
LIA. Trial began before a Rhode Island state court jury in September 2002 on the
question of whether lead pigment in paint on Rhode Island buildings is a public
nuisance. On October 29, 2002, the trial judge declared a mistrial in the case
when the jury was unable to reach a verdict on the question, with the jury
reportedly deadlocked 4-2 in the defendants' favor. Other claims made by the
Attorney General, including violation of the Rhode Island Unfair Trade Practices
and Consumer Protection Act, strict liability, negligence, negligent and
fraudulent misrepresentation, civil conspiracy, indemnity, and unjust enrichment
were not the subject of the 2002 trial. In March 2003, the court denied motions
by plaintiffs and defendants for judgment notwithstanding the verdict. In
January 2004, plaintiff requested the court to dismiss its claims for
state-owned buildings, claiming all remaining claims did not require a jury and
asking the court to reconsider the trial schedule. In February 2004, the court
dismissed the strict liability, negligence, negligent misrepresentation and
fraud claims with prejudice, and the time for the state to appeal this dismissal
has not yet run. In March 2004, the court ruled that the defendants have a
constitutional right to a trial by jury under the Rhode Island Constitution.
Plaintiff appealed such ruling, and in July 2004 the Rhode Island Supreme Court
dismissed plaintiff's appeal of, and plaintiff's petition to reverse, the trial
court's ruling. In May 2005, the trial court dismissed the conspiracy claim with
prejudice, and the time for the state to appeal this dismissal has not yet begun
to run. In September 2005, the state dismissed its Unfair Trade Practices Act
claim against NL without prejudice. Trial commenced on November 1, 2005 on the
state's remaining claims of public nuisance, indemnity and unjust enrichment
against NL and three other defendants. Following the state's presentation of its
case, the trial court dismissed the state's claims of indemnity and unjust
enrichment. The public nuisance claim was sent to the jury in February 2006, and
the jury found that NL and two other defendants substantially contributed to the
creation of a public nuisance as a result of the collective presence of lead
pigments in paints and coatings on buildings in Rhode Island. The jury also
found that NL and the two other defendants should be ordered to abate the public
nuisance. Following the jury verdict, the trial court dismissed the state's
claim for punitive damages. The scope of the abatement remedy will be determined
by the judge. The extent, nature and cost of such remedy is not currently known,
and will be determined only following additional proceedings. Various motions
made at the end of the state's presentation of evidence remain pending before
the trial court, including NL's motion to dismiss. NL intends to appeal any
adverse judgment which the trial court may enter against NL.
In October 1999, NL was served with a complaint in Smith, et al. v. Lead
Industries Association, et al. (Circuit Court for Baltimore City, Maryland, Case
No. 24-C-99-004490). Plaintiffs, seven minors from four families, each seek
compensatory damages of $5 million and punitive damages of $10 million for
alleged injuries due to lead-based paint. Plaintiffs allege that the former
pigment manufacturers and other companies alleged to have manufactured paint
and/or gasoline additives, the LIA and the National Paint and Coatings
Association are jointly and severally liable. NL has denied liability. The trial
court, on defendants' motions, dismissed all plaintiffs' claims. Plaintiffs
appealed, and in May 2004 the court of appeals reinstated certain claims. In
September 2004, the court of appeals granted plaintiffs' petition for review of
such court's affirmation of the dismissal of certain of the plaintiffs'
remaining claims. In April 2005, the court of appeals vacated the decision of
the intermediate appellate court, stating that such court should not have
accepted the appeal, and remanded the case back to the trial court for further
proceedings. In February 2006, the trial court issued orders again dismissing
the Smith's family's case and severing and staying the cases of the three other
families. Plaintiffs have appealed.
In February 2000, NL was served with a complaint in City of St. Louis v.
Lead Industries Association, et al. (Missouri Circuit Court 22nd Judicial
Circuit, St. Louis City, Cause No. 002-245, Division 1). Plaintiff seeks
compensatory and punitive damages for its expenses discovering and abating
lead-based paint, detecting lead poisoning and providing medical care and
educational programs for City residents, and the costs of educating children
suffering injuries due to lead exposure. Plaintiff seeks judgments of joint and
several liability against the former pigment manufacturers and the LIA. In
November 2002, defendants' motion to dismiss was denied. In May 2003, plaintiffs
filed an amended complaint alleging only a nuisance claim. Defendants renewed
motion to dismiss and motion for summary judgment were denied by the trial court
in March 2004, but the trial court limited plaintiff's complaint to monetary
damages from 1990 to 2000, specifically excluding future damages. In March 2005,
the defendants filed a motion for summary judgment. In January 2006, the trial
court granted defendants' motion for summary judgment. Plaintiffs have appealed.
In April 2000, NL was served with a complaint in County of Santa Clara v.
Atlantic Richfield Company, et al. (Superior Court of the State of California,
County of Santa Clara, Case No. CV788657) brought against the former pigment
manufacturers, the LIA and certain paint manufacturers. The County of Santa
Clara seeks to represent a class of California governmental entities (other than
the state and its agencies) to recover compensatory damages for funds the
plaintiffs have expended or will in the future expend for medical treatment,
educational expenses, abatement or other costs due to exposure to, or potential
exposure to, lead paint, disgorgement of profit, and punitive damages. Santa
Cruz, Solano, Alameda, San Francisco, and Kern counties, the cities of San
Francisco and Oakland, the Oakland and San Francisco unified school districts
and housing authorities and the Oakland Redevelopment Agency have joined the
case as plaintiffs. In February 2003, defendants filed a motion for summary
judgment. In July 2003, the court granted defendants' motion for summary
judgment on all remaining claims. In March 2006, the appellate court affirmed
the dismissal of plaintiffs' trespass claim, Unfair Competition Law claim and
public nuisance claim for government-owned properties. The appellate court
reversed the dismissal of plaintiffs' public nuisance claim for residential
housing properties and plaintiffs' negligence and strict liability claims for
government-owned buildings and plaintiffs' fraud claim.
In June 2000, a complaint was filed in Illinois state court, Lewis, et al.
v. Lead Industries Association, et al. (Circuit Court of Cook County, Illinois,
County Department, Chancery Division, Case No. 00CH09800). Plaintiffs seek to
represent two classes, one of all minors between the ages of six months and six
years who resided in housing in Illinois built before 1978, and one of all
individuals between the ages of six and twenty years who lived between the ages
of six months and six years in Illinois housing built before 1978 and had blood
lead levels of 10 micrograms/deciliter or more. The complaint seeks damages
jointly and severally from the former pigment manufacturers and the LIA to
establish a medical screening fund for the first class to determine blood lead
levels, a medical monitoring fund for the second class to detect the onset of
latent diseases, and a fund for a public education campaign. In March 2002, the
court dismissed all claims. Plaintiffs appealed, and in June 2003 the appellate
court affirmed the dismissal of five of the six counts of plaintiffs, but
reversed the dismissal of the conspiracy count. In May 2004, defendants filed a
motion for summary judgment on plaintiffs' conspiracy count, which was granted
in February 2005. In February 2006, the court of appeals reversed the trial
court's dismissal of the case and remanded the case for further proceedings. In
March 2006, the defendants filed a petition with the Illinois Supreme Court
seeking review of the appellate court's ruling.
In February 2001, NL was served with a complaint in Barker, et al. v. The
Sherwin-Williams Company, et al. (Circuit Court of Jefferson County,
Mississippi, Civil Action No. 2000-587, and formerly known as Borden, et al. vs.
The Sherwin-Williams Company, et al.). The complaint seeks joint and several
liability for compensatory and punitive damages from more than 40 manufacturers
and retailers of lead pigment and/or paint, including NL, on behalf of 18 adult
residents of Mississippi who were allegedly exposed to lead during their
employment in construction and repair activities. In 2003, the court ordered
that the claims of ten of the plaintiffs be transferred to Holmes County,
Mississippi state court. In April 2004, the parties jointly petitioned the
Mississippi Supreme Court to transfer these ten plaintiffs to their appropriate
venue, and in May 2004 the Mississippi Supreme Court remanded the case to the
trial court in Holmes County and instructed the court to transfer these ten
plaintiffs to their appropriate venues. Five of these ten plaintiffs have been
dismissed without prejudice with respect to NL, and five remain against NL. With
respect to the eight plaintiffs in Jefferson County, seven of these plaintiffs
have been dismissed without prejudice with respect to NL, and one remains
against NL.
In May 2001, NL was served with a complaint in City of Milwaukee v. NL
Industries, Inc. and Mautz Paint (Circuit Court, Civil Division, Milwaukee
County, Wisconsin, Case No. 01CV003066). Plaintiff seeks compensatory and
equitable relief for lead hazards in Milwaukee homes, restitution for amounts it
has spent to abate lead and punitive damages. NL has denied all liability. In
July 2003, defendants' motion for summary judgment was granted by the trial
court. In November 2004, the appellate court reversed this ruling and remanded
the case. Defendants filed a petition for review of the appellate court's ruling
in December 2004 with the Wisconsin Supreme Court, but withdrew this petition in
July 2005. The case is now proceeding in the trial court. In January 2006,
defendants filed a motion to dismiss plaintiffs' claim.
In January and February 2002, NL was served with complaints by 25 different
New Jersey municipalities and counties which have been consolidated as In re:
Lead Paint Litigation (Superior Court of New Jersey, Middlesex County, Case Code
702). Each complaint seeks abatement of lead paint from all housing and all
public buildings in each jurisdiction and punitive damages jointly and severally
from the former pigment manufacturers and the LIA. In November 2002, the court
entered an order dismissing this case with prejudice. In August 2005, the
appellate court affirmed the trial court's dismissal of all counts except for
the state's public nuisance count, which has been reinstated. In November 2005,
the New Jersey Supreme Court granted defendants' petition seeking review of the
appellate court's ruling on the public nuisance count.
In January 2002, NL was served with a complaint in Jackson, et al., v.
Phillips Building Supply of Laurel, et al. (Circuit Court of Jones County,
Mississippi, Dkt. Co. 2002-10-CV1). The complaint seeks joint and several
liability from three local retailers and six non-Mississippi companies that sold
paint for compensatory and punitive damages on behalf of three adults for
injuries alleged to have been caused by the use of lead paint. After removal to
federal court, in February 2003 the case was remanded to state court. NL has
denied all liability and pre-trial proceedings are continuing. In August 2004,
plaintiffs voluntarily agreed to dismiss one plaintiff and to sever the
remaining two plaintiffs. In July 2005, plaintiffs voluntarily agreed to dismiss
another plaintiff without prejudice, leaving one plaintiff remaining. In January
2006, the court set a trial date of April 2007.
In April 2003, NL was served with a complaint in Jones v. NL Industries,
Inc., et al. (Circuit Court of LeFlore County, Mississippi, Civil Action No.
2002-0241-CICI). The plaintiffs, fourteen children from five families, have sued
NL and one landlord alleging strict liability, negligence, fraudulent
concealment and misrepresentation, and seek compensatory and punitive damages
for alleged injuries caused by lead paint. Defendants removed this case to
federal court. Discovery is proceeding. In September 2005, the court set the
trial date for July 2006. In January 2006, defendants filed a motion for summary
judgment.
In November 2003, NL was served with a complaint in Lauren Brown v. NL
Industries, Inc., et al. (Circuit Court of Cook County, Illinois, County
Department, Law Division, Case No. 03L 012425). The complaint seeks damages
against NL and two local property owners on behalf of a minor for injuries
alleged to be due to exposure to lead paint contained in the minor's residence.
NL has denied all allegations of liability. Discovery is proceeding.
In December 2004, NL was served with a complaint in Terry, et al. v. NL
Industries, Inc., et al. (United States District Court, Southern District of
Mississippi, Case No. 4:04 CV 269 PB). The plaintiffs, seven children from three
families, have sued NL and one landlord alleging strict liability, negligence,
fraudulent concealment and misrepresentation, and seek compensatory and punitive
damages for alleged injuries caused by lead paint. The plaintiffs in the Terry
case are alleged to have resided in the same housing complex as the plaintiffs
in the Jones case discussed above. NL has denied all allegations of liability
and has filed a motion to dismiss plaintiffs' fraud claim. In August 2005, the
court denied NL's motion to strike plaintiffs' fraud claim for lack of
particularity, allowing plaintiffs to re-plead this claim.
In October 2005, NL was served with a complaint in Evans v. Atlantic
Richfield Company, et. al. (Circuit Court, Milwaukee, Wisconsin, Case No.
05-CV-9281). Plaintiff, a minor, alleges injuries purportedly caused by lead on
the surfaces of premises in homes in which she resided. Plaintiff seeks
compensatory and punitive damages. NL has denied all allegations of liability.
In December 2005, defendants filed a motion to dismiss the defective product
damages claims.
In December 2005, NL was served with a complaint in Hurkmans v. Salczenko,
et. al. (Circuit Court, Marinette County, Wisconsin, Case No. 05-CV-418).
Plaintiff, a minor, alleges injuries purportedly caused by lead on the surfaces
of the home in which he resided. Plaintiff seeks compensatory damages. NL has
denied all allegations of liability. In February 2006, defendants filed a motion
to dismiss the defective product damages claim.
In January 2006, NL was served with a complaint in Hess, et al. v. NL
Industries, Inc., et al. (Missouri Circuit Court 22nd Judicial Circuit, St.
Louis City, Cause No. 052-11799). Plaintiffs are two minor children who allege
injuries purportedly caused by lead on the surfaces of the home in which they
resided. Plaintiffs seek compensatory and punitive damages. NL intends to deny
all allegations of liability.
In addition to the foregoing litigation, various legislation and
administrative regulations have, from time to time, been proposed that seek to
(a) impose various obligations on present and former manufacturers of lead
pigment and lead-based paint with respect to asserted health concerns associated
with the use of such products and (b) effectively overturn court decisions in
which NL and other pigment manufacturers have been successful. Examples of such
proposed legislation include bills which would permit civil liability for
damages on the basis of market share, rather than requiring plaintiffs to prove
that the defendant's product caused the alleged damage, and bills which would
revive actions barred by the statute of limitations. While no legislation or
regulations have been enacted to date that are expected to have a material
adverse effect on NL's consolidated financial position, results of operations or
liquidity, the imposition of market share liability or other legislation could
have such an effect.
Environmental matters and litigation.
General. The Company's operations are governed by various environmental
laws and regulations. Certain of the Company's businesses are and have been
engaged in the handling, manufacture or use of substances or compounds that may
be considered toxic or hazardous within the meaning of applicable environmental
laws and regulations. As with other companies engaged in similar businesses,
certain past and current operations and products of the Company have the
potential to cause environmental or other damage. The Company has implemented
and continues to implement various policies and programs in an effort to
minimize these risks. The Company's policy is to maintain compliance with
applicable environmental laws and regulations at all of its plants and to strive
to improve its environmental performance. From time to time, the Company may be
subject to environmental regulatory enforcement under U.S. and foreign statutes,
resolution of which typically involves the establishment of compliance programs.
It is possible that future developments, such as stricter requirements of
environmental laws and enforcement policies thereunder, could adversely affect
the Company's production, handling, use, storage, transportation, sale or
disposal of such substances. The Company believes all of its plants are in
substantial compliance with applicable environmental laws.
Certain properties and facilities used in the Company's former businesses,
including divested primary and secondary lead smelters and former mining
locations of NL, are the subject of civil litigation, administrative proceedings
or investigations arising under federal and state environmental laws.
Additionally, in connection with past disposal practices, the Company has been
named as a defendant, potentially responsible party ("PRP") or both, pursuant to
CERCLA, and similar state laws in various governmental and private actions
associated with waste disposal sites, mining locations, and facilities currently
or previously owned, operated or used by the Company or its subsidiaries, or
their predecessors, certain of which are on the U.S. EPA's Superfund National
Priorities List or similar state lists. These proceedings seek cleanup costs,
damages for personal injury or property damage and/or damages for injury to
natural resources. Certain of these proceedings involve claims for substantial
amounts. Although the Company may be jointly and severally liable for such
costs, in most cases it is only one of a number of PRPs who may also be jointly
and severally liable.
Environmental obligations are difficult to assess and estimate for numerous
reasons including the complexity and differing interpretations of governmental
regulations, the number of PRPs and the PRPs' ability or willingness to fund
such allocation of costs, their financial capabilities and the allocation of
costs among PRPs, the solvency of other PRPs, the multiplicity of possible
solutions, and the years of investigatory, remedial and monitoring activity
required. In addition, the imposition of more stringent standards or
requirements under environmental laws or regulations, new developments or
changes respecting site cleanup costs or allocation of such costs among PRPs,
solvency of other PRPs, the results of future testing and analysis undertaken
with respect to certain sites or a determination that the Company is potentially
responsible for the release of hazardous substances at other sites, could result
in expenditures in excess of amounts currently estimated by the Company to be
required for such matters. In addition, with respect to other PRPs and the fact
that the Company may be jointly and severally liable for the total remediation
cost at certain sites, the Company could ultimately be liable for amounts in
excess of its accruals due to, among other things, reallocation of costs among
PRPs or the insolvency of one or more PRPs. No assurance can be given that
actual costs will not exceed accrued amounts or the upper end of the range for
sites for which estimates have been made, and no assurance can be given that
costs will not be incurred with respect to sites as to which no estimate
presently can be made. Further, there can be no assurance that additional
environmental matters will not arise in the future. If any such future liability
were to be incurred, it could have a material adverse effect on the Company's
consolidated financial statements, results of operations and liquidity.
The Company records liabilities related to environmental remediation
obligations when estimated future expenditures are probable and reasonably
estimable. Such accruals are adjusted as further information becomes available
or circumstances change. Estimated future expenditures are generally not
discounted to their present value. Recoveries of remediation costs from other
parties, if any, are recognized as assets when their receipt is deemed probable.
At December 31, 2005, no receivables for such recoveries have been recognized.
The exact time frame over which the Company makes payments with respect to
its accrued environmental costs is unknown and is dependent upon, among other
things, the timing of the actual remediation process that in part depends on
factors outside the control of the Company. At each balance sheet date, the
Company makes an estimate of the amount of its accrued environmental costs that
will be paid out over the subsequent 12 months, and the Company classifies such
amount as a current liability. The remainder of the accrued environmental costs
is classified as a noncurrent liability.
NL. Certain properties and facilities used in NL's former operations,
including divested primary and secondary lead smelters and former mining
locations, are the subject of civil litigation, administrative proceedings or
investigations arising under federal and state environmental laws. Additionally,
in connection with past disposal practices, NL has been named as a defendant,
PRP, or both, pursuant to CERCLA, and similar state laws in approximately 60
governmental and private actions associated with waste disposal sites, mining
locations and facilities currently or previously owned, operated or used by NL,
or its subsidiaries or their predecessors, certain of which are on the U.S.
EPA's Superfund National Priorities List or similar state lists. These
proceedings seek cleanup costs, damages for personal injury or property damage
and/or damages for injury to natural resources. Certain of these proceedings
involve claims for substantial amounts. Although NL may be jointly and severally
liable for such costs, in most cases, it is only one of a number of PRPs who may
also be jointly and severally liable. In addition, NL is a party to a number of
lawsuits filed in various jurisdictions alleging CERCLA or other environmental
claims.
On a quarterly basis, NL evaluates the potential range of its liability at
sites where it has been named as a PRP or defendant, including sites for which
EMS has contractually assumed NL's obligation. See Note 18 to the Consolidated
Financial Statements. At December 31, 2005, NL had accrued $54.9 million for
those environmental matters which NL believes are reasonably estimable. NL
believes it is not possible to estimate the range of costs for certain sites.
The upper end of the range of reasonably possible costs to NL for sites for
which NL believes it is possible to estimate costs is approximately $80.0
million. NL's estimates of such liabilities have not been discounted to present
value.
At December 31, 2005, there are approximately 20 sites for which NL is
currently unable to estimate a range of costs. For these sites, generally the
investigation is in the early stages, and it is either unknown as to whether or
not NL actually had any association with the site, or if NL had association with
the site, the nature of its responsibility, if any, for the contamination at the
site and the extent of contamination. The timing on when information would
become available to NL to allow NL to estimate a range of loss is unknown and
dependent on events outside the control of NL, such as when the party alleging
liability provides information to NL. On certain of these sites that had
previously been inactive, NL has received general and special notices of
liability from the EPA alleging that NL, along with other PRPs, is liable for
past and future costs of remediating environmental contamination allegedly
caused by former operations conducted at such sites. These notifications may
assert that NL, along with other PRP's, is liable for past clean-up costs that
could be material to NL if liability for such amounts ultimately were determined
against NL.
In January 2003, NL received a general notice of liability from the U.S.
EPA regarding the site of a formerly owned primary lead smelting facility
located in Collinsville, Illinois. The U.S. EPA alleged the site contained
elevated levels of lead. In July 2004, NL and the U.S. EPA entered into an
administrative order on consent to perform a removal action with respect to
residential properties located at the site. NL has complied with the order and
has substantially completed the clean-up work associated with the order. NL
anticipates it will undertake to perform an additional removal action with
respect to ponds located within the residential area.
In December 2003, NL was served with a complaint in The Quapaw Tribe of
Oklahoma et al. v. ASARCO Incorporated et al. (United States District Court,
Northern District of Oklahoma, Case No. 03-CII-846H(J). The complaint alleges
public nuisance, private nuisance, trespass, unjust enrichment, strict liability
and deceit by false representation against NL and six other mining companies
with respect to former operations in the Tar Creek mining district in Oklahoma.
The complaint seeks class action status for former and current owners, and
possessors of real property located within the Quapaw Reservation. Among other
things, the complaint seeks actual and punitive damages from the defendants. NL
has moved to dismiss the complaint and has denied all of plaintiffs'
allegations. In April 2004, plaintiffs filed an amended complaint adding claims
under the CERCLA and the RCRA, and NL moved to dismiss those claims. In June
2004, the court dismissed plaintiffs' claims for unjust enrichment and fraud as
well as one of the RCRA claims. In September 2004, the court stayed the case,
pending an appeal by the tribe related to sovereign immunity issues. In February
2006, the court of appeals affirmed the trial court's ruling that plaintiffs
waived their sovereign immunity to defendants' counter claim for contribution
and indemnity.
In February 2004, NL was served in Evans v. ASARCO (United States District
Court, Northern District of Oklahoma, Case No. 04-CV-94EA(M)), a purported class
action on behalf of two classes of persons living in the town of Quapaw,
Oklahoma: (1) a medical monitoring class of persons who have lived in the area
since 1994, and (2) a property owner class of residential, commercial and
government property owners. Four individuals are named as plaintiffs, together
with, the mayor of the town of Quapaw, Oklahoma, and the School Board of Quapaw,
Oklahoma. Plaintiffs allege causes of action in nuisance and seek a medical
monitoring program, a relocation program, property damages, and punitive
damages. NL answered the complaint and denied all of plaintiffs' allegations.
The trial court subsequently stayed all proceedings in this case pending the
outcome of a class certification decision in another case that had been pending
in the same U.S. District Court, a case from which NL has been dismissed with
prejudice.
In January 2006, NL was served in Brown et al. v. NL Industries, Inc., et
al. (Circuit Court Wayne County, Michigan, Case No. 06-602096 CZ), a purported
class action on behalf of a class of property owners living in the Krainz Woods
Neighborhood of Wayne County, Michigan. Plaintiffs allege causes of action in
negligence, nuisance, trespass and under the Michigan Natural Resources and
Environmental Protection Act with respect to a lead smelting facility formerly
operated by NL and another defendant. Plaintiffs seek property damages, personal
injury damages, loss of income and medical expense and medical monitoring costs.
In February 2006, NL filed a petition to remove the case to federal court. NL
intends to deny all allegations of liability.
See also Item 1 - "Business - Chemicals - Regulatory and environmental
matters."
Tremont. In July 2000 Tremont, entered into a voluntary settlement
agreement with the Arkansas Department of Environmental Quality and certain
other PRPs pursuant to which Tremont and the other PRPs will undertake certain
investigatory and interim remedial activities at a former mining site located in
Hot Springs County, Arkansas. Tremont currently believes that it has accrued
adequate amounts ($3.8 million at December 31, 2005) to cover its share of
probable and reasonably estimable environmental obligations for these
activities. Tremont has entered into an agreement with another PRP of this site,
Halliburton Energy Services, Inc. that provides for, among other things, the
interim sharing of remediation costs associated with the site pending a final
allocation of costs and an agreed-upon procedure through arbitration to
determine such final allocation of costs. On December 9, 2005, Halliburton and
DII Industries, LLC, another PRP of this site, filed suit in the United States
District Court for the Southern District of Texas, Houston Division, Case No.
H-05-4160, against NL, Tremont and certain of its subsidiaries, M-I, L.L.C.,
Milwhite, Inc. and Georgia-Pacific Corporation seeking (i) to recover response
and remediation costs incurred at the site, (ii) a declaration of the parties'
liability for response and remediation costs incurred at the site, (iii) a
declaration of the parties' liability for response and remediation costs to be
incurred in the future at the site and (iv) a declaration regarding the
obligation of Tremont to indemnify Halliburton and DII for costs and expenses
attributable to the site. On December 27, 2005, a subsidiary of Tremont filed
suit in the United States District Court for the Western District of Arkansas,
Hot Springs Division, Case No. 05-6089, against Georgia-Pacific, seeking to
recover response costs it has incurred and will incur at the site. Subsequently,
plaintiffs in the Houston litigation verbally agreed to stay that litigation and
enter into with NL, Tremont and its affiliates an amendment to the arbitration
agreement previously agreed upon for resolving the allocation of costs at the
site. Tremont has also agreed to stay the Arkansas litigation. Tremont has based
its accrual for this site based upon the agreed-upon interim cost sharing
allocation. Tremont currently expects that the nature and extent of any final
remediation measures that might be imposed with respect to this site will not be
known until 2008. Currently, no reasonable estimate can be made of the cost of
any such final remediation measures, and accordingly Tremont has accrued no
amounts at December 31, 2005 for any such cost. The amount accrued at December
31, 2005 represents Tremont's estimate of the costs to be incurred through 2008
with respect to the interim remediation measures.
TIMET. At December 31, 2005, TIMET had accrued approximately $3.2 million
for environmental cleanup matters, principally related to TIMET's facility in
Nevada. The upper end of the range of reasonably possible costs related to these
matters is approximately $5.4 million.
Other. The Company has also accrued approximately $7.0 million at December
31, 2005 in respect of other environmental cleanup matters. Such accrual is near
the upper end of the range of the Company's estimate of reasonably possible
costs for such matters.
Insurance coverage claims.
In October 2005, NL was served with a complaint in OneBeacon American
Insurance Company v. NL Industries, Inc., et. al.(Supreme Court of the State of
New York, County of New York, Index No. 603429-05). The plaintiff, a former
insurance carrier, seeks a declaratory judgment of its obligations to NL under
insurance policies issued to NL by the plaintiff's predecessor with respect to
certain lead pigment lawsuits. NL filed a motion to dismiss the New York action.
NL filed an action against OneBeacon and certain other former insurance
companies, captioned NL Industries, Inc. v. OneBeacon America Insurance Company,
et. al. (District Court for Dallas County, Texas, Case No. 05-11347) asserting
that OneBeacon has breached its obligations to NL under such insurance policies
and seeking a declaratory judgment of OneBeacon's obligations to NL under such
policies. Certain of the former insurance companies have filed a petition to
remove the Texas action to federal court.
In February 2006, NL was served with a complaint in Certain Underwriters at
Lloyds, London v. Millennium Holdings LLC et. al (Supreme Court of the State of
New York, County of New York, Index No. 06/60026). The plaintiff, a former
insurance carrier of NL, seeks a declaratory judgment of its obligations to
defendants under insurance policies issued to defendants by plaintiff with
respect to certain lead pigment lawsuits.
NL has reached an agreement with a former insurance carrier in which such
carrier would reimburse NL for a portion of its past and future lead pigment
litigation defense costs, although the amount that NL will ultimately recover
from such carrier with respect to such defense costs incurred by NL is not yet
determinable. In addition, during 2005, NL recognized $2.2 million of recoveries
from certain insolvent former insurance carriers relating to settlement of
excess insurance claims that were paid to NL. While NL continues to seek
additional insurance recoveries, there can be no assurance that NL will be
successful in obtaining reimbursement for either defense costs or indemnity. Any
such additional insurance recoveries would be recognized when their receipt is
deemed probable and the amount is determinable.
The issue of whether insurance coverage for defense costs or indemnity or
both will be found to exist for NL's lead pigment litigation depends upon a
variety of factors, and there can be no assurance that such insurance coverage
will be available. NL has not considered any potential insurance recoveries for
lead pigment or environmental litigation matters in determining related
accruals.
NL has settled insurance coverage claims concerning environmental claims
with certain of its principal former carriers. A portion of the proceeds from
these settlements were placed into special purpose trusts, as discussed below.
No further material settlements relating to environmental remediation coverage
are expected.
At December 31, 2004, NL had $19 million in restricted cash, restricted
cash equivalents and restricted marketable debt securities held by special
purpose trusts, the assets of which can only be used to pay for certain of NL's
future environmental remediation and other environmental expenditures. Use of
such restricted balances does not affect the Company's consolidated net cash
flows. All of such $19 million was so used by NL during 2005.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Valhi security holders during the
quarter ended December 31, 2005.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OR EQUITY SECURITIES
Valhi's common stock is listed and traded on the New York Stock Exchange
(symbol: VHI). As of February 28, 2006, there were approximately 4,100 holders
of record of Valhi common stock. The following table sets forth the high and low
closing per share sales prices for Valhi common stock for the periods indicated,
according to Bloomberg, and dividends paid during such periods. On February 28,
2006 the closing price of Valhi common stock according to Bloomberg was $17.85.
Cash
dividends
High Low paid
---- --- ---------
Year ended December 31, 2004
First Quarter $15.71 $11.50 $.06
Second Quarter 14.10 10.12 .06
Third Quarter 15.03 11.10 .06
Fourth Quarter 16.31 14.99 .06
Year ended December 31, 2005
First Quarter $21.43 $14.87 $.10
Second Quarter 22.47 17.00 .10
Third Quarter 18.26 16.94 .10
Fourth Quarter 19.14 17.20 .10
Valhi paid regular quarterly dividends of $.06 per share during 2004, and
regular quarterly dividends of $.10 per share during 2005. In March 2006,
Valhi's board of directors declared a first quarter 2006 dividend of $.10 per
share, to be paid on March 31, 2006 to Valhi shareholders of record as of March
16, 2006. However, declaration and payment of future dividends, and the amount
thereof, is discretionary and is dependent upon the Company's results of
operations, financial condition, cash requirements for its businesses,
contractual requirements and restrictions and other factors deemed relevant by
the Board of Directors. The amount and timing of past dividends is not
necessarily indicative of the amount or timing of any future dividends which
might be paid. In this regard, Valhi's revolving bank credit facility currently
limits the amount of Valhi's quarterly dividends to $.10 per share, plus an
additional aggregate amount of $67.9 million at December 31, 2005.
In March 2005, the Company's board of directors authorized the repurchase
of up to 5.0 million shares of Valhi's common stock in open market transactions,
including block purchases, or in privately negotiated transactions, which may
include transactions with affiliates of Valhi. The stock may be purchased from
time to time as market conditions permit. The stock repurchase program does not
include specific price targets or timetables and may be suspended at any time.
Depending on market conditions, the program could be terminated prior to
completion. The Company will use its cash on hand to acquire the shares.
Repurchased shares will be retired and cancelled or may be added to Valhi's
treasury and used for employee benefit plans, future acquisitions or other
corporate purposes. See Notes 14 and 17 to the Consolidated Financial
Statements.
The following table discloses certain information regarding shares of Valhi
common stock purchased by Valhi during the fourth quarter of 2005. All of such
purchases were made under the repurchase program discussed above, and all of
such purchases were made in open market transactions.
Maximum number of
Average Total number of shares that may yet
Total price paid shares purchased be purchased under
number of per share, as part of a the publicly-
shares including publicly-announced announced plan at
Period purchased commissions plan end of period
------ --------- ----------- ------------------ -------------------
October 1, 2005 to October
31, 2005 123,900 $17.54 123,900 1,564,500
November 1, 2005 to
November 30, 2005 13,600 17.34 13,600 1,550,900
December 1, 2005
to December 31,
2005 63,200 18.07 63,200 1,487,700
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's Consolidated Financial Statements and Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Years ended December 31,
-----------------------------------------------------------------
2001 (2) 2002 (2) 2003 (2) 2004 (2) 2005
-------- -------- -------- -------- ------
(Restated) (Restated) (Restated) (Restated)
(In millions, except per share data)
STATEMENTS OF OPERATIONS DATA:
Net sales:
Chemicals $ 835.1 $ 875.2 $1,008.2 $1,128.6 $1,196.7
Component products 179.6 166.7 173.9 182.6 186.3
Waste management 13.0 8.4 4.1 8.9 9.8
-------- -------- -------- -------- --------
$1,027.7 $1,050.3 $1,186.2 $1,320.1 $1,392.8
======== ======== ======== ======== ========
Operating income:
Chemicals $ 143.5 $ 84.4 $ 122.3 $ 103.5 $ 164.9
Component products 13.3 4.4 9.1 16.2 19.3
Waste management (14.4) (7.0) (11.5) (10.2) (12.1)
-------- -------- -------- -------- --------
$ 142.4 $ 81.8 $ 119.9 $ 109.5 172.1
======== ======== ======== ======== ========
Equity in earnings (losses) of
TIMET $ (11.1) $ (29.0) $ (2.3) $ 22.7 $ 64.9
======== ======== ======== ======== ========
Income (loss) from continuing
operations (1) $ 102.3 $ 5.4 $ (85.4) $ 226.3 $ 81.7
Discontinued operations (1.1) (.2) (2.9) 3.7 (.3)
Cumulative effect of change in
accounting principle - - .6 - -
-------- -------- -------- -------- --------
Net income (loss) $ 101.2 $ 5.2 $ (87.7) $ 230.0 $ 81.4
======== ======== ======== ======== ========
DILUTED EARNINGS PER SHARE DATA:
Income (loss) from continuing
Operations $ .88 $ .05 $ (.71) $ 1.88 $ .68
Net income (loss) $ .87 $ .04 $ (.73) $ 1.91 $ .68
Cash dividends $ .24 $ .24 $ .24 $ .24 $ .40
Weighted average common shares
Outstanding 116.1 115.8 119.9 120.4 118.5
STATEMENTS OF CASH FLOW DATA:
Cash provided (used) by:
Operating activities $ 158.6 $ 106.8 $ 108.5 $ 142.1 $ 104.3
Investing activities (53.8) (67.1) (33.8) (58.1) 20.4
Financing activities (84.5) (103.3) (71.2) 78.4 (115.8)
BALANCE SHEET DATA (at year end):
Total assets $2,238.8 $2,167.8 $2,307.2 $2,690.5 $2,578.4
Long-term debt 497.2 605.7 632.5 769.5 715.8
Stockholders' equity 692.5 688.5 629.0 874.7 795.6
(1) The Company's results of operations in 2001 includes $15.7 million of
goodwill amortization, net of income tax benefit and minority interest.
Goodwill ceased to be periodically amortized in 2002. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
for a discussion of unusual items occurring during 2003, 2004 and 2005.
(2) Income (loss) from continuing operations and net income (loss), and related
per share amounts, for the years ended December 31, 2001, 2002, 2003 and
2004, and total assets and stockholders' equity as of December 31, 2001,
2002, 2003 and 2004, have each been restated from amounts previously
disclosed due to a change in accounting principle adopted by TIMET in the
first quarter of 2005, which change in accounting method is adopted
retroactively under accounting principles generally accepted in the United
States of America ("GAAP"). See Note 1 to the Consolidated Financial
Statements. Income (loss) from continuing operations and net income, and
the related per diluted share amounts, as presented above, differs from
amounts previously reported by a $1.2 million reduction ($.01 per diluted
share) in 2001 and by a $2.5 million increase ($.02 per diluted share) in
2002. Total assets, as presented above, is greater than amounts previously
reported by $8.1 million at December 31, 2001, by $12.0 million at December
31, 2002 and by $7.7 million at December 31, 2003. Stockholders' equity, as
presented above, is greater than amounts previously reported at such dates
by $5.3 million, $7.7 million and $5.0 million, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Summary
The Company reported income from continuing operations of $81.7 million, or
$.68 per diluted share, in 2005 compared to income of $226.3 million, or $1.88
per diluted share, in 2004 and a loss of $85.4 million, or $.71 per diluted
share, in 2003. As discussed is Note 1 to the Consolidated Financial Statements,
the Company's consolidated financial statements as of December 31, 2004, and for
the years ended December 31, 2002 and 2003, have been restated from amounts
previously disclosed due to a change in accounting principle adopted by TIMET in
the first quarter of 2005, which change in accounting method is adopted
retroactively under GAAP.
The Company's diluted earnings per share declined from 2004 to 2005 as the
favorable effects in 2005 of (i) higher chemicals operating income, (ii) higher
component products operating income, (iii) higher securities transaction gains
and (iv) the Company's equity in a non-operating gain from the sale of certain
land and certain income tax benefits recognized by TIMET were less than the
favorable effect in 2004 of certain income tax benefits recognized by Kronos and
NL.
The Company's diluted earnings per share increased from 2003 to 2004 as the
favorable effects in 2004 of (i) higher component products operating income,
(ii) lower environmental remediation and legal expenses of NL, (iii) higher
equity in earnings of TIMET and (iv) certain income tax benefits more than
offset the effect of lower chemicals operating income.
Income from continuing operations in 2005 includes (i) gains from NL's
sales of shares of Kronos common stock of $.05 per diluted share, most of which
occurred in the first quarter, (ii) gains from Kronos' second quarter sale of
its passive interest in a Norwegian smelting operation of $.03 per diluted
share, (iii) income related to TIMET's second quarter sale of certain real
property adjacent to its Nevada facility of $.02 per diluted share, (iv) a net
non-cash income tax expense of $.03 per diluted share (mostly in the third
quarter) related to the aggregate effects of recent developments with respect to
certain income tax audits of Kronos (principally in Germany, Belgium and Canada)
and NL in the U.S., and a change in CompX's permanent reinvestment conclusion
regarding certain of its non-U.S. subsidiaries and (v) income related to certain
non-cash income tax benefits recognized by TIMET of $.11 per diluted share
recognized throughout all of 2005.
Income from continuing operations in 2004 includes (i) a second quarter
income tax benefit related to the reversal of Kronos' deferred income tax asset
valuation allowance in Germany of $1.91 per diluted share, (ii) a second quarter
income tax benefit related to the reversal of the deferred income tax asset
valuation allowance related to EMS and the adjustment of estimated income taxes
due upon the IRS settlement related to EMS of $.34 per diluted share, (iii)
income related to Kronos' contract dispute settlement of $.03 per diluted share,
(iv) income related to NL's fourth quarter sales of Kronos common stock in
market transactions of $.01 per diluted share, (v) income related to the
Company's pro-rata share of TIMET's non-operating gain from TIMET's exchange of
its convertible preferred debt securities for a new issue of TIMET convertible
preferred stock of $.03 per diluted share and (vi) income related to the
Company's pro-rata share of TIMET's income tax benefit resulting from TIMET's
utilization of a capital loss carryforward, the benefit of which had not been
previously recognized by TIMET, of $.01 per diluted share.
Income from continuing operations in 2003 includes (i) an income tax
benefit relating to the refund of prior year German income taxes of $.17 per
diluted share and (ii) gains from the disposal of property and equipment
(principally related to certain real property of NL) aggregating $.05 per
diluted share.
Each of these items is more fully discussed below and/or in the notes to
the Consolidated Financial Statements.
The Company currently believes its income from continuing operations will
be lower in 2006 as compared to 2005 due primarily to lower expected chemicals
operating income in 2006.
Critical accounting policies and estimates
The accompanying "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are based upon the Company's Consolidated
Financial Statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). The
preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reported period. On an ongoing basis, the Company evaluates its estimates,
including those related to bad debts, inventory reserves, impairments of
investments in marketable securities and investments accounted for by the equity
method, the recoverability of other long-lived assets (including goodwill and
other intangible assets), pension and other post-retirement benefit obligations
and the underlying actuarial assumptions related thereto, the realization of
deferred income tax assets and accruals for environmental remediation,
litigation, income tax and other contingencies. The Company bases its estimates
on historical experience and on various other assumptions that it believes to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the reported amounts of assets, liabilities, revenues and
expenses. Actual results may differ from previously-estimated amounts under
different assumptions or conditions.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
Consolidated Financial Statements:
o The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required
payments and other factors. The Company takes into consideration the
current financial condition of its customers, the age of the
outstanding balance and the current economic environment when
assessing the adequacy of the allowance. If the financial condition of
the Company's customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances
may be required. During 2003, 2004 and 2005, the net amount written
off against the allowance for doubtful accounts as a percentage of the
balance of the allowance for doubtful accounts as of the beginning of
the year ranged from 7% to 24%.
o The Company provides reserves for estimated obsolete or unmarketable
inventories equal to the difference between the cost of inventories
and the estimated net realizable value using assumptions about future
demand for its products and market conditions. If actual market
conditions are less favorable than those projected by management,
additional inventories reserves may be required. Kronos provides
reserves for tools and supplies inventory based generally on both
historical and expected future usage requirements.
o The Company owns investments in certain companies that are accounted
for either as marketable securities carried at fair value or accounted
for under the equity method. For all of such investments, the Company
records an impairment charge when it believes an investment has
experienced a decline in fair value below its cost basis (for
marketable securities) or below its carrying value (for equity method
investees) that is other than temporary. Future adverse changes in
market conditions or poor operating results of underlying investments
could result in losses or an inability to recover the carrying value
of the investments that may not be reflected in an investment's
current carrying value, thereby possibly requiring an impairment
charge in the future.
At December 31, 2005, the carrying value (which equals their fair
value) of substantially all of the Company's marketable securities
equaled or exceeded the cost basis of each of such investments. With
respect to the Company's investment in The Amalgamated Sugar Company
LLC, which represents approximately 92% of the aggregate carrying
value of all of the Company's marketable securities at December 31,
2005, the $250 million carrying value of such investment is the same
as its cost basis. At December 31, 2005, the $63.26 per share quoted
market price of the Company's investment in TIMET (the only one of the
Company's equity method investees for which quoted market prices are
available) was more than six times the Company's per share net
carrying value of its investment in TIMET.
o The Company recognizes an impairment charge associated with its
long-lived assets, including property and equipment, goodwill and
other intangible assets, whenever it determines that recovery of such
long-lived asset is not probable. Such determination is made in
accordance with the applicable GAAP requirements associated with the
long-lived asset, and is based upon, among other things, estimates of
the amount of future net cash flows to be generated by the long-lived
asset and estimates of the current fair value of the asset. Adverse
changes in such estimates of future net cash flows or estimates of
fair value could result in an inability to recover the carrying value
of the long-lived asset, thereby possibly requiring an impairment
charge to be recognized in the future.
Under applicable GAAP (SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets), property and equipment is not assessed
for impairment unless certain impairment indicators, as defined, are
present. During 2005, impairment indicators were present only with
respect to the property and equipment associated with the Company's
waste management operating segment, which represented approximately 4%
of the Company's consolidated net property and equipment as of
December 31, 2005. Waste Control Specialists completed an impairment
review of its net property and equipment and related net assets as of
December 31, 2005. Such analysis indicated no impairment was present
as the estimated future undiscounted cash flows associated with such
operations exceeded the carrying value of such operation's net assets.
Significant judgment is required in estimating such undiscounted cash
flows. Such estimated cash flows are inherently uncertain, and there
can be no assurance that the future cash flows reflected in these
projections will be achieved.
Under applicable GAAP (SFAS No. 142, Goodwill and other Intangible
Assets), goodwill is required to be reviewed for impairment at least
on an annual basis. Goodwill will also be reviewed for impairment at
other times during each year when impairment indicators, as defined,
are present. As discussed in Note 9 to the Consolidated Financial
Statements, at December 31, 2005 the Company has assigned its goodwill
to three reporting units (as that term is defined in SFAS No. 142).
Goodwill attributable to the chemicals operating segment was assigned
to the reporting unit consisting of Kronos in total. Goodwill
attributable to the component products operating segment was assigned
to two reporting units within that operating segment, one consisting
of CompX's security products operations and one consisting of CompX's
Michigan, Canadian and Taiwanese operations. No goodwill impairments
were deemed to exist as a result of the Company's annual impairment
review completed during the third quarter of 2005, as the estimated
fair value of each such reporting unit exceeded the net carrying value
of the respective reporting unit. The estimated fair values of the two
CompX reporting units are determined based on discounted cash flow
projections, and the estimated fair value of the Kronos reporting unit
is based upon the quoted market price for Kronos' common stock, as
appropriately adjusted for a control premium. Significant judgment is
required in estimating the discounted cash flows for the CompX
reporting units. Such estimated cash flows are inherently uncertain,
and there can be no assurance that CompX will achieve the future cash
flows reflected in its projections.
As discussed in Note 22 to the Consolidated Financial Statement, the
Company did recognize a $6.5 million goodwill impairment with respect
to CompX's European operations in the fourth quarter of 2004,
following CompX's decision to dispose of those assets. The disposal of
such operations was completed in January 2005, and therefore the
Company no longer reports any goodwill attributable to such operations
at December 31, 2005.
o The Company maintains various defined benefit pension plans and
postretirement benefits other than pensions ("OPEB"). The amounts
recognized as defined benefit pension and OPEB expenses, and the
reported amounts of prepaid and accrued pension costs and accrued OPEB
costs, are actuarially determined based on several assumptions,
including discount rates, expected rates of returns on plan assets and
expected health care trend rates. Variances from these actuarially
assumed rates will result in increases or decreases, as applicable, in
the recognized pension and OPEB obligations, pension and OPEB expenses
and funding requirements. These assumptions are more fully described
below under "--Assumptions on defined benefit pension plans and OPEB
plans."
o The Company records a valuation allowance to reduce its deferred
income tax assets to the amount that is believed to be realized under
the "more-likely-than-not" recognition criteria. While the Company has
considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation allowance,
it is possible that in the future the Company may change its estimate
of the amount of the deferred income tax assets that would
"more-likely-than-not" be realized in the future, resulting in an
adjustment to the deferred income tax asset valuation allowance that
would either increase or decrease, as applicable, reported net income
in the period such change in estimate was made. For example, Kronos
has substantial net operating loss carryforwards in Germany (the
equivalent of $593 million for German corporate purposes and $104
million for German trade tax purposes at December 31, 2005). During
2004 the Company concluded that the more-likely-than-not recognition
criteria had been met with respect to the income tax benefit
associated with Kronos' German net operating loss carryforwards in
Germany. Prior to the complete utilization of such carryforwards, it
is possible that the Company might conclude in the future that the
benefit of such carryforwards would no longer meet the
more-likely-than-not recognition criteria, at which point the Company
would be required to recognize a valuation allowance against the
then-remaining tax benefit associated with the carryforwards.
In addition, the Company makes an evaluation at the end of each
reporting period as to whether or not some or all of the undistributed
earnings of its foreign subsidiaries are permanently reinvested (as
that term is defined in GAAP). While the Company may have concluded in
the past that some of such undistributed earnings are permanently
reinvested, facts and circumstances can change in the future, and it
is possible that a change in facts and circumstances, such as a change
in the expectation regarding the capital needs of its foreign
subsidiaries, could result in a conclusion that some or all of such
undistributed earnings are no longer permanently reinvested. In such
an event, the Company would be required to recognize a deferred income
tax liability in an amount equal to the estimated incremental U.S.
income tax and withholding tax liability that would be generated if
all of such previously-considered permanently reinvested undistributed
earnings were distributed to the U.S. In this regard, during 2005
CompX determined that certain of the undistributed earnings of its
non-U.S. operations could no longer be considered permanently
reinvested, and in accordance with GAAP CompX recognized an aggregate
$9.0 million provision for deferred income taxes on such undistributed
earnings of its foreign subsidiaries. See Note 15 to the Consolidated
Financial Statements.
o The Company records accruals for environmental, legal, income tax and
other contingencies and commitments when estimated future expenditures
associated with such contingencies become probable, and the amounts
can be reasonably estimated. However, new information may become
available, or circumstances (such as applicable laws and regulations)
may change, thereby resulting in an increase or decrease in the amount
required to be accrued for such matters (and therefore a decrease or
increase in reported net income in the period of such change).
Operating income for each of the Company's three operating segments are
impacted by certain of these significant judgments and estimates, as summarized
below:
o Chemicals - allowance for doubtful accounts, reserves for obsolete or
unmarketable inventories, impairment of equity method investees,
goodwill and other long-lived assets, defined benefit pension and OPEB
plans and loss accruals.
o Component products - allowance for doubtful accounts, reserves for
obsolete or unmarketable inventories, impairment of long-lived assets
and loss accruals.
o Waste management - allowance for doubtful accounts, impairment of
long-lived assets and loss accruals.
In addition, general corporate and other items are impacted by the significant
judgments and estimates for impairment of marketable securities and equity
method investees, defined benefit pension and OPEB plans, deferred income tax
asset valuation allowances and loss accruals.
Chemicals - Kronos
Relative changes in Kronos' TiO2 sales and operating income during the past
three years are primarily due to (i) relative changes in TiO2 sales and
production volumes, (ii) relative changes in TiO2 average selling prices and
(iii) relative changes in foreign currency exchange rates. Selling prices (in
billing currencies) for TiO2, Kronos' principal product, were generally:
increasing during the first quarter of 2003, flat during the second quarter of
2003, decreasing during the last half of 2003 and the first quarter of 2004,
flat during the second quarter of 2004, increasing in the last half of 2004 and
the first six months of 2005 and decreasing during the second half of 2005.
Years ended December 31, % Change
----------------------------------------- ----------------------
2003 2004 2005 2003-04 2004-05
---- ---- ---- --------- --------
(In $ millions, except selling price data)
Net sales $1,008.2 $1,128.6 $1,196.7 +12% +6%
Operating income 122.3 103.5 164.9 -15% +59%
Operating income margin 12% 9% 14%
TiO2 operating statistics:
Sales volumes* 462 500 478 +8% -4%
Production volumes* 476 484 492 +2% +2%
Production rate as
percent of capacity Full Full 99%
Average selling prices
index (1990=100) $ 84 $ 82 $ 89 -2% +8%
Percent change in Ti02 average selling prices:
Using actual foreign currency exchange rates +4% +9%
Impact of changes in foreign exchange rates - 6% - 1%
--- ---
In billing currencies - 2% + 8%
=== ===
* Thousands of metric tons
Kronos' sales increased $68.1 million (6%) in 2005 as compared to 2004 due
primarily to the net effects of higher average TiO2 selling prices, lower TiO2
sales volumes and the favorable effect of fluctuations in foreign currency
exchange rates, which increased chemicals sales by approximately $16 million as
further discussed below. Excluding the effect of fluctuations in the value of
the U.S. dollar relative to other currencies, Kronos' average TiO2 selling
prices in billing currencies in 2005 were 8% higher as compared to 2004. When
translated from billing currencies to U.S. dollars using actual foreign currency
exchange rates prevailing during the respective periods, Kronos' average TiO2
selling prices in 2005 increased 9%.
Kronos' sales increased $120.4 million (12%) in 2004 as compared to 2003 as
the favorable effect of fluctuations in foreign currency exchange rates, which
increased chemicals sales by approximately $60 million as further discussed
below, and higher sales volumes more than offset the impact of lower average
TiO2 selling prices. Excluding the effect of fluctuations in the value of the
U.S. dollar relative to other currencies, Kronos' average TiO2 selling prices in
billing currencies were 2% lower in 2004 as compared to 2003. When translated
from billing currencies into U.S. dollars using actual foreign currency exchange
rates prevailing during the respective periods, Kronos' average TiO2 selling
prices in 2004 increased 4% in 2004 as compared to 2003.
Kronos' sales are denominated in various currencies, including the U.S.
dollar, the euro, other major European currencies and the Canadian dollar. The
disclosure of the percentage change in Kronos' average TiO2 selling prices in
billing currencies (which excludes the effects of fluctuations in the value of
the U.S. dollar relative to other currencies) is considered a "non-GAAP"
financial measure under regulations of the SEC. The disclosure of the percentage
change in Kronos' average TiO2 selling prices using actual foreign currency
exchange rates prevailing during the respective periods is considered the most
directly comparable financial measure presented in accordance with GAAP ("GAAP
measure"). Kronos discloses percentage changes in its average TiO2 prices in
billing currencies because Kronos believes such disclosure provides useful
information to investors to allow them to analyze such changes without the
impact of changes in foreign currency exchange rates, thereby facilitating
period-to-period comparisons of the relative changes in average selling prices
in the actual various billing currencies. Generally, when the U.S. dollar either
strengthens or weakens against other currencies, the percentage change in
average selling prices in billing currencies will be higher or lower,
respectively, than such percentage changes would be using actual exchange rates
prevailing during the respective periods. The difference between the 4% and 9%
increases in Kronos' average TiO2 selling prices during 2004 and 2005,
respectively, as compared to the respective prior year using actual foreign
currency exchange rates prevailing during the respective periods (the GAAP
measure), and the 2% decrease and the 8% increase in Kronos' average TiO2
selling prices in billing currencies (the non-GAAP measure) during such periods
is due to the effect of changes in foreign currency exchange rates. The above
table presents (i) the percentage change in Kronos' average TiO2 selling prices
using actual foreign currency exchange rates prevailing during the respective
periods (the GAAP measure), (ii) the percentage change in Kronos' average TiO2
selling prices in billing currencies (the non-GAAP measure) and (iii) the
percentage change due to changes in foreign currency exchange rates (or the
reconciling item between the non-GAAP measure and the GAAP measure).
Chemicals operating income in 2004 includes $6.3 million of income related
to the settlement of a contract dispute with a customer. The $6.3 million gain
recognized represents the present value of the future payments to be paid by the
customer to Kronos. The dispute with the customer concerned the customer's
alleged past failure to purchase the required amount of TiO2 from Kronos under
the terms of Kronos' contract with the customer. See Note 12 to the Consolidated
Financial Statements.
Kronos' operating income increased $61.4 million (59%) in 2005 as compared
to 2004 as the favorable effect of the higher average Ti02 selling prices and
higher TiO2 production volumes more than offset the impact of lower TiO2 sales
volumes, higher raw material and maintenance costs and the $6.3 million gain
recognized in 2004 discussed above. TiO2 sales volumes in 2005 decreased 4% as
compared to 2004, with volumes lower in all regions of the world. Approximately
one-half of Kronos' 2005 TiO2 sales volumes were attributable to markets in
Europe, with 38% attributable to North America and the balance to export
markets. Kronos estimates that overall worldwide demand for TiO2 in 2005
declined by approximately 5% from the exceptionally strong demand levels in
2004. Kronos attributes the decline in overall sales and its own sales to slower
overall economic growth in 2005 and inventory destocking by its customers.
Kronos' TiO2 production volumes in 2005 increased 2% as compared to 2004,
setting a new TiO2 production volume record for Kronos for the fourth
consecutive year. Kronos' operating rates were near full capacity in both
periods.
Kronos' operating income decreased $18.8 million (15%) in 2004 as compared
to 2003, as the effect of lower average TiO2 selling prices and higher raw
material and maintenance costs more than offset the impact of higher sales and
production volumes and the income from the contract dispute settlement. Kronos'
TiO2 sales volumes in 2004 increased 8% compared to 2003, as higher volumes in
European and export markets more than offset lower volumes in Canada. Demand for
TiO2 remained strong throughout 2004, and while Kronos believes that the strong
demand was largely attributable to the end-use demand of its customers, it is
possible that some portion of the strong demand resulted from customers
increasing their inventory levels of TiO2 in advance of implementation of
announced or anticipated price increases. Kronos' operating income comparisons
were also favorably impacted by higher production levels, which increased 2% in
2004 as compared to 2003. Kronos' operating rates were near full capacity in
both periods.
Kronos has substantial operations and assets located outside the United
States (primarily in Germany, Belgium, Norway and Canada). A significant amount
of Kronos' sales generated from its non-U.S. operations are denominated in
currencies other than the U.S. dollar, principally the euro, other major
European currencies and the Canadian dollar. A portion of Kronos' sales
generated from its non-U.S. operations are denominated in the U.S. dollar.
Certain raw materials, primarily titanium-containing feedstocks, are purchased
in U.S. dollars, while labor and other production costs are denominated
primarily in local currencies. Consequently, the translated U.S. dollar value of
Kronos' foreign sales and operating results are subject to currency exchange
rate fluctuations which may favorably or adversely impact reported earnings and
may affect the comparability of period-to-period operating results. Overall,
fluctuations in the value of the U.S. dollar relative to other currencies,
primarily the euro, increased TiO2 sales by a net $16 million in 2005 as
compared to 2004, and increased sales by a net $60 million in 2004 as compared
to 2003. Fluctuations in the value of the U.S. dollar relative to other
currencies similarly impacted Kronos' foreign currency-denominated operating
expenses. Kronos' operating costs that are not denominated in the U.S. dollar,
when translated into U.S. dollars, were higher in 2005 and 2004 as compared to
the same periods of the respective prior years. Overall, currency exchange rate
fluctuations resulted in a net $6 million increase in Kronos' operating income
in each of 2004 and 2005 as compared to the respective prior year.
On September 22, 2005, the chloride-process TiO2 facility operated by
Kronos' 50%-owned joint venture, Louisiana Pigment Company ("LPC"), temporarily
halted production due to Hurricane Rita. Although storm damage to core
processing facilities was not extensive, a variety of factors, including loss of
utilities, limited access and availability of employees and raw materials,
prevented the resumption of partial operations until October 9, 2005 and full
operations until late 2005. The joint venture expects the majority of its
property damage and unabsorbed fixed costs for periods in which normal
production levels were not achieved will be covered by insurance, and Kronos
believes insurance will cover its lost profits (subject to applicable
deductibles) resulting from its share of the lost production from LPC. Insurance
proceeds from the lost profit for product that Kronos was not able to sell as a
result of the loss of production from LPC are expected to be recognized by
Kronos during 2006, although the amount and timing of such insurance recoveries
is not presently determinable. The effect on Kronos' financial results will
depend on the timing and amount of insurance recoveries.
Kronos' efforts to debottleneck its production facilities to meet long-term
demand continue to prove successful. Such debottlenecking efforts included,
among other things, the addition of finishing capacity in the German facility
and equipment upgrades and enhancements in several locations to allow for
reduced downtime for maintenance activities. Kronos' production capacity has
increased by approximately 30% over the past ten years due to debottlenecking
programs, with only moderate capital expenditures. Kronos believes its annual
attainable production capacity for 2006 is approximately 510,000 metric tons,
with some slight additional capacity expected to be available in 2007 through
its continued debottlenecking efforts.
Kronos expects its operating income in 2006 will be somewhat lower than
2005, as the favorable effect of anticipated modest improvements in sales
volumes and average TiO2 selling prices are expected to be more than offset by
the effect of higher production costs, particularly raw material and energy
costs. Kronos' expectations as to the future prospects of Kronos and the TiO2
industry are based upon a number of factors beyond Kronos' control, including
worldwide growth of gross domestic product, competition in the marketplace,
unexpected or earlier-than-expected capacity additions and technological
advances. If actual developments differ from Kronos' expectations, Kronos'
results of operations could be unfavorably affected.
Chemicals operating income, as presented above, is stated net of
amortization of Valhi's purchase accounting adjustments made in conjunction with
its acquisitions of its interest in NL and Kronos. Such adjustments result in
additional depreciation and amortization expense beyond amounts separately
reported by Kronos. Such additional non-cash expenses reduced chemicals
operating income, as reported by Valhi, by $15.0 million in 2003, $16.2 million
in 2004 and $16.6 million in 2005 as compared to amounts separately reported by
Kronos. Changes in the aggregate amount of purchase accounting adjustment
amortization during the past three years are due primarily to the effect of
relative changes in foreign currency exchange rates.
Component products - CompX
Years ended December 31, % Change
-------------------------------------- ----------------------
2003 2004 2005 2003-04 2004-05
---- ---- ----- ------- --------
(In millions)
Net sales $173.9 $182.6 $186.3 +5% +2%
Operating income 9.1 16.2 19.3 +80% +18%
Operating income margin 5% 9% 10%
Component product sales were higher in 2005 as compared to 2004 principally
due to increases in selling prices for certain products across all segments to
recover volatile raw material prices, sales volume associated with a business
acquired in 2005 and the net effect of fluctuations in currency exchange rates,
which increased sales by $1.5 million, as discussed below, partially offset by
sales volume decreases for certain products resulting from Asian competition.
During 2005, sales of security products (including sales of the business
acquired in 2005) increased 6% as compared to 2004, while sales of precision
slide and ergonomic products decreased 1% and 2%, respectively. The percentage
changes in slide and ergonomic products include the impact resulting from
changes in foreign currency exchange rates. Sales of security products are
generally denominated in U.S. dollars.
Component products sales were higher in 2004 as compared to 2003 due in
part to the favorable effect of fluctuations in foreign currency exchange rates,
which increased component products sales by $2.5 million in 2004 as compared to
2003, as discussed below. Component products sales comparisons were also
impacted by increases in product prices for precision slides and ergonomic
products which were primarily a pass through of raw material steel cost
increases to customers. During 2004, sales of slide products increased 13% as
compared to 2003, while sales of security products decreased less than 1% and
sales of ergonomic products increased 1% during the same period.
Component products operating income increased in 2005 as compared to 2004
as the favorable impact of continued reductions in manufacturing, fixed overhead
and other overhead costs more than offset the negative impact of changes in
foreign currency exchange rates, as discussed below, and higher raw material
costs.
Component products operating income comparisons in 2004 were favorably
impacted by the effect of certain cost reduction initiatives undertaken in 2003.
Component products segment profit comparisons were also impacted by the net
effects of increases in the cost of steel (the primary raw material for CompX's
products) and continued reductions in manufacturing, fixed overhead and other
overhead costs.
CompX has substantial operations and assets located outside the United
States in Canada and Taiwan. A portion of CompX's sales generated from its
non-U.S. operations are denominated in currencies other than the U.S. dollar,
principally the Canadian dollar and the New Taiwan dollar. In addition, a
portion of CompX's sales generated from its non-U.S. operations are denominated
in the U.S. dollar. Most raw materials, labor and other production costs for
such non-U.S. operations are denominated primarily in local currencies.
Consequently, the translated U.S. dollar values of CompX's foreign sales and
operating results are subject to currency exchange rate fluctuations which may
favorably or unfavorably impact reported earnings and may affect comparability
of period-to-period operating results. During 2005, currency exchange rate
fluctuations positively impacted the Company's sales comparisons with 2004 as
discussed above, and negatively impacted component products operating income
comparisons for the same periods by approximately $2.3 million. During 2004,
currency exchange rate fluctuations positively impacted component products sales
comparisons with 2003 as discussed above, while currency exchange rate
fluctuations did not significantly impact component products operating income
comparisons for the same periods.
While demand has stabilized across most of CompX's product segments,
certain customers are seeking lower-priced Asian sources as alternatives to
CompX's products. CompX believes the impact of this will be mitigated through
its ongoing initiatives to expand both new products and new market
opportunities. Asian-sourced competitive pricing pressures are expected to
continue to be a challenge. CompX's strategy in responding to the competitive
pricing pressure has included reducing production cost through product
reengineering, improvement in manufacturing processes or moving production to
lower-cost facilities, including CompX's Asian-based manufacturing facilities.
CompX has also emphasized and focused on opportunities where it can provide
value-added customer support services that Asian-based manufacturers are
generally unable to provide. CompX believes its combination of cost control
initiatives together with its value-added approach to development and marketing
of products helps to mitigate the impact of competitive pricing pressures.
CompX will continue to focus on cost improvement initiatives, utilizing
lean manufacturing techniques and prudent balance sheet management in order to
minimize the impact of lower sales, particularly to the office furniture
industry, and to develop value-added customer relationships with an additional
focus on sales of CompX's higher-margin ergonomic computer support systems and
security products to improve operating results. In addition, CompX continues to
develop sources for lower cost components for certain product lines to
strengthen its ability to meet competitive pricing when practical. These
actions, along with other activities to eliminate excess capacity, are designed
to position CompX to expand more effectively on both new product and new market
opportunities to improve CompX's profitability.
Waste management - Waste Control Specialists
Years ended December 31,
----------------------------------------
2003 2004 2005
------- ------ -------
(In millions)
Net sales $ 4.1 $ 8.9 $ 9.8
Operating loss (11.5) (10.2) (12.1)
Waste management sales increased in 2005 as compared to 2004, but its
operating loss also increased, as higher operating costs more than offset the
effect of higher utilization of certain waste management services. Waste Control
Specialists also continues to explore opportunities to obtain certain types of
new business (including disposal and storage of certain types of waste) that, if
obtained, could help to further increase its sales, and decrease its operating
loss, in 2006.
Waste management sales increased, and its operating loss declined, in 2004
as compared to 2003 due to higher utilization of waste management services,
offset in part by higher expenses associated with the additional staffing and
consulting requirements related to licensing efforts to expand low-level and
mixed radioactive waste storage and disposal capabilities.
Waste Control Specialists currently has permits which allow it to treat,
store and dispose of a broad range of hazardous and toxic wastes, and to treat
and store a broad range of low-level and mixed low-level radioactive wastes.
Certain sectors of the waste management industry are experiencing a relative
improvement in the number of environmental remediation projects generating
wastes. However, efforts on the part of generators to reduce the volume of waste
and/or manage waste onsite at their facilities may result in weaker demand for
Waste Control Specialists' waste management services. Although Waste Control
Specialists believes demand appears to be improving, there is continuing price
pressure for waste management services. While Waste Control Specialists believes
its broad range of authorizations for the treatment and storage of low-level and
mixed low-level radioactive waste streams provides certain competitive
advantages, a key element of Waste Control Specialists' long-term strategy to
provide "one-stop shopping" for hazardous, low-level and mixed low-level
radioactive wastes includes obtaining additional regulatory authorizations for
the disposal of low-level and mixed low-level radioactive wastes.
Prior to June 2003, the state law in Texas (where Waste Control
Specialists' disposal facility is located) prohibited the applicable Texas
regulatory agency from issuing a license for the disposal of a broad range of
low-level and mixed low-level radioactive waste to a private enterprise
operating a disposal facility in Texas. In June 2003, a new Texas state law was
enacted that allows the Texas Commission on Environmental Quality ("TCEQ") to
issue a low-level radioactive waste disposal license to a private entity, such
as Waste Control Specialists. Waste Control Specialists has applied for such a
disposal license with the TCEQ, and Waste Control Specialists was the only
entity to submit an application for such a disposal license. The application was
declared administratively complete by the TCEQ in February 2005. The
regulatorially required merit review has been completed, and the TCEQ began its
technical review of the application in May 2005. The length of time that it will
take to complete the review and act upon the license application is uncertain,
although Waste Control Specialists does not currently expect the agency will
issue any final decision on the license application before late 2007. There can
be no assurance that Waste Control Specialists will be successful in obtaining
any such license.
Waste Control Specialists applied to the Texas Department of State Health
Services ("TDSHS") for a license to dispose of byproduct 11.e(2) waste material
in June 2004. Waste Control Specialists can currently treat and store byproduct
material, but may not dispose of it. The length of time that TDSHS will take to
review and act upon the license application is uncertain, but Waste Control
Specialists currently expects the TDSHS will issue a final decision on the
license application sometime during 2006. There can be no assurance that Waste
Control Specialists will be successful in obtaining any such license.
Waste Control Specialists is continuing its efforts to increase its sales
volumes from waste streams that conform to authorizations it currently has in
place. Waste Control Specialists is also continuing to identify certain waste
streams, and attempting to obtain modifications to its current permits, that
would allow for treatment, storage and disposal of additional types of wastes.
The ability of Waste Control Specialists to achieve increased sales volumes of
these waste streams, together with improved operating efficiencies through
further cost reductions and increased capacity utilization, are important
factors in Waste Control Specialists' ability to achieve improved cash flows.
The Company currently believes Waste Control Specialists can become a viable,
profitable operation, even if Waste Control Specialists is unsuccessful in
obtaining a license for the disposal of a broad range of low-level and mixed
low-level radioactive wastes. However, there can be no assurance that Waste
Control Specialists' efforts will prove successful in improving its cash flows.
Valhi has in the past, and may in the future, consider strategic alternatives
with respect to Waste Control Specialists. There can be no assurance that the
Company would not report a loss with respect to any such strategic transaction.
TIMET
Years ended December 31,
---------------------------------------
2003 2004 2005
------- -------- ------
(Restated) (Restated)
(In millions)
TIMET historical:
Net sales $385.3 $501.8 $749.8
====== ====== ======
Operating income (loss):
Boeing take-or-pay income $ 23.1 $ 22.1 $ 17.1
Tungsten accrual adjustment 1.7 - -
Contract termination charge (6.8) - -
Other, net (24.0) 21.0 154.0
------ ------ ------
(6.0) 43.1 171.1
Gain on sale of land - - 13.9
Gain on exchange of convertible
preferred securities - 15.5 -
Other general corporate, net (.3) .7 4.3
Interest expense (16.4) (12.5) (4.0)
------ ------ ------
(22.7) 46.8 185.3
Income tax benefit (expense) (1.2) 2.1 (24.5)
Minority interest (.4) (1.2) (4.9)
Dividends on preferred stock - (4.4) (12.2)
------ ------ ------
Income (loss) before cumulative effect
of change in accounting principle
attributable to common stock $(24.3) $ 43.3 $143.7
====== ====== ======
Equity in earnings (losses) of TIMET $ (2.3) $ 22.7 $ 64.9
====== ====== ======
The Company accounts for its interest in TIMET by the equity method. The
Company's equity in earnings of TIMET differs from the amounts that would be
expected by applying Tremont's ownership percentage to TIMET's
separately-reported earnings because of the effect of amortization of purchase
accounting adjustments made by the Company in conjunction with the Company's
acquisitions of its interests in TIMET. Amortization of such basis differences
generally increases earnings (or reduces losses) attributable to TIMET as
reported by the Company, and such increases aggregated $7.0 million in 2003,
$5.0 million in 2004 and $4.2 million in 2005.
In 2003, TIMET effected a reverse split of its common stock at a ratio of
one share of post-split common stock for each outstanding ten shares of
pre-split common stock, in 2004 TIMET effected a 5:1 split of its common stock,
in 2005 TIMET effected another 2:1 split of its common stock. Such stock splits
had no financial statement impact to the Company, and the Company's ownership
interest in TIMET did not change as a result of such splits. The per share
disclosures related to TIMET discussed herein have been adjusted to give effect
to such splits.
TIMET reported higher sales and operating income in 2005 as compared to
2004 due in part to higher sales volumes and average selling prices. TIMET's
average selling prices for melted products (ingot and slab) increased 48% in
2005 as compared to 2004, while average selling prices for mill products
increased 30%. TIMET's melted product average selling prices in 2005 were
positively affected by current market conditions and changes in customer and
product mix, while mill product average selling prices were positively affected
by changes in customer and product mix and by the weakening of the U.S. dollar
compared to both the British pound sterling and the euro. TIMET's sales volumes
of mill products increased 11% in 2005 as compared to 2004, while volumes of
melted products were 6% higher as a result of increased demand across all market
segments, especially commercial aerospace. Large commercial aircraft deliveries
increased from 600 in 2004 to 650 in 2005, and 2006 deliveries are expected to
be 840 aircraft. As previously discussed, a substantial portion of TIMET's
business is tied to the commercial aerospace industry, and sales of titanium
generally precede aircraft deliveries by about one year. Therefore, TIMET's
sales in 2005 were significantly benefited from the increase in production of
large commercial aircraft scheduled for delivery in 2006.
TIMET's operating results comparisons were favorably impacted in 2005 by
improved plant operating rates, which increased from 73% in 2004 to 80% in 2005,
and higher gross margin from the sale of titanium scrap (which TIMET can not
economically recycle) and other non-mill products. In addition, TIMET's
operating results comparisons were negatively impacted by higher costs for raw
materials, energy and accruals for certain performance-based employee incentive
compensation and a $1.2 million noncash impairment charge in the first quarter
of 2005 related to certain abandoned manufacturing equipment of TIMET.
TIMET reported higher sales in 2004 as compared to 2003, and operating
income improved from a $6.0 million loss in 2003 to $43.1 million of income in
2004, in part due to the net effects of a 28% increase in sales volumes of mill
products, a 13% increase in sales volumes of melted products (ingot and slab)
and an 11% increase in melted product average selling prices. TIMET's mill
product average selling prices were positively affected by the weakening of the
U.S. dollar compared to the British pound sterling and the euro, and were
negatively impacted by changes in customer and product mix. The increase in
sales volumes for mill and melted products is principally the result of greater
market demands and share gains. As discussed above, a substantial portion of
TIMET's business is derived from the commercial aerospace industry, and sales of
titanium to that market sector generally precede aircraft deliveries by about
one year. Therefore, TIMET's 2004 sales benefited significantly from the
increase in production of large commercial aircraft scheduled for delivery in
2005.
TIMET's operating results in 2004 includes income in the first quarter of
$1.9 million related to a change in TIMET's vacation policy. TIMET's operating
results comparisons were also favorably impacted by improved plant operating
rates, which increased from 56% in 2003 to 73% in 2004, and TIMET's continued
cost management efforts. TIMET's operating results comparisons were negatively
impacted by higher costs for raw materials (scrap and alloys) and energy.
TIMET's operating results in 2003 include (i) a $6.8 million charge related to
the termination of TIMET's purchase and sale agreement with Wyman-Gordon and
(ii) a $1.7 million reduction in its accrual for a previously-reported product
liability matter. TIMET's operating results in 2004 were also negatively
affected by higher accruals for employee incentive compensation.
During the second quarter of 2005, TIMET recognized a $13.9 million pre-tax
gain ($2.6 million, or $.02 per diluted share, net of income taxes and minority
interest to Valhi) related to the sale of certain real property adjacent to
TIMET's facility in Nevada. In addition, TIMET periodically reviews its deferred
income tax assets to determine if future realization is more likely than not.
During the first quarter of 2005, due to a change in estimate of TIMET's ability
to utilize the benefits of its net operating loss carryforwards, other tax
attributes and deductible temporary differences in the U.S. and the U.K., TIMET
determined that its net deferred income tax assets in such jurisdictions now met
the "more-likely-than-not" recognition criteria. Accordingly, TIMET's income tax
benefit in 2005 includes a $50.2 million benefit ($13.7 million, or $.11 per
diluted share, net of minority interest to Valhi) related to reversal of the
valuation allowances attributable to such deferred income tax assets.
TIMET's provision for income taxes in 2005 includes $4.4 million of
deferred income taxes resulting from the elimination of its minimum pension
liability equity adjustment component of accumulated other comprehensive income
related to its U.S. defined benefit pension plan. In accordance with GAAP, TIMET
did not recognize a deferred income tax benefit related to a portion of the
minimum pension equity adjustment previously recognized, as TIMET had also
recognized a deferred income tax asset valuation related to its U.S. net
operating loss carryforward and other U.S. net deductible temporary differences
during a portion of the periods in which the minimum pension equity adjustment
had previously been recognized. In accordance with GAAP, a portion of such
valuation allowance recognized ($4.4 million) was recognized through TIMET's
pension liability component of other comprehensive income. As discussed above,
during 2005 TIMET concluded recognition of such deferred income tax asset
valuation allowance was no longer required, and in accordance with GAAP the
reversal of all of such valuation allowance was recognized through the provision
for income taxes included in the determination of net income, including the $4.4
million portion of the valuation allowance which was previously recognized
through other comprehensive income. As of December 31, 2005, TIMET was no longer
required to recognize a minimum pension liability related to its U.S. plan, and
TIMET reversed the minimum pension liability previously recognized in other
comprehensive income. After the reversal of such minimum pension liability,
which in accordance with GAAP was recognized on a net-of-tax basis, the $4.4
million amount remained in accumulated other comprehensive income related to the
U.S. minimum pension liability, which in accordance with GAAP is required to be
recognized in the provision for income taxes during the period in which the
minimum pension liability is no longer required to be recognized.
In August 2004, TIMET completed an exchange offer in which approximately
3.9 million shares of the outstanding convertible preferred debt securities
issued by TIMET Capital Trust I (a wholly-owned subsidiary of TIMET) were
exchanged for an aggregate of 3.9 million shares of a newly-created Series A
Preferred Stock of TIMET at the exchange rate of one share of Series A Preferred
Stock for each convertible preferred debt security. TIMET recognized a non-cash
pre-tax gain of $15.5 million related to such exchange. The exchange of the
convertible preferred debt securities for a new issue of TIMET preferred stock
resulted in TIMET reporting lower interest expense subsequent to the August 2004
exchange, although the effect on TIMET's income attributable to common stock of
lower interest expense will be substantially offset by dividends accruing on the
preferred stock.
Effective July 1, 2005, TIMET entered into a new long-term agreement with
Boeing for the purchase and sale of titanium products. The new agreement expires
on December 31, 2010 and provides for, among other things, (i) mutual annual
purchase and supply commitments by both parties, (ii) continuation of the
existing buffer inventory program currently in place for Boeing and (iii)
certain improved product pricing, including certain adjustments for raw material
cost fluctuations. The new agreement also replaces, beginning in 2006, the
take-or-pay provisions of the previous agreement discussed below with an annual
makeup payment early in the following year in the event Boeing purchases less
than its annual volume commitment in any year. Under TIMET's prior long-term
agreement with Boeing, Boeing advanced TIMET $28.5 million annually for each of
2003, 2004 and 2005 at the beginning of the year, and Boeing forfeited a
proportionate part of the such annual advance, or effectively $3.80 per pound,
to the extent that its orders for delivery for such calendar year were less than
7.5 million pounds. TIMET was only required, however, to deliver up to 3 million
pounds per quarter. Based on TIMET's actual deliveries to Boeing of
approximately 1.4 million pounds during 2003, 1.7 million pounds during 2004 and
3.0 million pounds during 2005, TIMET recognized income of $23.1 million in
2003, $22.1 million in 2004 and $17.1 million in 2005 related to the take-or-pay
provisions of the contract. These earnings related to the take-or-pay provisions
distort TIMET's operating income percentages as there is no corresponding amount
reported in TIMET's sales.
TIMET's effective income tax rate in 2003 and 2004 varies from the 35% U.S.
federal statutory income tax rate primarily because TIMET concluded it was not
appropriate to recognize an income tax benefit related to its U.S. and U.K.
losses under the "more-likely-than-not" recognition criteria. In addition,
TIMET's provision for income taxes in 2004 includes a $4.2 million income tax
benefit ($1.1 million, or $.01 per diluted share, net of income taxes) related
to the utilization of a capital loss carryforward, the benefit of which had not
been previously recognized by TIMET.
TIMET continues to see the availability of certain raw materials tighten,
and, consequently, the prices for such raw materials increase. TIMET currently
expects that the shortage in certain raw materials is likely to continue
throughout 2006, which could limit TIMET's ability to produce enough titanium
products to fully meet customer demand. In addition, TIMET has certain long-term
customer agreements that will somewhat limit its ability to pass on all of its
increased raw material costs. However, TIMET expects that the impact of higher
average selling prices for melted and mill products in 2006 will more than
offset such increased raw material costs.
TIMET currently expects its 2006 net sales revenue will increase by 35% to
50% from 2005, to between $1.0 billion and $1.1 billion. Mill product sales
volumes, which were 12,660 metric tons in 2005, are expected to range from
14,500 and 15,000 metric tons in 2006, an increase of 15% to 18%. Melted product
sales volumes, which were 5,655 metric tons in 2005, are expected to remain
relatively unchanged in 2006. Melted product average selling prices in 2006 are
expected to increase by 75% to 80%, with mill product prices expected to
increase by 25% to 30%.
TIMET's cost of sales is affected by a number of factors including customer
and product mix, material yields, plant operating rates, raw material costs,
labor costs and energy costs. Raw material costs, which include sponge, scrap
and alloys, represent the largest portion of its cost structure, and as
previously discussed, continued cost increases are expected during 2006. Scrap
and certain alloy prices have continued their upward rise, and increased energy
costs also continue to have a negative impact on gross margin. TIMET currently
expects production volumes to continue to increase in 2006, with overall
capacity utilization expected to approximate 85% to 90% in 2006 (as compared to
80% in 2005). However, practical capacity utilization measures can vary
significantly based on product mix.
Under the terms of TIMET's new long-term agreement with Boeing, TIMET does
not currently expect Boeing will incur a makeup payment for 2006 as TIMET
expects Boeing will purchase at least its minimum specified volumes from TIMET.
TIMET expects its 2006 operating income will increase 50% to 65% over 2005, to
between $257 million and $282 million.
General corporate and other items
General corporate interest and dividend income. General corporate interest
and dividend income in 2005 was higher as compared to the same periods of 2004
due primarily to a higher level of distributions received from The Amalgamated
Sugar Company LLC ("LLC"). A significant portion of the Company's general
corporate interest and dividend income relates to distributions received from
The Amalgamated Sugar Company LLC and interest income on the Company's $80
million loan to Snake River Sugar Company. Dividend income for distributions
from the LLC aggregated $23.7 million in 2003, $23.8 million in 2004 and $45.0
million in 2005, while interest income on the Company's loan to Snake River
aggregated $5.2 million in each of 2003 and 2004 and $3.9 million in 2005. See
Notes 5, 8 and 12 to the Consolidated Financial Statements. In October 2005, the
Company and Snake River Sugar Company amended the Company Agreement of the LLC
pursuant to which, among other things, the LLC is required to make higher
minimum levels of distributions to its members (including the Company) as
compared to levels required under the prior Company Agreement, which would
result in the Company receiving annual distributions from the LLC in aggregate
amounts approximately $25.4 million. In addition, assuming certain specified
conditions are met (which conditions the Company met during the fourth quarter
of 2005 and which are currently expected to be met during 2006), the LLC would
be required to distribute, in addition to the distributions noted in the
preceding sentence, additional amounts that would result in the Company
receiving at least an additional $25 million during the 15-month period ending
December 31, 2006 (with approximately $19 million received in the fourth quarter
of 2005 and the remaining $6 million expected to be paid during 2006). Also in
the fourth quarter of 2005, the Company recognized a $21.6 million charge to
earnings related to the accrued interest on the Company's loan to Snake River
that was forgiven. See Note 8 to the Consolidated Financial Statements.
General corporate interest and dividend income in 2004 was comparable to
2003. Aggregate general corporate interest and dividend income in 2006 is
currently expected to be lower than 2005 due primarily to lower expected
distributions from the LLC, as discussed above.
Insurance recoveries. NL has reached an agreement with a former insurance
carrier in which such carrier would reimburse NL for a portion of its past and
future lead pigment litigation defense costs, although the amount that NL will
ultimately recover from such carrier with respect to such defense costs incurred
by NL is not yet determinable. In addition, during 2005, NL recognized $2.2
million of recoveries from certain insolvent former insurance carriers relating
to settlement of excess insurance claims that were paid to NL.
Insurance recoveries of $823,000 in 2003, $552,000 in 2004 and $804,000 in
2005 relate to NL's settlements with certain of its former insurance carriers.
These settlements, as well as similar prior settlements NL reached prior to
2003, resolved court proceedings in which NL had sought reimbursement from the
carriers for legal defense costs and indemnity coverage for certain of its
environmental remediation expenditures. No further material settlements relating
to litigation concerning environmental remediation coverages are expected. See
Note 12 to the Consolidated Financial Statements.
While NL continues to seek additional insurance recoveries, there can be no
assurance that NL will be successful in obtaining reimbursement for either
defense costs or indemnity. NL has not considered any potential insurance
recoveries in determining related accruals for lead pigment litigation matters.
Any such additional insurance recoveries would be recognized when their receipt
is deemed probable and the amount is determinable.
Securities transactions. Net securities transactions gains in 2005 relate
principally to a $14.7 million pre-tax gain ($6.6 million, or $.05 per diluted
share, net of income taxes and minority interest) related to NL's sale of shares
of Kronos common stock in market transaction and (ii) a $5.4 million gain ($3.1
million, or $.03 per diluted share, net of income taxes and minority interest)
related to Kronos' sale of its passive interest in a Norwegian smelting
operation, which had a nominal carrying value for financial reporting purposes.
See Notes 2 and 8 to the Consolidated Financial Statements.
Net securities transactions gains in 2004 includes a $2.2 million gain
($1.1 million, or $.01 per diluted share, net of income taxes and minority
interest) related to NL's sale of shares of Kronos common stock in market
transactions. Securities transaction gains in 2003 relate principally to a gain
of $316,000 related to NL's receipt of shares of Valhi common stock in exchange
for shares of Tremont common stock held directly or indirectly by NL (such gain
being attributable to NL stockholders other than the Company). See Notes 3 and
12 to the Consolidated Financial Statements.
Other general corporate income items. The gain on disposal of fixed assets
in 2003 relates primarily to the sale of certain real property of NL not
associated with any operations. NL has certain other real property, including
some subject to environmental remediation, which could be sold in the future for
a profit. See Note 12 to the Consolidated Financial Statements.
General corporate expenses. Net general corporate expenses in 2005 were
$5.2 million higher than 2004, due primarily to higher legal expenses of NL. Net
general corporate expenses in 2004 were $36.0 million lower than 2003 due
primarily to lower environmental remediation and legal expenses of NL. Such
environmental and legal expenses are included in selling, general and
administrative expenses.
Net general corporate expenses in calendar 2006 are currently expected to
be higher as compared to calendar 2005, in part due to higher expected
litigation and related expenses of NL. However, obligations for environmental
remediation obligations are difficult to assess and estimate, and no assurance
can be given that actual costs for environmental remediation will not exceed
accrued amounts or that costs will not be incurred in the future with respect to
sites for which no estimate of liability can presently be made. See Note 18 to
the Consolidated Financial Statements.
Interest expense. The Company has a significant amount of indebtedness
denominated in the euro, including KII's euro-denominated Senior Secured Notes
(euro 375 million outstanding at December 31, 2005). Accordingly, the reported
amount of interest expense will vary depending on relative changes in foreign
currency exchange rates. Interest expense in 2005 was higher than 2004 due
primarily to the interest expense associated with the additional euro 90 million
principal amount of Senior Secured Notes issued in November 2004. In addition,
the increase in interest expense was due to relative changes in foreign currency
exchange rates, which increased the U.S. dollar equivalent of interest expense
on the euro 285 million principal amount of KII Senior Secured Notes outstanding
during all of both 2004 and 2005 by approximately $1 million.
Interest expense in 2004 was higher than 2003 due primarily to relative
changes in foreign currency exchange rates, which increased the U.S. dollar
equivalent of interest expense on the euro 285 million principal amount of KII
Senior Secured Notes outstanding during all of both 2003 and 2004 by
approximately $3 million.
Assuming interest rates and foreign currency exchange rates do not increase
significantly from current levels, interest expense in 2006 is expected to be
approximate 2005.
At December 31, 2005, approximately $706 million of consolidated
indebtedness, principally KII's Senior Secured Notes and Valhi's loans from
Snake River Sugar Company, bears interest at fixed interest rates averaging 9.1%
(2004 - $770 million with a weighted average interest rate of 9.1%; 2003 - $607
million with a weighted average fixed interest rate of 9.1%). The weighted
average interest rate on $11 million of outstanding variable rate borrowings at
December 31, 2005 was 7.0% (2004 - 3.8%; 2003 - 3.1%). Relative changes in the
weighted average interest rate on outstanding variable rate borrowings at
December 31, 2003, 2004 and 2005 are due primarily to relative differences in
the mix of such borrowings, with higher relative outstanding borrowings at
December 31, 2004 as compared to December 31, 2003 under the KII European
revolver, for which the interest rate is generally higher than the interest rate
on any outstanding U.S. variable borrowings.
As noted above, KII has a significant amount of indebtedness denominated in
currencies other than the U.S. dollar. See Item 7A, "Quantitative and
Qualitative Disclosures About Market Risk."
Provision for income taxes. The principal reasons for the difference
between the Company's effective income tax rates and the U.S. federal statutory
income tax rates are explained in Note 15 to the Consolidated Financial
Statements.
The Company's income tax expense in 2005 includes the net non-cash effects
of (i) the aggregate favorable effects of recent developments with respect to
certain non-U.S. income tax audits of Kronos, principally in Belgium and Canada,
of $12.5 million ($10.8 million, or $.09 per diluted share, net of minority
interest), (ii) the favorable effect of recent developments with respect to
certain income tax items of NL of $7.4 million ($6.2 million, or $.05 per
diluted share, net of minority interest), (iii) the unfavorable effect with
respect to the loss of certain income tax attributes of Kronos in Germany of
$17.5 million ($15.2 million, or $.13 per diluted share, net of minority
interest) and (iv) the unfavorable effect with respect to a change in CompX's
permanent reinvestment conclusion regarding certain of its non-U.S. subsidiaries
of $9.0 million ($5.1 million, or $.04 per diluted share, net of minority
interest).
At December 31, 2005, Kronos had the equivalent of $593 million and $104
million of income tax loss carryforwards for German corporate and trade tax
purposes, respectively, all of which have no expiration date. As more fully
described in Note 15 to the Consolidated Financial Statements, Kronos had
previously provided a deferred income tax asset valuation allowance against
substantially all of these tax loss carryforwards and other deductible temporary
differences in Germany because Kronos did not believe they met the
"more-likely-than-not" recognition criteria. During the first six months of
2004, Kronos reduced its deferred income tax asset valuation allowance by
approximately $8.7 million, primarily as a result of utilization of these German
net operating loss carryforwards, the benefit of which had not previously been
recognized. At June 30, 2004, after considering all available evidence, Kronos
concluded that these German tax loss carryforwards and other deductible
temporary differences now met the "more-likely-than-not" recognition criteria.
Under applicable GAAP related to accounting for income taxes at interim periods,
a change in estimate at an interim period resulting in a decrease in the
valuation allowance is segregated into two components, the portion related to
the remaining interim periods of the current year and the portion related to all
future years. The portion of the valuation allowance reversal related to the
former is recognized over the remaining interim periods of the current year, and
the portion of the valuation allowance related to the latter is recognized at
the time the change in estimate is made. Accordingly, as of June 30, 2004,
Kronos reversed $268.6 million of the valuation allowance (the portion related
to future years), and Kronos reversed the remaining $3.4 million during the last
six months of 2004. Prior to the complete utilization of such carryforwards, it
is possible that the Company might conclude in the future that the benefit of
such carryforwards would no longer meet the more-likely-than-not recognition
criteria, at which point the Company would be required to recognize a valuation
allowance against the then-remaining tax benefit associated with the
carryforwards.
Also during 2004, NL recognized a second quarter $48.5 million income tax
benefit related to income tax attributes of NL Environmental Management
Services, Inc. ("EMS"), a subsidiary of NL. This income tax benefit resulted
from a settlement agreement reached with the U.S. IRS concerning the IRS'
previously-reported examination of a certain restructuring transaction involving
EMS, and included (i) an $17.4 million tax benefit related to a reduction in the
amount of additional income taxes and interest which NL estimates it will be
required to pay related to this matter as a result of the settlement agreement
and (ii) a $31.1 million tax benefit related to the reversal of a deferred
income tax asset valuation allowance related to certain tax attributes of EMS
(including a U.S. net operating loss carryforward) which NL now believes meet
the "more-likely-than-not" recognition criteria.
In January 2004, the German federal government enacted new tax law
amendments that limit the annual utilization of income tax loss carryforwards
effective January 1, 2004 to 60% of taxable income after the first euro 1
million of taxable income. The new law will have a significant effect on Kronos'
cash tax payments in Germany going forward, the extent of which will be
dependent upon the level of taxable income earned in Germany.
During 2003, NL and Kronos reduced their deferred income tax asset
valuation allowance by an aggregate of approximately $7.2 million, primarily as
a result of utilization of certain income tax attributes for which the benefit
had not previously been recognized. In addition, Kronos recognized a $38.0
million income tax benefit related to the net refund of certain prior year
German income taxes.
As discussed in Note 1 to the Consolidated Financial Statements, the
Company commenced to recognize deferred income taxes with respect to the excess
of the financial reporting carrying amount over the income tax basis of Valhi's
investment in Kronos beginning in December 2003 following NL's pro-data
distribution of shares of Kronos common stock to NL's shareholders, including
Valhi. The aggregate amount of such deferred income taxes included in the
Company's provision for income taxes was $104.0 million in 2003, $83.7 million
in 2004 and $10.4 million in 2005. In addition, the Company's provision for
income taxes in 2003, 2004 and 2005 includes an aggregate $22.5 million, $2.5
million and $664,000, respectively, for the current income tax effect related to
NL's distribution of such shares of Kronos common stock to NL's shareholders
other than Valhi during such periods.
Minority interest. See Note 13 to the Consolidated Financial Statements.
Discontinued operations. See Note 22 to the Consolidated Financial
Statements.
Accounting principles newly adopted in 2003 and 2004. See Note 19 to the
Consolidated Financial Statements.
Accounting principles not yet adopted. See Note 20 to the Consolidated
Financial Statements. Related party transactions. The Company is a party to
certain transactions with related parties. See Note 17 to the Consolidated
Financial Statements. It is the policy of the Company to engage in transactions
with related parties on terms, in the opinion of the Company, no less favorable
to the Company than could be obtained from unrelated parties.
Assumptions on defined benefit pension plans and OPEB plans.
Defined benefit pension plans. The Company maintains various defined
benefit pension plans in the U.S., Europe and Canada. See Note 16 to the
Consolidated Financial Statements. At December 31, 2005, the projected benefit
obligations for all defined benefit plans was comprised of $98 million related
to U.S. plans and $423 million related to non-U.S. plans. Substantially, all of
such projected benefit obligations attributable to non-U.S. plans related to
plans maintained by Kronos, and approximately 49%, 15% and 36% of the projected
benefit obligations attributable to U.S. plans related to plans maintained by
NL, Kronos and Medite Corporation, a former business unit of Valhi ("Medite
plan").
The Company accounts for its defined benefit pension plans using SFAS No.
87, Employer's Accounting for Pensions. Under SFAS No. 87, defined benefit
pension plan expense and prepaid and accrued pension costs are each recognized
based on certain actuarial assumptions, principally the assumed discount rate,
the assumed long-term rate of return on plan assets and the assumed increase in
future compensation levels. The Company recognized consolidated defined benefit
pension plan expense of $9.6 million in 2003, $13.5 million in 2004 and $13.1
million in 2005. The amount of funding requirements for these defined benefit
pension plans is generally based upon applicable regulation (such as ERISA in
the U.S.), and will generally differ from pension expense recognized under SFAS
No. 87 for financial reporting purposes. Contributions made by the Company to
all of its defined benefit pension plans aggregated $14.8 million in 2003, $17.8
million in 2004 and $19.2 million in 2005.
The discount rates the Company utilizes for determining defined benefit
pension expense and the related pension obligations are based on current
interest rates earned on long-term bonds that receive one of the two highest
ratings given by recognized rating agencies in the applicable country where the
defined benefit pension benefits are being paid. In addition, the Company
receives advice about appropriate discount rates from the Company's third-party
actuaries, who may in some cases utilize their own market indices. The discount
rates are adjusted as of each valuation date (September 30th for the Kronos and
NL plans and December 31st for the Medite plan) to reflect then-current interest
rates on such long-term bonds. Such discount rates are used to determine the
actuarial present value of the pension obligations as of December 31st of that
year, and such discount rates are also used to determine the interest component
of defined benefit pension expense for the following year.
Approximately 65%, 14%, 14% and 4% of the projected benefit obligations
attributable to plans maintained by Kronos at December 31, 2005 related to
Kronos plans in Germany, Norway, Canada and the U.S., respectively. The Medite
plan and NL's plans are all in the U.S. The Company uses several different
discount rate assumptions in determining its consolidated defined benefit
pension plan obligations and expense because the Company maintains defined
benefit pension plans in several different countries in North America and Europe
and the interest rate environment differs from country to country.
The Company used the following discount rates for its defined benefit
pension plans:
Discount rates used for:
------------------------------------------------------------------------------------------------
Obligations at Obligations at Obligations at
December 31, 2003 and expense December 31, 2004 and expense December 31, 2005 and
in 2004 in 2005 expense in 2006
------------------------------- -------------------------------- -----------------------------
Kronos and NL plans:
Germany 5.3% 5.0% 4.0%
Norway 5.5% 5.0% 4.5%
Canada 6.3% 6.0% 5.0%
U.S. 5.9% 5.8% 5.5%
Medite plan 6.0% 5.7% 5.5%
The assumed long-term rate return on plan assets represents the estimated
average rate of earnings expected to be earned on the funds invested or to be
invested in the plans' assets provided to fund the benefit payments inherent in
the projected benefit obligations. Unlike the discount rate, which is adjusted
each year based on changes in current long-term interest rates, the assumed
long-term rate of return on plan assets will not necessarily change based upon
the actual, short-term performance of the plan assets in any given year. Defined
benefit pension expense each year is based upon the assumed long-term rate of
return on plan assets for each plan and the actual fair value of the plan assets
as of the beginning of the year. Differences between the expected return on plan
assets for a given year and the actual return are deferred and amortized over
future periods based either upon the expected average remaining service life of
the active plan participants (for plans for which benefits are still being
earned by active employees) or the average remaining life expectancy of the
inactive participants (for plans for which benefits are not still being earned
by active employees).
At December 31, 2005, the fair value of plan assets for all defined benefit
plans was comprised of $112 million related to U.S. plans and $226 million
related to non-U.S. plans. All of such plan assets attributable to non-U.S.
plans related to plans maintained by Kronos, and approximately 46%, 16% and 38%
of the plan assets attributable to U.S. plans related to plans maintained by NL
and Kronos and the Medite plan, respectively. Approximately 51%, 19%, 18% and 7%
of the plan assets attributable to plans maintained by Kronos at December 31,
2005 related to plans in Germany, Norway, Canada and the U.S., respectively. The
Medite plan and NL's plans are all in the U.S. The Company uses several
different long-term rates of return on plan asset assumptions in determining its
consolidated defined benefit pension plan expense because the Company maintains
defined benefit pension plans in several different countries in North America
and Europe, the plan assets in different countries are invested in a different
mix of investments and the long-term rates of return for different investments
differs from country to country.
In determining the expected long-term rate of return on plan asset
assumptions, the Company considers the long-term asset mix (e.g. equity vs.
fixed income) for the assets for each of its plans and the expected long-term
rates of return for such asset components. In addition, the Company receives
advice about appropriate long-term rates of return from the Company's
third-party actuaries. Such assumed asset mixes are summarized below:
o During 2005, substantially all of the Kronos, NL and Medite plan
assets in the U.S. were invested in The Combined Master Retirement
Trust ("CMRT"), a collective investment trust sponsored by Contran to
permit the collective investment by certain master trusts which fund
certain employee benefits plans sponsored by Contran and certain of
its affiliates. Harold Simmons is the sole trustee of the CMRT. The
CMRT's long-term investment objective is to provide a rate of return
exceeding a composite of broad market equity and fixed income indices
(including the S&P 500 and certain Russell indices) utilizing both
third-party investment managers as well as investments directed by Mr.
Simmons. During the 18-year history of the CMRT through December 31,
2005, the average annual rate of return has been approximately 14%
(including a 36% return during 2005). At December 31, 2005, the asset
mix of the CMRT was 86% in U.S. equity securities, 3% in U.S. fixed
income securities, 7% in international equity securities and 4% in
cash and other investments.
o In Germany, the composition of Kronos' plan assets is established to
satisfy the requirements of the German insurance commissioner. The
current plan asset allocation at December 31, 2005 was 23% to equity
managers, 48% to fixed income managers and 29% to real estate.
o In Norway, Kronos currently has a plan asset target allocation of 14%
to equity managers, 64% to fixed income managers and the remainder
primarily to cash and liquid investments. The expected long-term rate
of return for such investments is approximately 8%, 4.5% to 6% and
2.5%, respectively. The plan asset allocation at December 31, 2005 was
16% to equity managers, 62% to fixed income managers and the remainder
primarily to cash and liquid investments.
o In Canada, Kronos currently has a plan asset target allocation of 65%
to equity managers and 35% to fixed income managers, with an expected
long-term rate of return for such investments to average approximately
125 basis points above the applicable equity or fixed income index.
The current plan asset allocation at December 31, 2005 was 64% to
equity managers, 32% to fixed income managers and 4% to other
investments.
The Company regularly reviews its actual asset allocation for each of its plans,
and periodically rebalances the investments in each plan to more accurately
reflect the targeted allocation when considered appropriate.
The assumed long-term rates of return on plan assets used for purposes of
determining net period pension cost for 2003, 2004 and 2005 were as follows:
2003 2004 2005
---- ---- ----
Kronos and NL plans:
Germany 6.5% 6.0% 5.5%
Norway 6.0% 6.0% 5.5%
Canada 7.0% 7.0% 7.0%
U.S. 10.0% 10.0% 10.0%
Medite plan 10.0% 10.0% 10.0%
The Company currently expects to utilize the same long-term rates of return
on plan asset assumptions in 2006 as it used in 2005 for purposes of determining
the 2006 defined benefit pension plan expense.
To the extent that a plan's particular pension benefit formula calculates
the pension benefit in whole or in part based upon future compensation levels,
the projected benefit obligations and the pension expense will be based in part
upon expected increases in future compensation levels. For all of the Company's
plans for which the benefit formula is so calculated, the Company generally
bases the assumed expected increase in future compensation levels based upon
average long-term inflation rates for the applicable country.
In addition to the actuarial assumptions discussed above, because Kronos
maintains defined benefit pension plans outside the U.S., the amount of
recognized defined benefit pension expense and the amount of prepaid and accrued
pension costs will vary based upon relative changes in foreign currency exchange
rates.
As discussed above, assumed discount rates and rate of return on plan
assets are re-evaluated annually. A reduction in the assumed discount rate
generally results in an actuarial loss, as the actuarially-determined present
value of estimated future benefit payments will increase. Conversely, an
increase in the assumed discount rate generally results in an actuarial gain. In
addition, an actual return on plan assets for a given year that is greater than
the assumed return on plan assets results in an actuarial gain, while an actual
return on plan assets that is less than the assumed return results in an
actuarial loss. Other actual outcomes that differ from previous assumptions,
such as individuals living longer or shorter than assumed in mortality tables
which are also used to determine the actuarially-determined present value of
estimated future benefit payments, changes in such mortality table themselves or
plan amendments, will also result in actuarial losses or gains. Under GAAP, all
of such actuarial gains and losses are not recognized in earnings currently, but
instead are deferred and amortized into income in the future as part of net
periodic defined benefit pension cost. However, any actuarial gains generated in
future periods would reduce the negative amortization effect of any cumulative
unrecognized actuarial losses, while any actuarial losses generated in future
periods would reduce the favorable amortization effect of any cumulative
unrecognized actuarial gains.
During 2005, all of the Company's defined benefit pension plans generated a
net actuarial loss of $101.4 million. This actuarial loss, principally related
to Kronos' defined benefit pension plans, resulted primarily from the general
overall reduction in the assumed discount rates as well as the unfavorable
effect of using updated mortality tables (which generally reflect individuals
living longer than prior mortality tables used), partially offset by an actual
return on plan assets in excess of the assumed return.
While actuarial gains and losses are deferred and amortized into income in
future periods, as discussed above, GAAP also requires that a minimum amount of
accrued pension cost be recognized in a statement of financial position for any
plans for which the accumulated benefit obligation is less than the fair value
of plan assets. To the extent GAAP accounting would otherwise result in an
accrued pension cost balance for such plans that was less than the excess of the
aggregate accumulated benefit obligation over the value of the related plan
assets, GAAP then requires that such excess be recognized as a component of the
consolidated accrued pension cost, with the offset to such additional accrued
pension cost (commonly referred to as an "additional minimum liability")
recognized (i) first as an intangible asset up to specified amounts (referred to
as "unrecognized net pension obligations" in the Company's balance sheet and
then (ii) second as part of accumulated other comprehensive income (loss). At
December 31, 2005, and primarily as a result of the aggregate $101.4 million
actuarial loss generated during 2005 as discussed above, the aggregate amount of
the additional minimum liability required to be recognized by Kronos increased
by approximately $87 million at December 31, 2005 as compared to December 31,
2004, resulting in the Company recognized aggregate accrued pension cost
(current and noncurrent) of $153.5 million at December 31, 2005 as compared to
$86.5 million at December 31, 2004.
Based on the actuarial assumptions described above and Kronos' current
expectations for what actual average foreign currency exchange rates will be
during 2006, the Company currently expects aggregate defined benefit pension
expense will approximate $19 million in 2006. In comparison, the Company
currently expects to be required to make approximately $18 million of aggregate
contributions to such plans during 2006.
As noted above, defined benefit pension expense and the amounts recognized
as prepaid and accrued pension costs are based upon the actuarial assumptions
discussed above. The Company believes all of the actuarial assumptions used are
reasonable and appropriate. If Kronos and NL had lowered the assumed discount
rates by 25 basis points for all of their plans as of December 31, 2005, their
aggregate projected benefit obligations would have increased by approximately
$16.5 million at that date, and their aggregate defined benefit pension expense
would be expected to increase by approximately $2 million during 2006.
Similarly, if Kronos and NL lowered the assumed long-term rates of return on
plan assets by 25 basis points for all of their plans, their defined benefit
pension expense would be expected to increase by approximately $700,000 during
2006. Similar assumed changes with respect to the discount rate and expected
long-term rate of return on plan assets for the Medite plan would not be
significant.
OPEB plans. Certain subsidiaries of the Company currently provide certain
health care and life insurance benefits for eligible retired employees. See Note
16 to the Consolidated Financial Statements. At December 31, 2005, approximately
35%, 33% and 31% of the Company's aggregate accrued OPEB costs relate to
Tremont, NL and Kronos, respectively. Kronos provides such OPEB benefits to
retirees in the U.S. and Canada, and NL and Tremont provide such OPEB benefits
to retirees in the U.S. The Company accounts for such OPEB costs under SFAS No.
106, Employers Accounting for Postretirement Benefits other than Pensions. Under
SFAS No. 106, OPEB expense and accrued OPEB costs are based on certain actuarial
assumptions, principally the assumed discount rate and the assumed rate of
increases in future health care costs. The Company recognized consolidated OPEB
expense of $935,000 in 2003, $2 million in 2004 and $1.2 million in 2005.
Similar to defined benefit pension benefits, the amount of funding will differ
from the expense recognized for financial reporting purposes, and contributions
to the plans to cover benefit payments aggregated $5.2 million in 2003, $5.7
million in 2004 and $5.0 million in 2005. Substantially all of the Company's
accrued OPEB costs relates to benefits being paid to current retirees and their
dependents, and no material amount of OPEB benefits are being earned by current
employees. As a result, the amount recognized for OPEB expense for financial
reporting purposes has been, and is expected to continue to be, significantly
less than the amount of OPEB benefit payments made each year. Accordingly, the
amount of accrued OPEB costs has been, and is expected to continue to, decline
gradually.
The assumed discount rates the Company utilizes for determining OPEB
expense and the related accrued OPEB obligations are generally based on the same
discount rates the Company utilizes for its U.S. and Canadian defined benefit
pension plans.
In estimating the health care cost trend rate, the Company considers its
actual health care cost experience, future benefit structures, industry trends
and advice from its third-party actuaries. In certain cases, NL has the right to
pass on to retirees all or a portion of any increases in health care costs.
During each of the past three years, the Company has assumed that the relative
increase in health care costs will generally trend downward over the next
several years, reflecting, among other things, assumed increases in efficiency
in the health care system and industry-wide cost containment initiatives. For
example, at December 31, 2005, the expected rate of increase in future health
care costs ranges from 8.2% to 9.0% in 2006, declining to rates of between 4%
and 5.5% in 2010 and thereafter.
Based on the actuarial assumptions described above and Kronos' current
expectation for what actual average foreign currency exchange rates will be
during 2006, the Company expects its consolidated OPEB expense will approximate
$1.3 million in 2006. In comparison, the Company expects to be required to make
approximately $3.9 million of contributions to such plans during 2006.
As noted above, OPEB expense and the amount recognized as accrued OPEB
costs are based upon the actuarial assumptions discussed above. The Company
believes all of the actuarial assumptions used are reasonable and appropriate.
If the Company had lowered the assumed discount rates by 25 basis points for all
of its OPEB plans as of December 31, 2005, the Company's aggregate projected
benefit obligations would have increased by approximately $1.2 million at that
date, and the Company's OPEB expense would be expected to increase by less than
$100,000 during 2006. Similarly, if the assumed future health care cost trend
rate had been increased by 100 basis points, the Company's accumulated OPEB
obligations would have increased by approximately $2.7 million at December 31,
2005, and OPEB expense would have increased by $221,000 in 2006.
Foreign operations
Kronos. Kronos has substantial operations located outside the United States
(principally Europe and Canada) for which the functional currency is not the
U.S. dollar. As a result, the reported amount of Kronos' assets and liabilities
related to its non-U.S. operations, and therefore the Company's consolidated net
assets, will fluctuate based upon changes in currency exchange rates. At
December 31, 2005, Kronos had substantial net assets denominated in the euro,
Canadian dollar, Norwegian kroner and British pound sterling.
CompX. CompX has substantial operations and assets located outside the
United States, principally slide and/or ergonomic product operations in Canada
and Taiwan.
TIMET. TIMET also has substantial operations and assets located in Europe,
principally in the United Kingdom, France and Italy. The United Kingdom has not
adopted the euro. Approximately 58% of TIMET's European sales was denominated in
the British pound or the euro. Certain purchases of raw materials for TIMET's
European operations, principally titanium sponge and alloys, are denominated in
U.S. dollars while labor and other production costs are primarily denominated in
local currencies. The U.S. dollar value of TIMET's foreign sales and operating
costs are subject to currency exchange rate fluctuations that can impact
reported earnings.
LIQUIDITY AND CAPITAL RESOURCES
Summary
The Company's primary source of liquidity on an ongoing basis is its cash
flows from operating activities, which is generally used to (i) fund capital
expenditures, (ii) repay short-term indebtedness incurred primarily for working
capital purposes and (iii) provide for the payment of dividends (including
dividends paid to Valhi by its subsidiaries). In addition, from time-to-time the
Company will incur indebtedness, generally to (i) fund short-term working
capital needs, (ii) refinance existing indebtedness, (iii) make investments in
marketable and other securities (including the acquisition of securities issued
by subsidiaries and affiliates of the Company) or (iv) fund major capital
expenditures or the acquisition of other assets outside the ordinary course of
business. Also, the Company will from time-to-time sell assets outside the
ordinary course of business, the proceeds of which are generally used to (i)
repay existing indebtedness (including indebtedness which may have been
collateralized by the assets sold), (ii) make investments in marketable and
other securities, (iii) fund major capital expenditures or the acquisition of
other assets outside the ordinary course of business or (iv) pay dividends.
At December 31, 2005, the Company's third-party indebtedness was
substantially comprised of (i) Valhi's $250 million of loans from Snake River
Sugar Company due in 2027, (ii) KII's euro-denominated Senior Secured Notes
(equivalent of $449 million principal amount outstanding) due in 2009 and (iii)
Kronos' U.S. revolving bank credit facility ($11.5 million outstanding) due in
2008. Accordingly, since none of such indebtedness comes due in 2006, the
Company does not currently expect that a significant amount of its cash flows
from operating activities generated during 2006 will be required to be used to
repay indebtedness during 2006.
Based upon the Company's expectations for the industries in which its
subsidiaries and affiliates operate, and the anticipated demands on the
Company's cash resources as discussed herein (including debt refinancing
expectations), the Company expects to have sufficient liquidity to meet its
short-term obligations (defined as the twelve-month period ending December 31,
2006) and its long-term obligations (defined as the five-year period ending
December 31, 2010, the time period for which the Company generally does
long-term budgeting), including operations, capital expenditures, debt service
current dividend policy and repurchases of its common stock. To the extent that
actual developments differ from the Company's expectations, the Company's
liquidity could be adversely affected.
Consolidated cash flows
Operating activities. Trends in cash flows from operating activities
(excluding the impact of significant asset dispositions and relative changes in
assets and liabilities) are generally similar to trends in the Company's
earnings. However, certain items included in the determination of net income are
non-cash, and therefore such items have no impact on cash flows from operating
activities. Non-cash items included in the determination of net income include
depreciation and amortization expense, non-cash interest expense, deferred
income taxes, asset impairment charges and unrealized securities transactions
gains and losses. Non-cash interest expense relates principally to Kronos and
consists of amortization of original issue discount or premium on certain
indebtedness and amortization of deferred financing costs.
Certain other items included in the determination of net income may have an
impact on cash flows from operating activities, but the impact of such items on
cash flows from operating activities will differ from their impact on net
income. For example, equity in earnings of affiliates will generally differ from
the amount of distributions received from such affiliates, and equity in losses
of affiliates does not necessarily result in current cash outlays paid to such
affiliates. The amount of periodic defined benefit pension plan expense and
periodic OPEB expense depends upon a number of factors, including certain
actuarial assumptions, and changes in such actuarial assumptions will result in
a change in the reported expense. In addition, the amount of such periodic
expense generally differs from the outflows of cash required to be currently
paid for such benefits. Also, proceeds from the disposal of marketable
securities classified as trading securities are reported as a component of cash
flows from operating activities, and such proceeds will generally differ from
the amount of the related gain or loss on disposal.
Certain other items included in the determination of net income have no
impact on cash flows from operating activities, but such items do impact cash
flows from investing activities (although their impact on such cash flows
differs from their impact on net income). For example, realized gains and losses
from the disposal of available-for-sale marketable securities and long-lived
assets are included in the determination of net income, although the proceeds
from any such disposal are shown as part of cash flows from investing
activities.
Changes in product pricing, production volumes and customer demand, among
other things, can significantly affect the liquidity of the Company. Relative
changes in assets and liabilities generally result from the timing of
production, sales, purchases and income tax payments. Such relative changes can
significantly impact the comparability of cash flows from operations from period
to period, as the income statement impact of such items may occur in a different
period from when the underlying cash transaction occurs. For example, raw
materials may be purchased in one period, but the payment for such raw materials
may occur in a subsequent period. Similarly, inventory may be sold in one
period, but the cash collection of the receivable may occur in a subsequent
period. Relative changes in accounts receivable are affected by, among other
things, the timing of sales and the collection of the resulting receivable.
Relative changes in inventories, accounts payable and accrued liabilities are
affected by, among other things, the timing of raw material purchases and the
payment for such purchases and the relative difference between production
volumes and sales volumes. Relative changes in accrued environmental costs are
affected by, among other things, the period in which the environmental accrual
is recognized and the period in which the remediation expenditure is actually
made.
Cash flows from operating activities decreased from $142.1 million in 2004
to $104.3 million in 2005. This $37.8 million net decrease is due primarily to
the net effects of (i) lower net income of $148.6 million, (ii) higher net
securities transaction gains of $18.1 million, (iii) a higher provision for
deferred income taxes of $256.9 million, (iv) lower minority interest of $32.7
million, (v) higher equity in earnings of TIMET of $42.2 million, (vi) lower net
cash distributions from the TiO2 manufacturing joint venture of $3.8 million,
(vii) higher net cash paid for income taxes of $74.7 million, due in large part
to $44.7 million of aggregate income tax refunds received by Kronos in 2004 and
a $21 million payment by NL in 2005 to settle a previously-reported income tax
audit, (viii) $50.5 million higher use of cash related to relative changes in
working capital items (principally accounts receivable, inventories, payables
and accruals and accounts with affiliates) , and (ix) higher net cash generated
from relative changes in other noncurrent assets and liabilities of $11.7
million.
Cash flows provided from operating activities increased from $108.5 million
in 2003 to $142.1 million in 2004. This $33.6 million increase was due primarily
to the net effect of (i) higher net income of $317.7 million, (ii) goodwill
impairment in 2004 of $6.5 million, (iii) lower net gains from the disposal of
property and equipment of $10.7 million, (iv) a larger deferred income tax
benefit of $364.0 million, (v) higher depreciation and amortization expense of
$5.4 million, (vi) higher distributions from Kronos' TiO2 manufacturing joint
venture of $7.7 million, (vii) a $25.0 million improvement in equity in earnings
(losses) of TIMET, (viii) higher minority interest of $51.5 million, (ix) a
higher use of cash related to relative changes in working capital items
(principally accounts receivable, inventories, payables and accruals and
accounts with affiliates) of $2.7 million, (x) higher net cash used from
relative changes in other noncurrent assets and liabilities of $37.9 million and
(xi) higher cash received for income taxes of $16.3 million.
Relative changes in working capital assets and liabilities can have a
significant effect on cash flows from operating activities. Kronos' average days
sales outstanding ("DSO") decreased from 60 days at December 31, 2004 to 55 days
at December 31, 2005, due to the timing of collection. At December 31, 2005,
Kronos' average number of days in inventory ("DII") increased to 102 days from
97 days at December 31, 2004 due to the effects of higher production volumes and
lower sales volumes. CompX's average DSO related to its continuing operations
increased from 38 days at December 31, 2004 to 40 days at December 31, 2005 due
to timing of collection on the slightly higher accounts receivable balance at
the end of 2005. CompX's average DII related to its continuing operations was 52
days at December 31, 2004 and 59 days at December 31, 2005. The increase in
CompX's DII is primarily due to higher raw material prices, primarily steel.
Valhi does not have complete access to the cash flows of its subsidiaries
and affiliates, in part due to limitations contained in certain credit
agreements as well as the fact that such subsidiaries and affiliates are not
100% owned by Valhi. A detail of Valhi's consolidated cash flows from operating
activities is presented in the table below. Eliminations consist of intercompany
dividends (most of which are paid to Valhi Parent and NL Parent and, prior to
2005, Tremont).
Years ended December 31,
------------------------------------
2003 2004 2005
---- ---- ----
(In millions)
Cash provided (used) by operating activities:
Kronos $107.7 $151.0 $ 97.8
NL Parent (10.2) 8.8 (20.1)
CompX 24.4 30.2 20.0
Waste Control Specialists (6.6) (7.4) (7.7)
Tremont 7.2 2.0 (5.0)
Valhi Parent 30.6 24.8 101.4
Other (2.7) (.3) (.7)
Eliminations (41.9) (67.0) (81.4)
------ ------ ------
$108.5 $142.1 $104.3
====== ====== ======
Investing activities. Capital expenditures are disclosed by business
segment in Note 2 to the Consolidated Financial Statements.
At December 31, 2005, firm purchase commitments for capital projects in
process approximated $10.0 million, of which $7.4 million relates to Kronos'
Ti02 facilities and the remainder relates to CompX's facilities. Aggregate
capital expenditures for 2006 are expected to approximate $67 million ($41
million for Kronos, $16 million for CompX and $10 million for Waste Control
Specialists). Capital expenditures in 2006 are expected to be financed primarily
from operations or existing cash resources and credit facilities.
During 2005, (i) Valhi purchased shares of TIMET common stock in market
transactions for $18.0 million, (ii) NL sold shares of Kronos common stock in
market transactions for $19.2 million, (iii) NL purchased shares of CompX common
stock in market transactions for $3.6 million, (iv) Valhi purchased shares of
Kronos common stock in market transactions for $7.0 million, (v) CompX received
a net $18.1 million from the sale of its Thomas Regout operations (which had
approximately $4.0 million of cash at the date of disposal), (vi) Valhi received
a net $4.9 million on its short-term loan to Contran, (vii) NL collected $10.0
million on its loan to one of the Contran family trusts described in Note 1 to
the Consolidated Financial Statements, (viii) the Company made net purchases of
marketable securities of $9.8 million, (ix) Kronos received $3.5 million from
the sale of its passive interest in a Norwegian smelting operations, (x) CompX
acquired a company for an aggregate of $7.3 million and (xi) Valhi collected
$80.0 million principal amount of its loan to Snake River Sugar Company. See
Notes 2, 8 and 15 to the Consolidated Financial Statements.
During 2004, (i) Valhi purchased shares of Kronos common stock in market
transactions for $17.1 million, (ii) NL collected $4 million on its loan to one
of the Contran family trusts, (iii) Valhi loaned a net $4.9 million to Contran
and (iv) NL sold shares of Kronos common stock in market transactions for net
proceeds of $2.7 million.
During 2003, (i) Valhi purchased shares of Kronos common stock in market
transactions in December 2003 for $6.4 million, (ii) the Company purchased
additional shares of TIMET common stock for $976,000, and the Company purchased
a nominal number of shares of convertible preferred securities issued by a
wholly-owned subsidiary of TIMET for $238,000 and (iii) NL collected $4 million
of its loan to one of the Contran family trusts. In addition, the Company
generated approximately $13.5 million from the sale of property and equipment,
including the real property of NL discussed above.
Financing activities. During 2005, Kronos repaid an aggregate euro 10
million ($12.9 million when repaid) under its European revolving credit
facility, Kronos borrowed a net $11.5 million under its U.S. credit facility and
entered into additional capital lease arrangements for certain mining equipment
for the equivalent of $4.4 million, and Valhi borrowed and repaid $5.0 million
under its revolving bank credit facility. Valhi, which increased its regular
quarterly dividend from $.06 per share to $.10 per share in the first quarter of
2005, paid cash dividends in 2005 aggregating $48.8 million. Distributions to
minority interest in 2005 are primarily comprised of Kronos cash dividends paid
to shareholders other than Valhi and NL, NL cash dividends paid to shareholders
other than Valhi and CompX dividends paid to shareholders other than NL. Valhi
purchased approximately 3.5 million shares of its common stock in market and
other transactions for an aggregate of $62.1 million, and other cash flows from
financing activities in 2005 relate primarily to proceeds from the issuance of
NL, CompX and Valhi common stock upon exercises of stock options.
During 2004, (i) Valhi repaid a net $7.3 million of its short-term demand
loans from Contran and repaid a net $5 million under its revolving bank credit
facility, (ii) CompX repaid a net $26.0 million under its revolving bank credit
facility, (iii) KII issued an additional euro 90 million principal amount of it
Senior Secured Notes at 107% of par (equivalent to $130 million when issued) and
(iv) Kronos borrowed an aggregate of euro 90 million ($112 million when
borrowed) of borrowings under its European revolving bank credit facility, of
which euro 80 million ($100 million) were subsequently repaid. In addition,
Valhi paid cash dividends of $.06 per share per quarter, or an aggregate of
$29.8 million for 2004. Distributions to minority interest in 2004 are primarily
comprised of Kronos cash dividends paid to shareholders other than Valhi,
Tremont and NL and CompX dividends paid to shareholders other than NL. Other
cash flows from financing activities relate primarily to proceeds from the
issuance of NL common stock issued upon exercise of stock options.
During 2003, (i) Valhi borrowed a net $5 million under its revolving bank
credit facility and repaid a net $3.8 million of its short-term demand loans
from Contran, (ii) CompX repaid a net $5 million under its revolving bank credit
facility and (iii) KII borrowed an aggregate of euro 15 million ($16 million
when borrowed) of borrowings under its European revolving bank credit facility
and repaid kroner 80 million ($11 million) and euro 30 million ($34 million)
under such facility. In addition, Valhi paid cash dividends of $.06 per share
per quarter, or an aggregate of $29.8 million for 2003. Distributions to
minority interest in 2003 are primarily comprised of NL cash dividends paid to
NL shareholders other than Valhi and Tremont. Other cash flows from financing
activities relate primarily to proceeds from the sale of Valhi and NL common
stock issued upon exercise of stock options.
At December 31, 2005, unused credit available under existing credit
facilities approximated $287.4 million, which was comprised of: CompX - $50.0
million under its revolving credit facility; Kronos - $92.3 million under its
European credit facility, $33.5 million under its U.S. credit facility, $12.8
million under its Canadian credit facility and $.3 million under other non-U.S.
facilities; and Valhi - $98.5 million under its revolving bank credit facility.
See Note 10 to the Consolidated Financial Statements.
In March 2006, Valhi's board of directors declared Valhi's regular
quarterly dividend of $.10 per share, to be paid on March 31, 2006 to Valhi
shareholders of record as of March 16, 2006. However, the declaration and
payment of future dividends, and the amount thereof, is discretionary and
dependent upon several factors. See Item 5 - "Market for Registrant's Common
Equity, Related Stockholder Matters and Issuer Purchases of Common Stock."
Provisions contained in certain of the Company's credit agreements could
result in the acceleration of the applicable indebtedness prior to its stated
maturity for reasons other than defaults from failing to comply with typical
financial covenants. For example, certain credit agreements allow the lender to
accelerate the maturity of the indebtedness upon a change of control (as
defined) of the borrower. The terms of Valhi's revolving bank credit facility
could require Valhi to either reduce outstanding borrowings or pledge additional
collateral in the event the fair value of the existing pledged collateral falls
below specified levels. In addition, certain credit agreements could result in
the acceleration of all or a portion of the indebtedness following a sale of
assets outside the ordinary course of business. See Note 10 to the Consolidated
Financial Statements.
Off-balance sheet financing arrangements. Other than the operating leases
discussed in Note 18 to the Consolidated Financial Statements, neither Valhi nor
any of its subsidiaries or affiliates are parties to any off-balance sheet
financing arrangements.
Chemicals - Kronos
At December 31, 2005, Kronos had cash, cash equivalents and marketable debt
securities of $76.0 million, including restricted balances of $3.9 million, and
Kronos had approximately $139 million available for borrowing under its U.S.,
Canadian and European credit facilities. Based upon Kronos' expectations for the
TiO2 industry, Kronos expects to have sufficient liquidity to meet its future
obligations including operations, capital expenditures, debt service and current
dividend policy. To the extent that actual developments differ from Kronos'
expectations, Kronos' liquidity could be adversely affected.
At December 31, 2005, Kronos' outstanding debt was comprised of $449.3
million related to KII's Senior Secured Notes, $11.5 million outstanding under
Kronos' U.S. revolving credit facility and approximately $4.5 million of other
indebtedness.
Kronos' capital expenditures during the past three years aggregated $117.9
million, including $15 million ($4 million in 2005) for Kronos' ongoing
environmental protection and compliance programs. Kronos' estimated 2006 capital
expenditures are $41 million, including $6 million in the area of environmental
protection and compliance.
See Note 15 to the Consolidated Financial Statements for certain income tax
examinations currently underway with respect to certain of Kronos' income tax
returns in various U.S. and non-U.S. jurisdictions, and see Note 18 to the
Consolidated Financial Statements with respect to certain legal proceedings with
respect to Kronos.
Kronos International's assets consist primarily of investments in its
operating subsidiaries, and its ability to service its parent level obligations,
including the Senior Secured Notes, depends in large part upon the distribution
of earnings of its subsidiaries, whether in the form of dividends, advances or
payments on account of intercompany obligation, or otherwise. None of its
subsidiaries have guaranteed the Senior Secured Notes, although Kronos
International has pledged 65% of the common stock or other ownership interest of
certain of its first-tier operating subsidiaries as collateral of such Senior
Secured Notes.
Kronos periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and availability of resources in view of, among other
things, its dividend policy, its debt service and capital expenditure
requirements and estimated future operating cash flows. As a result of this
process, Kronos in the past has sought and may in the future seek to reduce,
refinance, repurchase or restructure indebtedness, raise additional capital,
repurchase shares of its common stock, modify its dividend policy, restructure
ownership interests, sell interests in subsidiaries or other assets, or take a
combination of such steps or other steps to manage its liquidity and capital
resources. In the normal course of its business, Kronos may review opportunities
for the acquisition, divestiture, joint venture or other business combinations
in the chemicals or other industries, as well as the acquisition of interests in
related entities. In the event of any such transaction, Kronos may consider
using available cash, issuing equity securities or increasing its indebtedness
to the extent permitted by the agreements governing Kronos' existing debt.
Kronos has substantial operations located outside the United States for
which the functional currency is not the U.S. dollar. As a result, the reported
amounts of Kronos' assets and liabilities related to its non-U.S. operations,
and therefore Kronos' consolidated net assets, will fluctuate based upon changes
in currency exchange rates.
NL Industries Parent
At December 31, 2005, NL (exclusive of CompX) had cash, cash equivalents
and marketable debt securities of $59.9 million, including restricted balances
of $4.3 million.
See Note 15 to the Consolidated Financial Statements for certain income tax
examinations currently underway with respect to certain of NL's income tax
returns, and see Note 18 to the Consolidated Financial Statements and Item 3,
"Legal Proceedings" with respect to certain legal proceedings and environmental
matters with respect to NL.
In addition to those legal proceedings described in Note 18 to the
Consolidated Financial Statements and Item 3, various legislation and
administrative regulations have, from time to time, been proposed that seek to
(i) impose various obligations on present and former manufacturers of lead
pigment and lead-based paint with respect to asserted health concerns associated
with the use of such products and (ii) effectively overturn court decisions in
which NL and other pigment manufacturers have been successful. Examples of such
proposed legislation include bills which would permit civil liability for
damages on the basis of market share, rather than requiring plaintiffs to prove
that the defendant's product caused the alleged damage, and bills which would
revive actions barred by the statute of limitations. While no legislation or
regulations have been enacted to date that are expected to have a material
adverse effect on NL's consolidated financial position, results of operations or
liquidity, enactment of such legislation could have such an effect.
Prior to December 2003, Kronos was a wholly-owned subsidiary of NL. In
December 2003, and in conjunction with a recapitalization of Kronos, NL
completed the distribution of approximately 48.8% of Kronos' common stock to NL
shareholders (including Valhi and Tremont LLC) in the form of a pro-rata
dividend. Shareholders of NL received one share of Kronos common stock for every
two shares of NL held. During 2004 and the first quarter of 2005, NL paid an
aggregate of five quarterly dividends in the form of shares of Kronos common
stock, in which an aggregate of approximately 1.5 million shares of Kronos'
common stock (3.0% of Kronos' outstanding shares) were distributed to NL
shareholders (including Valhi and Tremont) in the form of pro-rata dividends.
Valhi and Tremont (which until January 2005 owned part of the Company's interest
in NL) received an aggregate of approximately 1.2 million shares of Kronos with
respect to these distributions. In January 2005, Tremont distributed to Valhi
its ownership interest in Kronos. NL's 2003, 2004 and 2005 distributions of
shares of common stock of Kronos are taxable to NL, and NL is required to
recognize a taxable gain equal to the difference between the fair market value
of the shares of Kronos common stock distributed on the various dates of
distribution and NL's adjusted tax basis in such stock at such dates of
distribution. The amount of such tax liability related to the shares of Kronos
distributed to NL shareholders other than Valhi and Tremont was approximately
$22.5 million in 2003, $2.5 million in 2004 and $664,000 in 2005, and such
amounts are recognized as a component of the Company's consolidated provision
for income taxes in such periods. Other than the Company's recognition of such
NL tax liabilities, the completion of the December 2003 and 2004 and 2005
quarterly distributions of Kronos had no other impact on the Company's
consolidated financial position, results of operations or cash flows. See Note 3
to the Consolidated Financial Statements.
The amount of NL's separate tax liability with respect to the shares of
Kronos distributed to Valhi and Tremont, while recognized by NL at its separate
company level, is not recognized in the Company's consolidated financial
statements because the separate tax liability is eliminated at the Valhi level
due to Valhi, Tremont and NL all being members of the Contran Tax Group. With
respect to such shares of Kronos distributed to Valhi and Tremont, effective
December 1, 2003, Valhi and NL amended the terms of their tax sharing agreement
to not require NL to pay up to Valhi the separate tax liability generated from
the distribution of such Kronos shares to Valhi and Tremont. On November 30,
2004 Valhi and NL agreed to further amend the terms of their tax sharing
agreement to provide that NL would now be required to pay up to Valhi the
separate tax liability generated from the distribution of shares of Kronos
common stock to Valhi and Tremont, including the tax related to such shares
distributed to Valhi and Tremont in December 2003 and the tax related to the
shares distributed to Valhi and Tremont during all of 2004. In determining to so
amend the terms of the tax sharing agreement, NL and Valhi considered, among
other things, the changed expectation for the generation of taxable income at
the NL level resulting from the inclusion of CompX in NL's consolidated taxable
income effective in the fourth quarter of 2004, as discussed in Note 1 to the
Consolidated Financial Statements. Valhi and NL further agreed that in lieu of a
cash income tax payment, such separate tax liability could be paid by NL to
Valhi in the form of shares of Kronos common stock held by NL. Such tax
liability related to the shares of Kronos distributed to Valhi and Tremont in
December 2003 and 2004, including the tax liability resulting from the use of
Kronos common stock to settle such liability, aggregated approximately $227
million. Accordingly, in the fourth quarter of 2004 NL transferred approximately
5.5 million shares of Kronos common stock to Valhi in satisfaction of such
separate tax liability and the tax liability generated from the use of such
Kronos shares to settle such tax liability. In agreeing to settle such tax
liability with such 5.5 million shares of Kronos common stock, the Kronos shares
were valued at an agreed-upon price of $41 per share. Kronos' average closing
market prices during the months of November and December 2004 were $41.53 and
$41.77, respectively. NL also considered the fact that the shares of Kronos held
by non-affiliates are very thinly traded, and consequently an average price over
a period of days mitigates the effect of the thinly-traded nature of Kronos'
common stock. The transfer of such 5.5 million shares of Kronos common stock,
accounted for under GAAP as a transfer of net assets among entities under common
control at carryover basis, had no effect on the Company's consolidated
financial statements, and as noted above such tax liability is not recognized in
the Company's consolidated financial statements because it is eliminated at the
Valhi level due to Valhi, Tremont and NL all being members of Valhi's tax group
on a separate-company basis and of the Contran Tax Group. Such tax liability
related to the shares of Kronos distributed to Valhi in the first quarter of
2005 aggregated $3.3 million, and such tax liability was paid by NL to Valhi in
cash. This aggregate $230 million tax liability has not been paid by Valhi to
Contran, nor has Contran paid such tax liability to the applicable tax
authority. Such income tax liability would become payable by Valhi to Contran,
and by Contran to the applicable tax authority, when the shares of Kronos
transferred or distributed by NL to Valhi and Tremont are sold or otherwise
transferred outside the Contran Tax Group or in the event of certain
restructuring transactions involving NL and Valhi. However, as discussed in Note
1 to the Consolidated Financial Statements, the Company does recognize deferred
income taxes with respect to its investment in Kronos, and in accordance with
GAAP the amount of such deferred income taxes recognized by Valhi ($184 million
at December 31, 2005) is limited to this $230 million tax liability. See Note 3
to the Consolidated Financial Statements.
Following the second of such 2004 quarterly dividends of NL, NL no longer
owned a majority of Kronos' outstanding common stock, and accordingly NL ceased
to consolidate Kronos as of July 1, 2004. However, the Company continues to
consolidate Kronos since the Company continues to own a majority of Kronos,
either directly or indirectly through NL.
Prior to September 24, 2004, the Company's ownership of CompX was owned by
Valhi and Valcor (a wholly-owned subsidiary of Valhi). On September 24, 2004, NL
completed the acquisition of the CompX shares previously held by Valhi and
Valcor at a purchase price of $16.25 per share, or an aggregate of approximately
$168.6 million. The purchase price was paid by NL's transfer to Valhi and Valcor
of $168.6 million of NL's $200 million long-term note receivable from Kronos
(which long-term note and related interest income and interest expense were
eliminated in the preparation of the Company's Consolidated Financial
Statements). See Note 3 to the Consolidated Financial Statements. NL's
acquisition was accounted for under GAAP as a transfer of net assets among
entities under common control, and such transaction had no effect on the
Company's consolidated financial statements. After such acquisition, NL retained
a $31.4 million note receivable from Kronos, which note receivable Kronos
prepaid in November 2004 using funds from KII's November 2004 issuance of euro
90 million principal amount of KII Senior Secured Notes.
NL periodically evaluates its liquidity requirements, alternative uses of
capital, capital needs and availability of resources in view of, among other
things, its dividend policy, its debt service and capital expenditure
requirements and estimated future operating cash flows. As a result of this
process, NL has in the past and may in the future seek to reduce, refinance,
repurchase or restructure indebtedness, raise additional capital, repurchase
shares of its common stock, modify its dividend policy, restructure ownership
interests, sell interests in subsidiaries or other assets, or take a combination
of such steps or other steps to manage its liquidity and capital resources. In
the normal course of its business, NL may review opportunities for the
acquisition, divestiture, joint venture or other business combinations in the
component products or other industries, as well as the acquisition of interests
in, and loans to, related entities.
Component products - CompX International
CompX's capital expenditures during the past three years aggregated $24.7
million. Such capital expenditures included manufacturing equipment that
emphasizes improved production and efficiency.
CompX received approximately $18.1 million cash (net of expenses) in
January 2005 upon the sale of its Thomas Regout operations in The Netherlands.
See Note 22 to the Consolidated Financial Statements. CompX believes that its
cash on hand, together with cash generated from operations and borrowing
availability under its bank credit facility, will be sufficient to meet CompX's
liquidity needs for working capital, capital expenditures, debt service and
dividends (if declared). To the extent that CompX's actual operating results or
other developments differ from CompX's expectations, CompX's liquidity could be
adversely affected. CompX, which had suspended its regular quarterly dividend of
$.125 per share in the second quarter of 2003, reinstated its regular quarterly
dividend at the $.125 per share rate in the fourth quarter of 2004.
In August 2005, CompX completed the acquisition of a components product
company for aggregate cash consideration of $7.3 million, net of cash acquired.
See Note 3 to the Consolidated Financial Statements.
CompX periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements, dividend policy and estimated
future operating cash flows. As a result of this process, CompX has in the past
and may in the future seek to raise additional capital, refinance or restructure
indebtedness, issue additional securities, modify its dividend policy,
repurchase shares of its common stock or take a combination of such steps or
other steps to manage its liquidity and capital resources. In the normal course
of business, CompX may review opportunities for acquisitions, divestitures,
joint ventures or other business combinations in the component products
industry. In the event of any such transaction, CompX may consider using cash,
issuing additional equity securities or increasing the indebtedness of CompX or
its subsidiaries.
Waste management - Waste Control Specialists
At December 31, 2005, Waste Control Specialists' indebtedness consisted
principally of $4.6 million of borrowings owed to a wholly-owned subsidiary of
Valhi (December 31, 2004 intercompany indebtedness - $4.6 million). During 2005,
this subsidiary of Valhi loaned an additional net $21.9 million to Waste Control
Specialists, which were used by Waste Control Specialists primarily to fund its
operating loss and its capital expenditures. Such $21.9 million of net
additional borrowings by Waste Control Specialists during 2005 were contributed
to Waste Control Specialists' equity as of December 31, 2005. Such indebtedness
is eliminated in the Company's Consolidated Financial Statements. Waste Control
Specialists will likely borrow additional amounts during 2006 from such Valhi
subsidiary under the terms of its revolving credit facility, that as amended has
a maturity date of March 2007 and provides for borrowings by Waste Control
Specialists of up to $19.0 million as of December 31, 2005.
Waste Control Specialists capital expenditures and capitalized permit costs
during the past three years aggregated $22.2 million. Such expenditures were
funded primarily from certain debt financing provided to Waste Control
Specialists by the wholly-owned subsidiary of Valhi.
TIMET
At December 31, 2005, TIMET had $124 million of borrowing availability
under its various U.S. and European credit agreements.
In May 2005, TIMET announced it plans to expand its existing titanium
sponge facility in Nevada. This expansion, which TIMET currently expects to
complete by the first quarter of 2007 and cost an aggregate of $38 million, will
provide the capacity to produce an additional 4,000 metric tons of sponge
annually, an increase of approximately 42% over the current sponge production
capacity levels at its Nevada facility. TIMET's capital expenditures during the
past three years aggregated $97.2 million ($61.1 million in 2005), including
$11.8 million spent in 2005 related to such expansion of its sponge facility in
Nevada and $24 million spent in 2005 related to completion of the construction
of a water conservation facilty in Nevada. TIMET's capital expenditures during
2006 are currently expected to range from $90 million to $100 million, including
$23 million related to the expansion of the Nevada sponge facility as well as
additional capacity improvements as TIMET continues to prepare for increased
demand by certain customers under long-term agreements.
See Note 18 to the Consolidated Financial Statements for certain legal
proceedings, environmental matters and other contingencies associated with
TIMET. While TIMET currently believes that the outcome of these matters,
individually and in the aggregate, will not have a material adverse effect on
TIMET's consolidated financial position, liquidity or overall trends in results
of operations, all such matters are subject to inherent uncertainties. Were an
unfavorable outcome to occur in any given period, it is possible that it could
have a material adverse impact on TIMET's consolidated results of operations or
cash flows in a particular period.
In 2003, TIMET effected a reverse split of its common stock at a ratio of
one share of post-split common stock for each outstanding ten shares of
pre-split common stock, in 2004 TIMET effected a 5:1 split of its common stock
and in 2005 TIMET effected another 2:1 split of its common stock. Such stock
splits had no financial statement impact to the Company, and the Company's
ownership interest in TIMET did not change as a result of such splits. The per
share disclosures related to TIMET discussed herein have been adjusted to give
effect to such splits.
Prior to August 2004, a wholly-owned subsidiary of TIMET had issued
4,024,820 shares outstanding of its 6.625% convertible preferred debt
securities, representing an aggregate $201.2 million liquidation amount, that
mature in 2026. Each security is convertible into shares of TIMET common stock
at a conversion rate of .1339 shares of TIMET common stock per convertible
preferred security. Such convertible preferred debt securities do not require
principal amortization, and TIMET has the right to defer distributions on the
convertible preferred securities for one or more quarters of up to 20
consecutive quarters, provided that such deferral period may not extend past the
2026 maturity date. TIMET is prohibited from, among other things, paying
dividends or reacquiring its capital stock while distributions are being
deferred on the convertible preferred securities. In October 2002, TIMET elected
to exercise its right to defer future distributions on its convertible preferred
securities for a period of up to 20 consecutive quarters. Distributions
continued to accrue at the coupon rate on the liquidation amount and unpaid
distributions. This deferral was effective starting with TIMET's December 1,
2002 scheduled payment. In April 2004, TIMET paid all previously-deferred
distributions with respect to the convertible preferred debt securities and paid
the next scheduled distribution in June 2004.
In August 2004, TIMET completed an exchange offer in which approximately
3.9 million shares of the outstanding convertible preferred debt securities
issued by TIMET Capital Trust I were exchanged for an aggregate of 3.9 million
shares of a newly-created Series A Preferred Stock of TIMET at the exchange rate
of one share of Series A Preferred Stock for each convertible preferred debt
security. Dividends on the Series A shares accumulate at the rate of 6 3/4% of
their liquidation value of $50 per share, and are convertible into shares of
TIMET common stock at the rate of one and two-thirds of a share of TIMET common
stock per Series A share. The Series A shares are not mandatorily redeemable,
but are redeemable at the option of TIMET in certain circumstances. Through
December 31, 2005, an aggregate of approximately 926,000 shares of such
preferred stock were converted into an aggregate of 6.2 million shares of
TIMET's common stock, and 3.0 million preferred shares remained outstanding.
TIMET periodically evaluates its liquidity requirements, capital needs and
availability of resources in view of, among other things, its alternative uses
of capital, debt service requirements, the cost of debt and equity capital, and
estimated future operating cash flows. As a result of this process, TIMET has in
the past, or in light of its current outlook, may in the future seek to raise
additional capital, modify its common and preferred dividend policies,
restructure ownership interests, incur, refinance or restructure indebtedness,
repurchase shares of capital stock or debt securities, sell assets, or take a
combination of such steps or other steps to increase or manage its liquidity and
capital resources. In the normal course of business, TIMET investigates,
evaluates, discusses and engages in acquisition, joint venture, strategic
relationship and other business combination opportunities in the titanium,
specialty metal and other industries. In the event of any future acquisition or
joint venture opportunities, TIMET may consider using then-available liquidity,
issuing equity securities or incurring additional indebtedness.
Tremont LLC
See Note 18 to the Consolidated Financial Statements for certain legal
proceedings and environmental matters with respect to Tremont.
General corporate - Valhi
Because Valhi's operations are conducted primarily through its subsidiaries
and affiliates, Valhi's long-term ability to meet its parent company level
corporate obligations is dependent in large measure on the receipt of dividends
or other distributions from its subsidiaries and affiliates. At Kronos' current
quarterly cash dividend rate of $.25 per share, and based on the 28.1 million
shares of Kronos held by Valhi at December 31, 2005, Valhi would receive
aggregate annual dividends from Kronos of $28.1 million. NL, which paid its 2004
regular quarterly dividends of $.20 per share in the form of shares of Kronos
common stock, increased its regular quarterly dividend in the first quarter of
2005 to $.25 per share, which also was in the form of shares of Kronos common
stock. In the second, third and fourth quarters of 2005, NL paid its regular
quarterly dividend in the form of cash. In March 2006, NL reduced its regular
quarterly dividend to $.125 per share. Assuming NL paid its regular quarterly
dividends in the form of cash at such reduced rate, and based on the 40.4
million shares of NL common stock held by Valhi at December 31, 2005, Valhi
would receive aggregate annual dividends from NL of $20.2 million. The Company
does not currently expect to receive any distributions from Waste Control
Specialists or TIMET during 2006. CompX dividends, which resumed in the fourth
quarter of 2004, are paid to NL. See also the discussion contained in Item 1A -
"Risk Factors - our assets consist primarily of investments in our operating
subsidiaries and we are dependent upon distributions from our subsidiaries."
Various credit agreements to which certain subsidiaries or affiliates are
parties contain customary limitations on the payment of dividends, typically a
percentage of net income or cash flow; however, such restrictions in the past
have not significantly impacted Valhi's ability to service its parent company
level obligations. Valhi generally does not guarantee any indebtedness or other
obligations of its subsidiaries or affiliates. To the extent that one or more of
Valhi's subsidiaries were to become unable to maintain its current level of
dividends, either due to restrictions contained in the applicable subsidiary's
credit agreements or otherwise, Valhi parent company's liquidity could become
adversely impacted. In such an event, Valhi might consider reducing or
eliminating its dividends or selling interests in subsidiaries or other assets.
Waste Control Specialists is required to provide certain financial
assurances to Texas government agencies with respect to certain decommissioning
obligations related to its facility in West Texas. Such financial assurances may
be provided by various means, including a parent company guarantee assuming the
parent meets specified financial tests. In March 2005, Valhi agreed to guarantee
certain specified decommissioning obligations of Waste Control Specialists,
currently estimated by Waste Control Specialists at approximately $3.5 million.
Such obligations would arise only upon a closure of the facility and Waste
Control Specialists' failure to perform such activities. The Company does not
currently expect that it will have to perform under such guarantee for the
foreseeable future.
In March 2005, the Company's board of directors authorized the repurchase
of up to 5.0 million shares of Valhi's common stock in open market transactions,
including block purchases, or in privately negotiated transactions, which may
include transactions with affiliates of Valhi. The stock may be purchased from
time to time as market conditions permit. The stock repurchase program does not
include specific price targets or timetables and may be suspended at any time.
Depending on market conditions, the program could be terminated prior to
completion. The Company will use its cash on hand to acquire the shares.
Repurchased shares will be retired and cancelled or may be added to Valhi's
treasury and used for employee benefit plans, future acquisitions or other
corporate purposes. On April 1, 2005, the Company purchased 2.0 million shares
of its common stock, at a discount to the then-current market price, from
Contran for $17.50 per share or an aggregate purchase price of $35.0 million.
Such shares were purchased under the stock repurchase program. Valhi's
independent directors approved such purchase. The Company has also purchased
during the second, third and fourth quarters of 2005 an additional 1.5 million
shares of its common stock under the repurchase program in market transactions
for an aggregate of $27.1 million. See Note 14 to the Consolidated Financial
Statements.
At December 31, 2005, Valhi had $119.8 million of parent level cash and
cash equivalents and had no amounts outstanding under its revolving bank credit
agreement. In addition, Valhi had $98.5 million of borrowing availability under
its revolving bank credit facility. See Note 10 to the Consolidated Financial
Statements.
As noted above, in September 2004 NL completed the acquisition of the
shares of CompX common stock previously held by Valhi and Valcor. The purchase
price for these shares was paid by NL's transfer to Valhi and Valcor of an
aggregate $168.6 million of NL's note receivable from Kronos ($162.5 million to
Valcor and $6.1 million to Valhi). In October 2004, Valcor distributed to Valhi
its $162.5 million note receivable from Kronos, and subsequently in the fourth
quarter of 2004 Kronos prepaid the $168.5 million note payable to Valhi using
cash on hand and funds from KII's November 2004 issuance of euro 90 million
principal amount of its Senior Secured Notes. Valhi used $58 million of the
proceeds from the repayment of its note receivable from Kronos to repay the
outstanding balance under its revolving bank credit facility. The remainder of
such funds were available for Valhi's general corporate purposes.
The terms of The Amalgamated Sugar Company LLC Company Agreement provide
for annual "base level" of cash dividend distributions (sometimes referred to as
distributable cash) by the LLC of $26.7 million, from which the Company is
entitled to a 95% preferential share. Distributions from the LLC are dependent,
in part, upon the operations of the LLC. The Company records dividend
distributions from the LLC as income upon receipt, which occurs in the same
month in which they are declared by the LLC. To the extent the LLC's
distributable cash is below this base level in any given year, the Company is
entitled to an additional 95% preferential share of any future annual LLC
distributable cash in excess of the base level until such shortfall is
recovered. Based on the LLC's current projections for 2006, Valhi currently
expects that distributions received from the LLC in 2006 will exceed its debt
service requirements under its $250 million loans from Snake River Sugar
Company.
Certain covenants contained in Snake River's third-party senior debt
allowed Snake River in certain circumstances to pay periodic installments of
debt service payments (principal and interest) under Valhi's $80 million loan to
Snake River prior to its scheduled maturity in 2007, and such loan was
subordinated to Snake River's third-party senior debt. During the third quarter
of 2005, Snake River prepaid such senior third-party senior debt, and Snake
River subsequently made an aggregate of $5.5 million of debt service payments to
Valhi during the quarter. At September 30, 2005, the accrued and unpaid interest
on the $80 million loan to Snake River aggregated $36.7 million and was
classified as a noncurrent asset. The Company believed it would ultimately
realize both the $80 million principal amount and the accrued and unpaid
interest, whether through cash generated from the future operations of Snake
River and the LLC or otherwise (including any liquidation of Snake River or the
LLC). Following the complete repayment of Snake River's third-party senior debt,
Snake River was required, under the terms of the Company's loan to Snake River,
to use all of its available cash resources to make debt service payments to
Valhi (estimated to be approximately $20 million annually), including the funds
that Snake River previously was using to fund debt service on its third-party
senior debt. In October 2005, when Valhi agreed to forgive approximately $21.6
million of accrued and unpaid interest in return for Snake River prepaying an
aggregate of $94.8 million under its loan from Valhi, Valhi considered, among
other things, the present value of the future repayment of its loan to Snake
River under the present terms, the income tax benefit relating to forgiveness of
the accrued interest and Valhi's various alternate reinvestment opportunities
with respect to such prepayment and the returns thereon. Consequently, while
Valhi continued to believe it would ultimately fully collect all amounts due
under the terms of its loan to Snake River, Valhi was willing to accept a
discount under certain conditions (principally, Snake River's $94.8 million
prepayment). In October 2005, Snake River completed a new senior loan facility
that generated funds sufficient to make the $94.8 million prepayment to Valhi,
and Valhi accordingly forgave the remaining accrued and unpaid interest. See
Note 3 and 8 to the Consolidated Financial Statements.
The Company may, at its option, require the LLC to redeem the Company's
interest in the LLC beginning in 2012, and the LLC has the right to redeem the
Company's interest in the LLC beginning in 2027. The redemption price is
generally $250 million plus the amount of certain undistributed income allocable
to the Company, if any. In the event the Company requires the LLC to redeem the
Company's interest in the LLC, Snake River has the right to accelerate the
maturity of and call Valhi's $250 million loans from Snake River. Redemption of
the Company's interest in the LLC would result in the Company reporting income
related to the disposition of its LLC interest for income tax purposes, although
the Company would not be expected to report a gain in earnings for financial
reporting purposes at the time its LLC interest was redeemed (as discussed in
Note 3 to the Consolidated Financial Statements). However, because of Snake
River's ability to call its $250 million loans to Valhi upon redemption of the
Company's interest in the LLC, the net cash proceeds (after repayment of the
debt) generated by redemption of the Company's interest in the LLC could be less
than the income taxes that would become payable as a result of the disposition.
The Company routinely compares its liquidity requirements and alternative
uses of capital against the estimated future cash flows to be received from its
subsidiaries, and the estimated sales value of those units. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify its dividend policies, consider
the sale of interests in subsidiaries, affiliates, business units, marketable
securities or other assets, or take a combination of such steps or other steps,
to increase liquidity, reduce indebtedness and fund future activities. Such
activities have in the past and may in the future involve related companies.
The Company and related entities routinely evaluate acquisitions of
interests in, or combinations with, companies, including related companies,
perceived by management to be undervalued in the marketplace. These companies
may or may not be engaged in businesses related to the Company's current
businesses. The Company intends to consider such acquisition activities in the
future and, in connection with this activity, may consider issuing additional
equity securities and increasing the indebtedness of the Company, its
subsidiaries and related companies. From time to time, the Company and related
entities also evaluate the restructuring of ownership interests among their
respective subsidiaries and related companies.
Non-GAAP financial measures
In an effort to provide investors with additional information regarding the
Company's results of operations as determined by GAAP, the Company has disclosed
certain non-GAAP information which the Company believes provides useful
information to investors:
o The Company discloses percentage changes in Kronos' average TiO2
selling prices in billing currencies, which excludes the effects of
foreign currency translation. The Company believes disclosure of such
percentage changes allows investors to analyze such changes without
the impact of changes in foreign currency exchange rates, thereby
facilitating period-to-period comparisons of the relative changes in
average selling prices in the actual various billing currencies.
Generally, when the U.S. dollar either strengthens or weakens against
other currencies, the percentage change in average selling prices in
billing currencies will be higher or lower, respectively, than such
percentage changes would be using actual exchange rates prevailing
during the respective periods.
Summary of debt and other contractual commitments
As more fully described in the notes to the Consolidated Financial
Statements, the Company is a party to various debt, lease and other agreements
which contractually and unconditionally commit the Company to pay certain
amounts in the future. See Notes 10 and 18 to the Consolidated Financial
Statements. The Company's obligations related to the long-term supply contract
for the purchase of Ti02 feedstock is more fully described in Note 18 to the
Consolidated Financial Statements and above in "Business - Chemicals - Kronos
Worldwide, Inc., - manufacturing process, properties and raw materials." The
following table summarizes such contractual commitments of the Company and its
consolidated subsidiaries as of December 31, 2005 by the type and date of
payment.
Payment due date
--------------------------------------------------------------------
2011 and
Contractual commitment 2006 2007/2008 2009/2010 after Total
---------------------- ---- --------- --------- -------- -----
(In millions)
Third-party indebtedness:
Principal $ 1.6 $ 13.6 $452.2 $250.0 $717.4
Interest 63.4 126.2 85.8 376.0 651.4
Operating leases 5.4 6.9 3.7 21.1 37.1
Kronos' long-term supply
contract for the purchase
of TiO2 feedstock 194.6 312.7 173.5 - 680.8
CompX raw material and
other purchase commitments 16.9 - - - 16.9
Fixed asset acquisitions 10.0 - - - 10.0
Income taxes 24.7 - - - 24.7
------ ------ ------ ------ --------
$316.6 $459.4 $715.2 $647.1 $2,138.3
====== ====== ====== ====== ========
The timing and amount shown for the Company's commitments related to
indebtedness (principal and interest), operating leases and fixed asset
acquisitions are based upon the contractual payment amount and the contractual
payment date for such commitments. With respect to indebtedness involving
revolving credit facilities, the amount shown for indebtedness is based upon the
actual amount outstanding at December 31, 2005, and the amount shown for
interest for any outstanding variable-rate indebtedness is based upon the
December 31, 2005 interest rate and assumes that such variable-rate indebtedness
remains outstanding until the maturity of the facility. The amount shown for
income taxes is the consolidated amount of income taxes payable at December 31,
2005, which is assumed to be paid during 2006. A significant portion of the
amount shown for indebtedness relates to KII's Senior Secured Notes ($449.3
million at December 31, 2005). Such indebtedness is denominated in euro. See
Item 7A - "Quantative and Qualitative Disclosures About Market Risk" and Note 10
to the Consolidated Financial Statements.
Kronos' contracts for the purchase of TiO2 feedstock contain fixed
quantities that Kronos is required to purchase, although certain of these
contracts allow for an upward or downward adjustment in the quantity purchased,
generally no more than 10%, based on Kronos' feedstock requirements. The pricing
under these agreements is generally based on a fixed price with price escalation
clauses primarily based on consumer price indices, as defined in the respective
contracts. The timing and amount shown for Kronos' commitments related to the
long-term supply contracts for TiO2 feedstock is based upon Kronos' current
estimate of the quantity of material that will be purchased in each time period
shown, and the payment that would be due based upon such estimated purchased
quantity and an estimate of the effect of the price escalation clause. The
actual amount of material purchased, and the actual amount that would be payable
by Kronos, may vary from such estimated amounts.
The above table of contractual commitments does not include any amounts
under Kronos' obligation under the Louisiana Pigment Company, L.P. joint
venture, as the timing and amount of such purchases are unknown and dependent
on, among other things, the amount of TiO2 produced by the joint venture in the
future, and the joint venture's future cost of producing such TiO2. However, the
table of contractual commitments does include amounts related to Kronos' share
of the joint venture's ore requirements necessary to produce TiO2 for Kronos.
See Notes 7 and 17 to the Consolidated Financial Statements and "Business -
Chemicals - Kronos Worldwide, Inc. - TiO2 manufacturing joint venture."
In addition, Waste Control Specialists is a party to an agreement which
could require Waste Control Specialists to pay certain amounts to a third party
based upon specified percentages of qualifying revenues. The Company has not
included any amounts for this conditional commitment in the above table because
the Company currently believes it is not probable that the Company will be
required to pay any amounts pursuant to this agreement. See Note 18 to the
Consolidated Financial Statements.
The above table does not reflect any amounts that the Company might pay to
fund its defined benefit pension plans and OPEB plans, as the timing and amount
of any such future fundings are unknown and dependent on, among other things,
the future performance of defined benefit pension plan assets, interest rate
assumptions and actual future retiree medical costs. Such defined benefit
pension plans and OPEB plans are discussed above in greater detail. The above
table also does not reflect any amounts that the Company might pay related to
its asset retirement obligations, as the timing and amounts of such future
fundings are unknown. See Notes 16 and 19 to the Consolidated Financial
Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. The Company is exposed to market risk from changes in foreign
currency exchange rates, interest rates and equity security prices. In the past,
the Company has periodically entered into interest rate swaps or other types of
contracts in order to manage a portion of its interest rate market risk. The
Company has also periodically entered into currency forward contracts to either
manage a nominal portion of foreign exchange rate market risk associated with
receivables denominated in a currency other than the holder's functional
currency or similar risk associated with future sales, or to hedge specific
foreign currency commitments. Otherwise, the Company does not generally enter
into forward or option contracts to manage such market risks, nor does the
Company enter into any such contract or other type of derivative instrument for
trading or speculative purposes. Other than the contracts discussed below, the
Company was not a party to any forward or derivative option contract related to
foreign exchange rates, interest rates or equity security prices at December 31,
2004 and 2005. See Notes 1 and 21 to the Consolidated Financial Statements for a
discussion of the assumptions used to estimate the fair value of the financial
instruments to which the Company is a party at December 31, 2004 and 2005.
Interest rates. The Company is exposed to market risk from changes in
interest rates, primarily related to indebtedness and certain interest-bearing
notes receivable.
At December 31, 2005, the Company's aggregate indebtedness was split
between 98% of fixed-rate instruments and 2% of variable-rate borrowings (2004 -
98% of fixed-rate instruments and 2% of variable rate borrowings). The large
percentage of fixed-rate debt instruments minimizes earnings volatility which
would result from changes in interest rates. The following table presents
principal amounts and weighted average interest rates for the Company's
aggregate outstanding indebtedness at December 31, 2005. Information shown below
for such foreign currency denominated indebtedness is presented in its U.S.
dollar equivalent at December 31, 2005 using exchange rates of 1.18 U.S. dollars
per euro.
Amount
-----------------------
Carrying Fair Interest Maturity
Indebtedness* value value rate date
------------- -------- ----- -------- --------
(In millions)
Fixed-rate indebtedness:
Euro-denominated KII
Senior Secured Notes $449.3 $463.6 8.9% 2009
Valhi loans from Snake River 250.0 250.0 9.4% 2027
Other 2.0 2.0 7.7% Various
------ ------
701.3 715.6 9.1%
------ ------
Variable-rate indebtedness -
Kronos U.S. revolver 11.5 11.5 7.0% 2008
------ ------
$712.8 $727.1 9.0%
====== ======
* Denominated in U.S. dollars, except as otherwise indicated. Excludes capital
lease obligations.
At December 31, 2004, fixed rate indebtedness aggregated $769.8 million
(fair value - $799.7 million) with a weighted-average interest rate of 9.1%;
variable rate indebtedness at such date aggregated $13.6 million, which
approximates fair value, with a weighted-average interest rate of 3.9%. Such
fixed rate indebtedness was denominated in the euro (68% of the total) or the
U.S. dollars 32%. At December 31, 2004, all outstanding fixed-rate indebtedness
was denominated in U.S. dollars or the euro, and the outstanding variable rate
borrowings were denominated in the euro.
The Company had an $80 million loan to Snake River Sugar Company at
December 31, 2004. Such loan bore interest at a fixed interest rate of 6.49%,
and the estimated fair value of such loan at such date was $96.3 million. The
potential decrease in the fair value of such loan resulting from a hypothetical
100 basis point increase in market interest rates would be approximately $5.4
million at December 31, 2004. Such loan was prepaid during 2005. See Note 8 to
the Consolidated Financial Statements.
Foreign currency exchange rates. The Company is exposed to market risk
arising from changes in foreign currency exchange rates as a result of
manufacturing and selling its products worldwide. Earnings are primarily
affected by fluctuations in the value of the U.S. dollar relative to the euro,
the Canadian dollar, the Norwegian kroner and the British pound sterling.
As described above, at December 31, 2005, Kronos had the equivalent of
$449.3 million of outstanding euro-denominated indebtedness (2004- the
equivalent of $532.8 million of euro-denominated indebtedness). The potential
increase in the U.S. dollar equivalent of the principal amount outstanding
resulting from a hypothetical 10% adverse change in exchange rates at such date
would be approximately $44.4 million at December 31, 2005 (2004 - $52.4
million).
Certain of the Kronos' sales generated by its non-U.S. operations are
denominated in U.S. dollars. Kronos periodically uses currency forward contracts
to manage a very nominal portion of foreign exchange rate risk associated with
receivables denominated in a currency other than the holder's functional
currency or similar exchange rate risk associated with future sales. Kronos has
not entered into these contracts for trading or speculative purposes in the
past, nor does Kronos currently anticipate entering into such contracts for
trading or speculative purposes in the future. Derivatives used to hedge
forecasted transactions and specific cash flows associated with foreign currency
denominated financial assets and liabilities which meet the criteria for hedge
accounting are designated as cash flow hedges. Consequently, the effective
portion of gains and losses is deferred as a component of accumulated other
comprehensive income and is recognized in earnings at the time the hedged item
affects earnings. Contracts that do not meet the criteria for hedge accounting
are marked-to-market at each balance sheet date with any resulting gain or loss
recognized in income currently as part of net currency transactions. During 2004
and 2005, Kronos has not used hedge accounting for any of its contracts. To
manage such exchange rate risk, at December 31, 2005, Kronos held a series of
short-term currency forward contracts, which mature through March 2006, to
exchange an aggregate of U.S. $7.5 million for an equivalent amount of Canadian
dollars at an exchange rate of Cdn. $1.19 per U.S. dollar. At December 31, 2005,
the actual exchange rate was Cdn. $1.16 per U.S. dollar. The estimated fair
value of such foreign currency forward contracts at December 31, 2005 was not
material. Kronos held no such contracts at December 31, 2004, and held no other
significant derivative contracts at December 31, 2004 or 2005.
Certain of the CompX's sales generated by its non-U.S. operations are
denominated in U.S. dollars. CompX periodically uses currency forward contracts
to manage a portion of foreign exchange rate risk associated with receivables
denominated in a currency other than the holder's functional currency. CompX has
not entered into these contracts for trading or speculative purposes in the
past, nor does CompX currently anticipate entering into such contracts for
trading or speculative purposes in the future. Derivatives used to hedge
forecasted transactions and specific cash flows associated with foreign currency
denominated financial assets and liabilities which meet the criteria for hedge
accounting are designated as cash flow hedges. Consequently, the effective
portion of gains and losses is deferred as a component of accumulated other
comprehensive income and is recognized in earnings at the time the hedged item
affects earnings. Contracts that do not meet the criteria for hedge accounting
are marked-to-market at each balance sheet date with any resulting gain or loss
recognized in income currently as part of net currency transactions. At December
31, 2005, CompX had entered into a series of short-term forward exchange
contracts maturing through March 2006 to exchange an aggregate of $6.5 million
for an equivalent value of Canadian dollars at an exchange rate of Cdn. $1.19
per U.S. dollar. The actual exchange rate was Cdn. $1.17 per U.S. dollar at
December 31, 2005. At December 31, 2004 CompX had entered into a series of
short-term forward exchange contracts maturing through March 2005 to exchange an
aggregate of $7.2 million for an equivalent amount of Canadian dollars at an
exchange rates of Cdn. $1.19 to Cdn. $1.23 per U.S. dollar. The estimated fair
value of such forward exchange contracts at December 31, 2004 and 2005 is not
material.
Marketable equity and debt security prices. The Company is exposed to
market risk due to changes in prices of the marketable securities which are
owned. The fair value of such debt and equity securities at December 31, 2004
and 2005 was $266.2 million and $270.5 million, respectively. The potential
change in the aggregate fair value of these investments, assuming a 10% change
in prices, would be $26.6 million at December 31, 2004 and $27.1 million at
December 31, 2005.
Other. The Company believes there may be a certain amount of incompleteness
in the sensitivity analyses presented above. For example, the hypothetical
effect of changes in interest rates discussed above ignores the potential effect
on other variables which affect the Company's results of operations and cash
flows, such as demand for the Company's products, sales volumes and selling
prices and operating expenses. Contrary to the above assumptions, changes in
interest rates rarely result in simultaneous comparable shifts along the yield
curve. Also, certain of the Company's marketable securities are exchangeable for
certain of the Company's debt instruments, and a decrease in the fair value of
such securities would likely be mitigated by a decrease in the fair value of the
related indebtedness. Accordingly, the amounts presented above are not
necessarily an accurate reflection of the potential losses the Company would
incur assuming the hypothetical changes in market prices were actually to occur.
The above discussion and estimated sensitivity analysis amounts include
forward-looking statements of market risk which assume hypothetical changes in
market prices. Actual future market conditions will likely differ materially
from such assumptions. Accordingly, such forward-looking statements should not
be considered to be projections by the Company of future events, gains or
losses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item is contained in a separate section
of this Annual Report. See "Index of Financial Statements and Schedules" (page
F-1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Remediation of Prior Material Weakness. A material weakness is a control
deficiency, or a combination of control deficiencies, that results in more than
a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The Company has
previously concluded that as of December 31, 2004 and March 31, June 30 and
September 30, 2005, the Company did not maintain effective controls over the
accounting for income taxes, including the determination and reporting of income
taxes payable to affiliates, deferred income tax assets and liabilities,
deferred income tax asset valuation allowance, and the provision for income
taxes. Specifically, the Company did not have adequate personnel with sufficient
knowledge of income tax accounting and reporting. Additionally, the Company did
not maintain effective controls over the review and monitoring of the accuracy,
completeness and valuation of the components of the income tax provision and
related deferred income taxes as well as the income taxes payable to affiliates
resulting in errors in (i) the accounting for the income tax effect of the
difference between book and income tax basis of the Company's investment in
Kronos Worldwide, Inc., a majority-owned subsidiary of the Company, (ii) current
income taxes related to distributions or transfer of Kronos common stock made by
NL Industries, Inc., a majority-owned subsidiary of the Company, to NL's
stockholders and (iii) current and deferred income taxes related to other items,
that were not prevented or detected. This control deficiency resulted in the
previously-reported restatements of the Company's 2002, 2003 and 2004
consolidated financial statements and its 2004 and 2005 interim financial
information. Additionally, this control deficiency could result in a
misstatement of income taxes payable to affiliates, deferred income tax assets
and liabilities, deferred income tax asset valuation allowance, and the
provision for income taxes that would result in a material misstatement to the
Company's annual or interim consolidated financial statements that would not be
prevented or detected. Accordingly, management of the Company determined that
this control deficiency constituted a material weakness.
To remediate this material weakness, in the fourth quarter of 2005
additional resources have been added with a background in accounting for income
taxes in accordance with SFAS No. 109 and the related authoritative guidance.
Management has concluded that the addition of such staff has ensured that
accounting principles generally accepted in the United States of America has
been appropriately applied with respect to the calculation and classification
within the consolidated financial statements of income tax provisions and
related current and deferred income tax accounts. Accordingly, the Company has
concluded that this material weakness no longer exists at December 31, 2005.
Evaluation of Disclosure Controls and Procedures. The Company maintains a
system of disclosure controls and procedures. The term "disclosure controls and
procedures," as defined by Exchange Act Rule 13a-15(e), means controls and other
procedures that are designed to ensure that information required to be disclosed
in the reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits to the SEC under the Act is
accumulated and communicated to the Company's management, including its
principal executive officer and its principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions to be
made regarding required disclosure. Each of Steven L. Watson, the Company's
President and Chief Executive Officer, and Bobby D. O'Brien, the Company's Vice
President and Chief Financial Officer, has evaluated the design and operating
effectiveness of the Company's disclosure controls and procedures as of December
31, 2005. Based upon their evaluation, these executive officers have concluded
that the Company's disclosure controls and procedures were effective as of
December 31, 2005.
Scope of Management's Report on Internal Control Over Financial Reporting.
The Company also maintains internal control over financial reporting. The term
"internal control over financial reporting," as defined by Exchange Act Rule
13a-15(f), means a process designed by, or under the supervision of, the
Company's principal executive and principal financial officers, or persons
performing similar functions, and effected by the Company's board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles, and includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company,
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and
directors of the Company, and
o Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the Company's consolidated
financial statements.
Section 404 of the Sarbanes-Oxley Act of 2002 requires the Company to
include a management report on internal control over financial reporting in this
Annual Report on Form 10-K for the year ended December 31, 2005. The Company's
independent registered public accounting firm is also required to audit the
Company's internal control over financial reporting as of December 31, 2005.
As permitted by the SEC, the Company's assessment of internal control over
financial reporting excludes (i) internal control over financial reporting of
its equity method investees and (ii) internal control over the preparation of
the Company's financial statement schedules required by Article 12 of Regulation
S-X. However, our assessment of internal control over financial reporting with
respect to the Company's equity method investees did include our controls over
the recording of amounts related to our investment that are recorded in our
consolidated financial statements, including controls over the selection of
accounting methods for our investments, the recognition of equity method
earnings and losses and the determination, valuation and recording of our
investment account balances.
Management's Report on Internal Control Over Financial Reporting. The
Company's management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rules 13a-15(f) and 15d-15(f). The Company's evaluation of the effectiveness
of its internal control over financial reporting is based upon the framework
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (commonly referred to as
the "COSO" framework). Based on the Company's evaluation under that framework,
management of the Company has concluded that the Company's internal control over
financial reporting was effective as of December 31, 2005.
PricewaterhouseCoopers LLP, the independent registered public accounting
firm that has audited the Company's Consolidated Financial Statement included in
this Annual Report on Form 10-K, has audited management's assessment of the
effectiveness of the Company's internal control over financial reporting as of
December 31, 2005, as stated in their report which is included in this Annual
Report on Form 10-K.
Changes in Internal Control Over Financial Reporting. Other than the
remediation of the material weakness discussed above, there have been no changes
to the Company's internal control over financial reporting during the quarter
ended December 31, 2005 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
Certifications. The Company's chief executive officer is required to
annually file a certification with the New York Stock Exchange ("NYSE"),
certifying the Company's compliance with the corporate governance listing
standards of the NYSE. During 2005, the Company's chief executive officer filed
such annual certification with the NYSE. The 2005 certification was qualified in
that, while the Company had publicly disclosed in its latest proxy statement
that the audit committee chairman presided at meetings of its independent
directors and how its stockholders might communicate directly with the audit
committee chairman, it had not publicly disclosed how other interested parties
could communicate with the presiding director of the non-management directors
and had not established procedures as to who presided at meetings of
non-management directors. The Company remediated this qualification by amending
its corporate governance guidelines on November 1, 2005, disclosing that the
audit committee chairman presided at meetings of the non-management directors
and how stockholders and other interested parties might communicate with the
presiding director. The Company's chief executive officer and chief financial
officer are also required to, among other things, quarterly file certifications
with the SEC regarding the quality of the Company's public disclosures, as
required by Section 302 of the Sarbanes-Oxley Act of 2002. The certifications
for the quarter ended December 31, 2005 have been filed as exhibits 31.1 and
31.2 to this Annual Report on Form 10-K.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
Valhi's definitive Proxy Statement to be filed with the SEC pursuant to
Regulation 14A within 120 days after the end of the fiscal year covered by this
report (the "Valhi Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Valhi Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to the
Valhi Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Valhi Proxy Statement. See also Note 17 to the Consolidated Financial
Statements.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated by reference to the
Valhi Proxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) and (c) Financial Statements and Schedules
The Registrant
The Consolidated Financial Statements and schedules of the
Registrant listed on the accompanying Index of Financial
Statements and Schedules (see page F-1) are filed as part of this
Annual Report.
50%-or-less owned persons
The consolidated financial statements of TIMET (39%-owned at
December 31, 2005) are filed as Exhibit 99.1 of this Annual
Report pursuant to Rule 3-09 of Regulation S-X. Management's
Report on Internal Control Over Financial Reporting of TIMET is
not included as part of Exhibit 99.1. The Registrant is not
required to provide any other consolidated financial statements
pursuant to Rule 3-09 of Regulation S-X.
(b) Exhibits
Included as exhibits are the items listed in the Exhibit Index.
The Company has retained a signed original of any of these
exhibits that contain signatures, and the Company will provide
such exhibit to the Commission or its staff upon request. Valhi
will furnish a copy of any of the exhibits listed below upon
request and payment of $4.00 per exhibit to cover the costs to
Valhi of furnishing the exhibits. Valhi will also furnish,
without charge, a copy of its Code of Business Conduct and
Ethics, its Audit Committee Charter and its Corporate Governance
Guidelines, each as adopted by the Company's board of directors,
upon request. Such requests should be directed to the attention
of Valhi's Corporate Secretary at Valhi's corporate offices
located at 5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, any instrument
defining the rights of holders of long-term debt issues and other
agreements related to indebtedness which do not exceed 10% of
consolidated total assets as of December 31, 2005 will be
furnished to the Commission upon request.
Item No. Exhibit Item
3.1 Restated Articles of Incorporation of the Registrant -
incorporated by reference to Appendix A to the definitive
Prospectus/Joint Proxy Statement of The Amalgamated Sugar Company
and LLC Corporation (File No. 1-5467) dated February 10, 1987.
3.2 By-Laws of the Registrant as amended - incorporated by reference
to Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q
(File No. 1-5467) for the quarter ended June 30, 2002.
4.1 Indenture dated June 28, 2002 between Kronos International, Inc.
and The Bank of New York, as Trustee, governing Kronos
International's 8.875% Senior Secured Notes due 2009 -
incorporated by reference to Exhibit 4.1 to NL Industries, Inc.'s
Quarterly Report on Form 10-Q (File No. 1-640) for the quarter
ended June 30, 2002.
9.1 Shareholders' Agreement dated February 15, 1996 among TIMET,
Tremont, IMI plc, IMI Kynoch Ltd. and IMI Americas, Inc. -
incorporated by reference to Exhibit 2.2 to Tremont's Current
Report on Form 8-K (File No. 1-10126) dated March 1, 1996.
9.2 Amendment to the Shareholders' Agreement dated March 29, 1996
among TIMET, Tremont, IMI plc, IMI Kynosh Ltd. and IMI Americas,
Inc. - incorporated by reference to Exhibit 10.30 to Tremont's
Annual Report on Form 10-K (File No. 1-10126) for the year ended
December 31, 1995.
10.1 Intercorporate Services Agreement between the Registrant and
Contran Corporation effective as of January 1, 2004 -
incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2004.
10.2 Intercorporate Services Agreement between Contran Corporation and
NL effective as of January 1, 2004 - incorporated by reference to
Exhibit 10.1 to NL's Quarterly Report on Form 10-Q (File No.
1-640) for the quarter ended March 31, 2004.
10.3 Intercorporate Services Agreement between Contran Corporation,
Tremont LLC and TIMET effective as of January 1, 2004 -
incorporated by reference to Exhibit 10.14 to TIMET's Annual
Report on Form 10-K (File No. 0-28538) for the year ended
December 31, 2003.
10.4 Intercorporate Services Agreement between Contran Corporation and
CompX effective January 1, 2004 - incorporated by reference to
Exhibit 10.2 to CompX's Annual Report on Form 10-K (File No.
1-13905) for the year ended December 31, 2003.
Item No. Exhibit Item
10.5 Intercorporate Services Agreement between Contran Corporation and
Kronos Worldwide, Inc. effective January 1, 2004 - incorporated
by reference to Exhibit No. 10.1 to Kronos' Quarterly Report on
Form 10-Q (File No. 1-31763) for the quarter ended March 31,
2004.
10.6 Revolving Loan Note dated May 4, 2001 with Harold C. Simmons
Family Trust No. 2 and EMS Financial, Inc. - incorporated by
reference to Exhibit 10.1 to NL's Quarterly Report on Form 10-Q
(File No. 1-640) for the quarter ended September 30, 2001.
10.7 Security Agreement dated May 4, 2001 by and between Harold C.
Simmons Family Trust No. 2 and EMS Financial, Inc. - incorporated
by reference to Exhibit 10.2 to NL's Quarterly Report on Form
10-Q (File No. 1-640) for the quarter ended September 30, 2001.
10.8* Valhi, Inc. 1987 Stock Option - Stock Appreciation Rights Plan,
as amended - incorporated by reference to Exhibit 10.4 to the
Registrant's Annual Report on Form 10-K (File No. 1-5467) for the
year ended December 31, 1994.
10.9* Valhi, Inc. 1997 Long-Term Incentive Plan - incorporated by
reference to Exhibit 10.12 to the Registrant's Annual Report on
Form 10-K (File No. 1-5467) for the year ended December 31, 1996.
10.10* CompX International Inc. 1997 Long-Term Incentive Plan -
incorporated by reference to Exhibit 10.2 to CompX's Registration
Statement on Form S-1 (File No. 333-42643).
10.11* NL Industries, Inc. 1998 Long-Term Incentive Plan - incorporated
by reference to Appendix A to NL's Proxy Statement on Schedule
14A (File No. 1-640) for the annual meeting of shareholders held
on May 9, 1998.
10.12* Kronos Worldwide, Inc. 2003 Long-Term Incentive Plan -
incorporated by reference to Exhibit 10.4 to Kronos' Registration
Statement on Form 10 (File No. 001-31763).
10.13 Agreement Regarding Shared Insurance dated as of October 30, 2003
by and between CompX International Inc., Contran Corporation,
Keystone Consolidated Industries, Inc., Kronos Worldwide, Inc.,
NL Industries, Inc., Titanium Metals Corporation and Valhi, Inc.
- incorporated by reference to Exhibit 10.32 to Kronos' Annual
Report on Form 10-K (File No. 1-31763) for the year ended
December 31, 2003.
10.14 Formation Agreement of The Amalgamated Sugar Company LLC dated
January 3, 1997 (to be effective December 31, 1996) between Snake
River Sugar Company and The Amalgamated Sugar Company -
incorporated by reference to Exhibit 10.19 to the Registrant's
Annual Report on Form 10-K (File No. 1-5467) for the year ended
December 31, 1996.
10.15 Master Agreement Regarding Amendments to The Amalgamated Sugar
Company Documents dated October 19, 2000 - incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q (File No. 1-5467) for the quarter ended September 30,
2000.
10.16 Prerepayment and Termination Agreement dated October 14, 2005
among Valhi, Inc., Snake River Sugar Company and Wells Fargo Bank
Northwest, N.A. - incorporated by reference to Exhibit No. 10.1
to the Registrant's Amendment No. 1 to its Current Report on Form
8-K (File No. 1-5467) dated October 18, 2005.
Item No. Exhibit Item
10.17 Company Agreement of The Amalgamated Sugar Company LLC dated
January 3, 1997 (to be effective December 31, 1996) -
incorporated by reference to Exhibit 10.20 to the Registrant's
Annual Report on Form 10-K (File No. 1-5467) for the year ended
December 31, 1996.
10.18 First Amendment to the Company Agreement of The Amalgamated Sugar
Company LLC dated May 14, 1997 - incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
(File No. 1-5467) for the quarter ended June 30, 1997.
10.19 Second Amendment to the Company Agreement of The Amalgamated
Sugar Company LLC dated November 30, 1998 - incorporated by
reference to Exhibit 10.24 to the Registrant's Annual Report on
Form 10-K (File No. 1-5467) for the year ended December 31, 1998.
10.20 Third Amendment to the Company Agreement of The Amalgamated Sugar
Company LLC dated October 19, 2000 - incorporated by reference to
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q
(File No. 1-5467) for the quarter ended September 30, 2000.
10.21 Amended and Restated Company Agreement of The Amalgamated Sugar
Company LLC dated October 14, 2005 among The Amalgamated Sugar
Company LLC, Snake River Sugar Company and The Amalgamated
Collateral Trust - incorporated by reference to Exhibit No. 10.7
to the Registrant's Amendment No. 1 to its Current Report on Form
8-K (File No. 1-5467) dated October 18, 2005.
10.22 Subordinated Promissory Note in the principal amount of $37.5
million between Valhi, Inc. and Snake River Sugar Company, and
the related Pledge Agreement, both dated January 3, 1997 -
incorporated by reference to Exhibit 10.21 to the Registrant's
Annual Report on Form 10-K (File No. 1-5467) for the year ended
December 31, 1996.
10.23 Limited Recourse Promissory Note in the principal amount of
$212.5 million between Valhi, Inc. and Snake River Sugar Company,
and the related Limited Recourse Pledge Agreement, both dated
January 3, 1997 - incorporated by reference to Exhibit 10.22 to
the Registrant's Annual Report on Form 10-K (File No. 1-5467) for
the year ended December 31, 1996.
10.24 Subordinated Loan Agreement between Snake River Sugar Company and
Valhi, Inc., as amended and restated effective May 14, 1997 -
incorporated by reference to Exhibit 10.9 to the Registrant's
Quarterly Report on Form 10-Q (File No. 1-5467) for the quarter
ended June 30, 1997.
10.25 Second Amendment to the Subordinated Loan Agreement between Snake
River Sugar Company and Valhi, Inc. dated November 30, 1998 -
incorporated by reference to Exhibit 10.28 to the Registrant's
Annual Report on Form 10-K (File No. 1-5467) for the year ended
December 31, 1998.
10.26 Third Amendment to the Subordinated Loan Agreement between Snake
River Sugar Company and Valhi, Inc. dated October 19, 2000 -
incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q (File No. 1-5467) for the quarter
ended September 30, 2000.
Item No. Exhibit Item
10.27 Fourth Amendment to the Subordinated Loan Agreement between Snake
River Sugar Company and Valhi, Inc. dated March 31, 2003 -
incorporated by reference to Exhibit No. 10.1 to the Registrant's
Quarterly Report on Form 10-Q (file No. 1-5467) for the quarter
ended March 31, 2003.
10.28 Contingent Subordinate Pledge Agreement between Snake River Sugar
Company and Valhi, Inc., as acknowledged by First Security Bank
National Association as Collateral Agent, dated October 19, 2000
- incorporated by reference to Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q (File No. 1-5467) for the quarter
ended September 30, 2000.
10.29 Contingent Subordinate Security Agreement between Snake River
Sugar Company and Valhi, Inc., as acknowledged by First Security
Bank National Association as Collateral Agent, dated October 19,
2000 - incorporated by reference to Exhibit 10.5 to the
Registrant's Quarterly Report on Form 10-Q (File No. 1-5467) for
the quarter ended September 30, 2000.
10.30 Contingent Subordinate Collateral Agency and Paying Agency
Agreement among Valhi, Inc., Snake River Sugar Company and First
Security Bank National Association dated October 19, 2000 -
incorporated by reference to Exhibit 10.6 to the Registrant's
Quarterly Report on Form 10-Q (File No. 1-5467) for the quarter
ended September 30, 2000.
10.31 Deposit Trust Agreement related to the Amalgamated Collateral
Trust among ASC Holdings, Inc. and Wilmington Trust Company dated
May 14, 1997 - incorporated by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q (File No. 1-5467) for
the quarter ended June 30, 1997.
10.32 First Amendment to Deposit Trust Agreement dated October 14, 2005
among ASC Holdings, Inc. and Wilmington Trust Company-
incorporated by reference to Exhibit No. 10.2 to the Registrant's
Amendment No. 1 to its Current Report on Form 8-K (File No.
1-5467) dated October 18, 2005.
10.33 Pledge Agreement between the Amalgamated Collateral Trust and
Snake River Sugar Company dated May 14, 1997 - incorporated by
reference to Exhibit 10.3 to the Registrant's Quarterly Report on
Form 10-Q (File No. 1-5467) for the quarter ended June 30, 1997.
10.34 Second Pledge Amendment (SPT) dated October 14, 2005 among The
Amalgamated Collateral Trust and Snake River Sugar Company -
incorporated by reference to Exhibit No. 10.4 to the Registrant's
Amendment No. 1 to its Current Report on Form 8-K (File No.
1-5467) dated October 18, 2005.
10.35 Guarantee by the Amalgamated Collateral Trust in favor of Snake
River Sugar Company dated May 14, 1997 - incorporated by
reference to Exhibit 10.4 to the Registrant's Quarterly Report on
Form 10-Q (File No. 1-5467) for the quarter ended June 30, 1997.
10.36 Second SPT Guaranty Amendment dated October 14, 2005 among The
Amalgamated Collateral Trust and Snake River Sugar Company -
incorporated by reference to Exhibit No. 10.5 to the Registrant's
Amendment No. 1 to its Current Report on Form 8-K (File No.
1-5467) dated October 18, 2005.
Item No. Exhibit Item
10.37 Amended and Restated Pledge Agreement between ASC Holdings, Inc.
and Snake River Sugar Company dated May 14, 1997 - incorporated
by reference to Exhibit 10.5 to the Registrant's Quarterly Report
on Form 10-Q (File No. 1-5467) for the quarter ended June 30,
1997.
10.38 Second Amended and Restated Pledge Agreement dated October 14,
2005 among ASC Holdings, Inc. and Snake River Sugar Company -
incorporated by reference to Exhibit No. 10.3 to the Registrant's
Amendment No. 1 to its Current Report on Form 8-K (File No.
1-5467) dated October 18, 2005.
10.39 Collateral Deposit Agreement among Snake River Sugar Company,
Valhi, Inc. and First Security Bank, National Association dated
May 14, 1997 - incorporated by reference to Exhibit 10.6 to the
Registrant's Quarterly Report on Form 10-Q (File No. 1-5467) for
the quarter ended June 30, 1997.
10.40 Voting Rights and Forbearance Agreement among the Amalgamated
Collateral Trust, ASC Holdings, Inc. and First Security Bank,
National Association dated May 14, 1997 - incorporated by
reference to Exhibit 10.7 to the Registrant's Quarterly Report on
Form 10-Q (File No. 1-5467) for the quarter ended June 30, 1997.
10.41 First Amendment to the Voting Rights and Forbearance Agreement
among the Amalgamated Collateral Trust, ASC Holdings, Inc. and
First Security Bank National Association dated October 19, 2000 -
incorporated by reference to Exhibit 10.9 to the Registrant's
Quarterly Report on Form 10-Q (File No. 1-5467) for the quarter
ended September 30, 2000.
10.42 Voting Rights and Collateral Deposit Agreement among Snake River
Sugar Company, Valhi, Inc., and First Security Bank, National
Association dated May 14, 1997 - incorporated by reference to
Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q
(File No. 1-5467) for the quarter ended June 30, 1997.
10.43 Subordination Agreement between Valhi, Inc. and Snake River Sugar
Company dated May 14, 1997 - incorporated by reference to Exhibit
10.10 to the Registrant's Quarterly Report on Form 10-Q (File No.
1-5467) for the quarter ended June 30, 1997.
10.44 First Amendment to the Subordination Agreement between Valhi,
Inc. and Snake River Sugar Company dated October 19, 2000 -
incorporated by reference to Exhibit 10.7 to the Registrant's
Quarterly Report on Form 10-Q (File No. 1-5467) for the quarter
ended September 30, 2000.
10.45 Form of Option Agreement among Snake River Sugar Company, Valhi,
Inc. and the holders of Snake River Sugar Company's 10.9% Senior
Notes Due 2009 dated May 14, 1997 - incorporated by reference to
Exhibit 10.11 to the Registrant's Quarterly Report on Form 10-Q
(File No. 1-5467) for the quarter ended June 30, 1997.
10.46 Option Agreement dated October 14, 2005 among Valhi, Inc., Snake
River Sugar Company, Northwest Farm Credit Services, FLCA and
U.S. Bank National Association - incorporated by reference to
Exhibit No. 10.6 to the Registrant's Amendment No. 1 to its
Current Report on Form 8-K (File No. 1-5467) dated October 18,
2005.
Item No. Exhibit Item
10.47 First Amendment to Option Agreements among Snake River Sugar
Company, Valhi Inc., and the holders of Snake River's 10.9%
Senior Notes Due 2009 dated October 19, 2000 - incorporated by
reference to Exhibit 10.8 to the Registrant's Quarterly Report on
Form 10-Q (File No. 1-5467) for the quarter ended September 30,
2000.
10.48 Formation Agreement dated as of October 18, 1993 among Tioxide
Americas Inc., Kronos Louisiana, Inc. and Louisiana Pigment
Company, L.P. - incorporated by reference to Exhibit 10.2 of NL's
Quarterly Report on Form 10-Q (File No. 1-640) for the quarter
ended September 30, 1993.
10.49 Joint Venture Agreement dated as of October 18, 1993 between
Tioxide Americas Inc. and Kronos Louisiana, Inc. - incorporated
by reference to Exhibit 10.3 of NL's Quarterly Report on Form
10-Q (File No. 1-640) for the quarter ended September 30, 1993.
10.50 Kronos Offtake Agreement dated as of October 18, 1993 by and
between Kronos Louisiana, Inc. and Louisiana Pigment Company,
L.P. - incorporated by reference to Exhibit 10.4 of NL's
Quarterly Report on Form 10-Q (File No. 1-640) for the quarter
ended September 30, 1993.
10.51 Amendment No. 1 to Kronos Offtake Agreement dated as of December
20, 1995 between Kronos Louisiana, Inc. and Louisiana Pigment
Company, L.P. - incorporated by reference to Exhibit 10.22 of
NL's Annual Report on Form 10-K (File No. 1-640) for the year
ended December 31 1995.
10.52 Master Technology and Exchange Agreement dated as of October 18,
1993 among Kronos, Inc., Kronos Louisiana, Inc., Kronos
International, Inc., Tioxide Group Limited and Tioxide Group
Services Limited - incorporated by reference to Exhibit 10.8 of
NL's Quarterly Report on Form 10-Q (File No. 1-640) for the
quarter ended September 30, 1993.
10.53 Allocation Agreement dated as of October 18, 1993 between Tioxide
Americas Inc., ICI American Holdings, Inc., Kronos, Inc. and
Kronos Louisiana, Inc. - incorporated by reference to Exhibit
10.10 to NL's Quarterly Report on Form 10-Q (File No. 1-640) for
the quarter ended September 30, 1993.
10.54 Lease Contract dated June 21, 1952, between Farbenfabrieken Bayer
Aktiengesellschaft and Titangesellschaft mit beschrankter Haftung
(German language version and English translation thereof) -
incorporated by reference to Exhibit 10.14 of NL's Annual Report
on Form 10-K (File No. 1-640) for the year ended December 31,
1985.
10.55 Contract on Supplies and Services among Bayer AG, Kronos Titan
GmbH and Kronos International, Inc. dated June 30, 1995 (English
translation from German language document) - incorporated by
reference to Exhibit 10.1 of NL's Quarterly Report on Form 10-Q
(File No. 1-640) for the quarter ended September 30, 1995.
10.56 Amendment dated August 11, 2003 to the Contract on Supplies and
Services among Bayer AG, Kronos Titan-GmbH & Co. OHG and Kronos
International (English translation of German language document) -
incorporated by reference to Exhibit No. 10.32 to the Kronos
Worldwide, Inc. Registration Statement on Form 10 (File No.
001-31763).
Item No. Exhibit Item
10.57 Form of Lease Agreement, dated November 12, 2004, between The
Prudential Assurance Company Limited and TIMET UK Ltd. related to
the premises known as TIMET Number 2 Plant, The Hub, Birmingham,
England - incorporated by reference to Exhibit 10.1 to TIMET's
Current Report on Form 8-K (File No. 1 -10126) filed with the SEC
on November 17, 2004.
10.58** Richards Bay Slag Sales Agreement dated May 1, 1995 between
Richards Bay Iron and Titanium (Proprietary) Limited and Kronos,
Inc.- incorporated by reference to Exhibit 10.17 to NL's Annual
Report on Form 10-K (File No. 1-640) for the year ended December
31, 1995.
10.59** Amendment to Richards Bay Slag Sales Agreement dated May 1, 1999,
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc. - incorporated by reference to Exhibit 10.4 to NL's
Annual Report on Form 10-K (File No. 1-640) for the year ended
December 31, 1999.
10.60** Amendment to Richards Bay Slag Sales Agreement dated June 1, 2001
between Richards Bay Iron and Titanium (Proprietary) Limited and
Kronos, Inc.- incorporated by reference to Exhibit No. 10.5 to
NL's Annual Report on Form 10-K (File No. 1-640) for the year
ended December 31, 2001.
10.61** Amendment to Richards Bay Slag Sales Agreement dated December 20,
2002 between Richards Bay Iron and Titanium (Proprietary) Limited
and Kronos, Inc.- incorporated by reference to Exhibit No. 10.7
to NL's Annual Report on Form 10-K (File No. 1-640) for the year
ended December 31, 2002.
10.62** Amendment to Richards Bay Slag Sales Agreement dated October 31,
2003 between Richards Bay Iron and Titanium (Proprietary) Limited
and Kronos, Inc. - incorporated by reference to Exhibit No. 10.17
to Kronos' Annual Report on Form 10-K (File No. 1-31763) for the
year ended December 31, 2003.
10.63 Agreement between Sachtleben Chemie GmbH and Kronos Titan GmbH
effective as of December 30, 1988 - Incorporated by reference to
Exhibit No. 10.1 to Kronos International Inc.'s Quarterly Report
on Form 10-Q (File No. 333-100047) for the quarter ended
September 30, 2002.
10.64 Supplementary Agreement dated as of May 3, 1996 to the Agreement
effective as of December 30, 1986 between Sachtleben Chemie GmbH
and Kronos Titan GmbH - incorporated by reference to Exhibit No.
10.2 to Kronos International Inc.'s Quarterly Report on Form 10-Q
(File No. 333-100047) for the quarter ended September 30, 2002.
10.65 Second Supplementary Agreement dated as of January 8, 2002 to the
Agreement effective as of December 30, 1986 between Sachtleben
Chemie GmbH and Kronos Titan GmbH - incorporated by reference to
Exhibit No. 10.3 to Kronos International Inc.'s Quarterly Report
on Form 10-Q (File No. 333-100047) for the quarter ended
September 30, 2002.
10.66 Purchase and Sale Agreement (for titanium products) between The
Boeing Company, acting through its division, Boeing Commercial
Airplanes, and Titanium Metals Corporation (as amended and
restated effective April 19, 2001) - incorporated by reference to
Exhibit No. 10.2 to Titanium Metals Corporation's Quarterly
Report on Form 10-Q (File No. 0-28538) for the quarter ended June
30, 2002.
Item No. Exhibit Item
10.67 Purchase and Sale Agreement between Rolls Royce plc and Titanium
Metals Corporation dated December 22, 1998 - incorporated by
reference to Exhibit No. 10.3 to Titanium Metals Corporation's
Quarterly Report on Form 10-Q (File No. 0-28538) for the quarter
ended June 30, 2002.
10.68** First Amendment to Purchase and Sale Agreement between
Rolls-Royce plc and TIMET - incorporated by reference to Exhibit
No. 10.1 to TIMET's Quarterly Report on Form 10-Q (File No.
0-28538) for the quarter ended June 30, 2004.
10.69** Second Amendment to Purchase and Sale Agreement between
Rolls-Royce plc and TIMET - incorporated by reference to Exhibit
No. 10.2 to TIMET's Quarterly Report on Form 10-Q (File No.
0-28538) for the quarter ended June 30, 2004.
10.70** General Terms Agreement between The Boeing Company and Titanium
Metals Corporation - incorporated by reference to Exhibit No.
10.2 to TIMET's Amendment No. 1 to its Current Report on Form 8-K
(File No. 0-28538) dated August 2, 2005.
10.71** Special Business Provisions between The Boeing Company and
Titanium Metals Corporation - incorporated by reference to
Exhibit No. 10.3 to TIMET's Amendment No. 1 its Current Report on
Form 8-K (File No. 0-28538) dated August 2, 2005.
10.72 Insurance Sharing Agreement, effective January 1, 1990, by and
between NL, Tall Pines Insurance Company, Ltd. and Baroid
Corporation - incorporated by reference to Exhibit 10.20 to NL's
Annual Report on Form 10-K (File No. 1-640) for the year ended
December 31, 1991.
10.73 Indemnification Agreement between Baroid, Tremont and NL
Insurance, Ltd. dated September 26, 1990 - incorporated by
reference to Exhibit 10.35 to Baroid's Registration Statement on
Form 10 (No. 1-10624) filed with the Commission on August 31,
1990.
10.74 Administrative Settlement for Interim Remedial Measures, Site
Investigation and Feasibility Study dated July 7, 2000 between
the Arkansas Department of Environmental Quality, Halliburton
Energy Services, Inc., M I, LLC and TRE Management Company -
incorporated by reference to Exhibit 10.1 to Tremont
Corporation's Quarterly Report on Form 10-Q (File No. 1-10126)
for the quarter ended June 30, 2002.
10.75 Settlement Agreement and Release of Claims dated April 19, 2001
between Titanium Metals Corporation and the Boeing Company -
incorporated by reference to Exhibit 10.1 to TIMET's Quarterly
Report on Form 10-Q (File No. 0-28538) for the quarter ended
March 31, 2001.
21.1*** Subsidiaries of the Registrant.
23.1*** Consent of PricewaterhouseCoopers LLP with respect to Valhi's
consolidated financial statements
23.2*** Consent of PricewaterhouseCoopers LLP with respect to TIMET's
consolidated financial statements
Item No. Exhibit Item
31.1*** Certification
31.2*** Certification
32.1*** Certification
99.1 Consolidated financial statements of Titanium Metals Corporation
- incorporated by reference to TIMET's Annual Report on Form 10-K
(File No. 0-28538) for the year ended December 31, 2005.
* Management contract, compensatory plan or agreement.
** Portions of the exhibit have been omitted pursuant to a request for
confidential treatment.
*** Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VALHI, INC.
(Registrant)
By: /s/ Steven L. Watson
Steven L. Watson, March 24, 2006
(President and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ Harold C. Simmons /s/ Steven L. Watson
----------------------------------- -----------------------------------
Harold C. Simmons, March 24, 2006 Steven L. Watson, March 24, 2006
(Chairman of the Board) (President, Chief Executive Officer
and Director)
/s/ Thomas E. Barry /s/ Glenn R. Simmons
----------------------------------- -----------------------------------
Thomas E. Barry, March 24, 2006 Glenn R. Simmons, March 24, 2006
(Director) (Vice Chairman of the Board)
/s/ Norman S. Edelcup /s/ Bobby D. O'Brien
----------------------------------- -----------------------------------
Norman S. Edelcup, March 24, 2006 Bobby D. O'Brien, March 24, 2006
(Director) (Vice President and
Chief Financial Officer,
Principal Financial Officer)
/s/ W. Hayden McIlroy /s/ Gregory M. Swalwell
----------------------------------- -----------------------------------
W. Hayden McIlroy, March 24, 2006 Gregory M. Swalwell, March 24, 2006
(Director) (Vice President and Controller,
Principal Accounting Officer)
/s/ J. Walter Tucker, Jr.
-----------------------------------
J. Walter Tucker, Jr. March 24, 2006
(Director)
Annual Report on Form 10-K
Items 8, 15(a) and 15(d)
Index of Financial Statements and Schedules
Financial Statements Page
----
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets - December 31, 2004 (Restated);
December 31, 2005 F-4
Consolidated Statements of Operations -
Years ended December 31, 2003 and 2004 (Restated);
Year ended December 31, 2005 F-6
Consolidated Statements of Comprehensive Income (Loss) -
Years ended December 31, 2003 and 2004 (Restated);
Year ended December 31, 2005 F-8
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 2003 and 2004 (Restated);
Year ended December 31, 2005 F-9
Consolidated Statements of Cash Flows -
Years ended December 31, 2003 and 2004 (Restated);
Year ended December 31, 2005 F-10
Notes to Consolidated Financial Statements F-13
Financial Statement Schedules
Schedule I - Condensed Financial Information of Registrant
(Restated) S-1
Schedule II - Valuation and Qualifying Accounts S-10
Schedules III and IV are omitted because they are not applicable.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Valhi, Inc.:
We have completed integrated audits of Valhi, Inc.'s 2004 and 2005
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2005, and an audit of its 2003 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements and financial statement schedules
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Valhi, Inc. and its subsidiaries at December 31, 2004 and 2005, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2005 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedules listed in the accompanying index present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit of
financial statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the
Company has restated its 2003 and 2004 consolidated financial statements as a
result of a change in accounting principle adopted retroactively in 2005 by
Titanium Metals Corporation, an equity method investee of the Company.
As discussed in Note 19 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 143 on January
1, 2003.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in Management's
Report on Internal Control Over Financial Reporting appearing under Item 9A,
that the Company maintained effective internal control over financial reporting
as of December 31, 2005 based on the criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of
Treadway Commission ("COSO), is fairly stated, in all material respects, based
on those criteria. Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control -
Integrated Framework issued by the COSO. The Company's management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company, (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Dallas, Texas
March 24, 2006
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2005
(In thousands, except per share data)
ASSETS
2004 2005
---------- ----------
(Restated)
Current assets:
Cash and cash equivalents $ 267,829 $ 274,963
Restricted cash equivalents 9,609 6,007
Marketable securities 9,446 11,755
Accounts and other receivables 217,931 218,766
Refundable income taxes 3,330 1,489
Receivable from affiliates 5,531 34
Inventories 263,414 283,157
Prepaid expenses 12,342 9,981
Deferred income taxes 9,705 10,502
--------- ----------
Total current assets 799,137 816,654
--------- ----------
Other assets:
Marketable securities 256,770 258,705
Investment in affiliates 189,726 270,632
Receivable from affiliate 10,000 -
Loans and other receivables 119,452 2,502
Unrecognized net pension obligations 13,518 11,916
Prepaid pension cost - 3,529
Goodwill 354,051 361,783
Other intangible assets 3,189 3,432
Deferred income taxes 239,521 213,726
Other assets 52,326 59,137
--------- ----------
Total other assets 1,238,553 1,185,362
--------- ----------
Property and equipment:
Land 38,493 37,876
Buildings 234,152 220,110
Equipment 894,023 827,690
Mining properties 20,277 19,969
Construction in progress 21,557 15,771
--------- ----------
1,208,502 1,121,416
Less accumulated depreciation 555,707 545,055
--------- ----------
Net property and equipment 652,795 576,361
--------- ----------
$2,690,485 $2,578,377
========== ==========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2004 and 2005
(In thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
2004 2005
-------- --------
(Restated)
Current liabilities:
Current maturities of long-term debt $ 14,412 $ 1,615
Accounts payable 109,158 105,650
Accrued liabilities 131,119 129,429
Payable to affiliates 11,607 13,754
Income taxes 21,196 24,680
Deferred income taxes 24,170 4,313
---------- ---------
Total current liabilities 311,662 279,441
---------- ---------
Noncurrent liabilities:
Long-term debt 769,525 715,820
Accrued pension costs 77,360 140,742
Accrued OPEB costs 34,988 32,279
Accrued environmental costs 55,450 49,161
Deferred income taxes 386,054 400,964
Other 41,061 39,328
---------- ---------
Total noncurrent liabilities 1,364,438 1,378,294
---------- ---------
Minority interest 139,710 125,049
---------- ---------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares
authorized; none issued - -
Common stock, $.01 par value; 150,000 shares
authorized; 124,195 and 120,748 shares issued 1,242 1,207
Additional paid-in capital 110,978 108,810
Retained earnings 812,484 786,268
Accumulated other comprehensive income:
Marketable securities 5,449 4,194
Currency translation 36,380 11,157
Pension liabilities (53,916) (78,101)
Treasury stock, at cost - 3,984 and 3,984 shares (37,942) (37,942)
---------- ---------
Total stockholders' equity 874,675 795,593
---------- ---------
$2,690,485 $2,578,377
========== ==========
Commitments and contingencies (Notes 5, 10, 15, 17 and 18)
See accompanying notes to consolidated financial statements.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2003, 2004 and 2005
(In thousands, except per share data)
2003 2004 2005
---- ---- ----
(Restated) (Restated)
Revenues and other income:
Net sales $1,186,185 $1,320,128 $1,392,866
Other, net 41,427 44,244 67,989
Equity in earnings of:
Titanium Metals Corporation ("TIMET") (2,312) 22,669 64,889
Other 771 2,175 3,563
---------- ---------- ----------
1,226,071 1,389,216 1,529,307
---------- ---------- ----------
Cost and expenses:
Cost of sales 905,658 1,036,950 1,042,838
Selling, general and administrative 220,753 208,101 219,641
Interest 58,524 62,901 69,190
---------- ---------- ----------
1,184,935 1,307,952 1,331,669
---------- ---------- ----------
Income before taxes 41,136 81,264 197,638
Provision for income taxes (benefit) 132,406 (193,338) 104,159
Minority interest in after-tax
earnings (losses) (5,863) 48,343 11,756
---------- ---------- ----------
Income (loss) from continuing
operations (85,407) 226,259 81,723
Discontinued operations (2,874) 3,732 (272)
Cumulative effect of change in accounting
principle 586 - -
---------- ---------- ----------
Net income (loss) $ (87,695) $ 229,991 $ 81,451
=========== ========== ==========
See accompanying notes to consolidated financial statements.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
Years ended December 31, 2003, 2004 and 2005
(In thousands, except per share data)
2003 2004 2005
---- ---- ----
(Restated) (Restated)
Basic earnings per share:
Income (loss) from continuing
operations $ (.71) $ 1.89 $ .69
Discontinued operations (.03) .03 -
Cumulative effect of change in
accounting principle .01 - -
-------- -------- --------
Net income (loss) $ (.73) $ 1.92 $ .69
======== ======== ========
Diluted earnings per share:
Income (loss) from continuing
operations $ (.71) $ 1.88 $ .68
Discontinued operations (.03) .03 -
Cumulative effect of change in
accounting principle .01 - -
-------- -------- --------
Net income (loss) $ (.73) $ 1.91 $ .68
======== ======== ========
Cash dividends per share $ .24 $ .24 $ .40
Shares used in the calculation of
per share amounts:
Basic earnings per share 119,696 120,197 118,155
Diluted impact of stock options - 243 364
-------- -------- --------
Diluted earnings per share 119,696 120,440 118,519
======== ======== ========
See accompanying notes to consolidated financial statements.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended December 31, 2003, 2004 and 2005
(In thousands)
2003 2004 2005
---- ---- ----
(Restated) (Restated)
Net income (loss) $(87,695) $229,991 $ 81,451
-------- -------- --------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment 860 3,243 (1,255)
Currency translation adjustment 31,798 40,172 (25,223)
Pension liabilities adjustment (18,275) 1,870 (24,185)
-------- -------- --------
Total other comprehensive income (loss), net 14,383 45,285 (50,663)
-------- -------- --------
Comprehensive income (loss) $(73,312) $275,276 $ 30,788
======== ======== ========
See accompanying notes to consolidated financial statements.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2003, 2004 and 2005
(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
----- ------- -------- ---------- ----------- ----------- -------- ------------
(Restated) (Restated)
Balance at December 31, 2002:
As previously reported $1,262 $47,657 $779,240 $1,346 $(35,590) $(37,511) $(75,649) $680,755
Effect of TIMET's change in
accounting principle - - 7,778 - - - - 7,778
------ ------- -------- ------ -------- -------- -------- --------
Balance as restated 1,262 47,657 787,018 1,346 (35,590) (37,511) (75,649) 688,533
Net loss* - - (87,695) - - - - (87,695)
Cash dividends - - (29,796) - - - - (29,796)
Other comprehensive income
(loss), net - - - 860 31,798 (18,275) - 14,383
Merger transactions - Valhi
shares issued to acquire
Tremont shares attributable to:
Tremont minority interest 48 50,926 - - - - - 50,974
NL's holdings on Tremont 30 19,219 - - - - (19,249) -
Adjust treasury stock for Valhi
shares held by NL - - - - - - (7,616) (7,616)
Other, net - 265 - - - - - 265
------ ------- -------- ------ -------- -------- -------- --------
Balance at December 31, 2003* 1,340 118,067 669,527 2,206 (3,792) (55,786) (102,514) 629,048
Net income* - - 229,991 - - - - 229,991
Cash dividends - - (29,804) - - - - (29,804)
Other comprehensive income, net - - - 3,243 40,172 1,870 - 45,285
Retirement of treasury stock (99) (7,243) (57,230) - - - 64,572 -
Other, net 1 154 - - - - - 155
------ ------- -------- ------ -------- -------- -------- --------
Balance at December 31, 2004* 1,242 110,978 812,484 5,449 36,380 (53,916) (37,942) 874,675
Net income - - 81,451 - - - - 81,451
Cash dividends - - (48,805) - - - - (48,805)
Other comprehensive income
(loss), net - - - (1,255) (25,223) (24,185) - (50,663)
Treasury stock:
Acquired - - - - - - (62,060) (62,060)
Retired (35) (3,163 (58,862) - - - 62,060 -
Other, net - 995 - - - - - 995
------ ------- -------- ------ -------- -------- -------- --------
Balance at December 31, 2005 $1,207 $108,810 $786,268 $ 4,194 $ 11,157 $(78,101) $(37,942) $795,593
====== ======== ======== ======= ======== ======== ======== ========
*As restated.
See accompanying notes to consolidated financial statements.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003, 2004 and 2005
(In thousands)
2003 2004 2005
---- ---- ----
(Restated) (Restated)
Cash flows from operating activities:
Net income (loss) $ (87,695) $ 229,991 $ 81,451
Depreciation and amortization 72,969 78,352 74,527
Goodwill impairment - 6,500 -
Securities transactions, net (487) (2,113) (20,259)
Proceeds from disposal of marketable
securities (trading) 50 - -
Write-off of accrued interest receivable - - 21,638
Loss (gain) on disposal of property and
equipment (9,845) 855 1,555
Noncash interest expense 2,366 2,543 3,037
Benefit plan expense less than
cash funding:
Defined benefit pension expense (5,478) (2,977) (6,365)
Other postretirement benefit expense (4,078) (2,839) (2,963)
Deferred income taxes:
Continuing operations 151,257 (211,831) 42,295
Discontinued operations (2,590) (3,508) (696)
Minority interest:
Continuing operations (5,863) 48,343 11,756
Discontinued operations (1,414) (4,124) (205)
Equity in:
TIMET 2,312 (22,669) (64,889)
Other (771) (2,175) (3,563)
Cumulative effect of change in accounting
principle (586) - -
Net distributions from:
Ti02 manufacturing joint venture 875 8,600 4,850
Other 1,205 494 964
Other, net (1,195) 4,391 347
Change in assets and liabilities:
Accounts and other receivables 3,795 (25,148) (4,052)
Inventories (20,938) 46,937 (48,858)
Accounts payable and accrued liabilities (8,948) (10,116) 1,407
Income taxes (26,646) 30,759 16,082
Accounts with affiliates 24,077 (10,060) 3,750
Other noncurrent assets (1,812) (812) (4,562)
Other noncurrent liabilities 21,115 (17,764) (2,307)
Other, net 6,871 500 (649)
-------- ------- -------
Net cash provided by operating activities 108,546 142,129 104,291
-------- ------- -------
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2003, 2004 and 2005
(In thousands)
2003 2004 2005
---- ---- ----
(Restated) (Restated)
Cash flows from investing activities:
Capital expenditures $ (44,659) $ (48,521) $ (62,778)
Purchases of:
Kronos common stock (6,428) (17,057) (7,039)
TIMET common stock (976) - (17,972)
CompX common stock - - (3,638)
TIMET debt securities (238) - -
Other subsidiary - (575) -
Business unit - - (7,342)
Marketable securities - - (29,449)
Capitalized permit costs (672) (6,274) (4,105)
Proceeds from disposal of:
Business unit - - 18,094
Property and equipment 13,472 2,964 553
Kronos common stock - 2,745 19,176
Marketable securities - - 19,690
Interest in Norwegian smelting operation - - 3,542
Change in restricted cash equivalents, net (248) 10,068 (1,759)
Collection of loan to Snake River Sugar
Company - - 80,000
Cash of disposed business unit - - (4,006)
Loans to affiliates:
Loans - (12,929) (11,000)
Collections 4,000 12,000 25,929
Other, net 1,984 (508) 2,474
--------- ------- -------
Net cash provided (used) by investing
activities (33,765) (58,087) 20,370
--------- ------- -------
Cash flows from financing activities:
Indebtedness:
Borrowings 27,106 297,439 56,996
Principal payments (59,782) (186,274) (54,210)
Deferred financing costs paid (426) (2,017) (114)
Loans from affiliates:
Loans 16,354 26,117 -
Repayments (20,193) (33,449) -
Valhi dividends paid (29,796) (29,804) (48,805)
Distributions to minority interest (6,509) (3,577) (12,007)
Treasury stock acquired - - (62,060)
NL common stock issued 1,738 9,201 2,507
Other, net 264 802 1,931
--------- ------- -------
Net cash provided (used) by financing
Activities (71,244) 78,438 (115,762)
--------- ------- -------
Net increase $ 3,537 $ 162,480 $ 8,899
======== ========= =========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2003, 2004 and 2005
(In thousands)
2003 2004 2005
---- ---- ----
(Restated) (Restated)
Cash and cash equivalents - net change from:
Operating, investing and financing
activities $ 3,537 $162,480 $ 8,899
Currency translation 5,178 1,955 (1,765)
-------- -------- --------
8,715 164,435 7,134
Balance at beginning of year 94,679 103,394 267,829
-------- -------- --------
Balance at end of year $103,394 $267,829 $274,963
======== ======== ========
Supplemental disclosures:
Cash paid (received) for:
Interest, net of amounts capitalized $ 53,990 $ 59,446 $ 64,964
Income taxes, net (4,237) (20,583) 54,131
Noncash investing activities:
Note receivable received upon
disposal of business unit $ - $ - $ 4,179
Inventories received as partial
consideration for disposal of
interest in Norwegian smelting
operation - - 1,897
See accompanying notes to consolidated financial statements.
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Restatement and summary of significant accounting policies:
Restatement of financial statements. As previously reported, effective
January 1, 2005, TIMET, an equity method investee of the Company, changed its
method of accounting for approximately 40% of its inventories from the last-in,
first-out ("LIFO") method to the specific identification cost method,
representing all of its inventories previously accounted for under the LIFO
method. In accordance with accounting principles generally accepted in the
United States of America ("GAAP"), the Company has retroactively restated its
consolidated financial statements to reflect its financial position, results of
operations and cash flows as if TIMET had accounted for such inventories under
the new method for all periods presented. As a result of this change in
accounting principles by TIMET, the Company's consolidated stockholders' equity
as of December 31, 2002 is approximately $7.8 million higher than previously
reported, the Company's consolidated income from continuing operations and net
income in 2003 are approximately $2.7 million, or $.02 per diluted share, lower
than previously reported (comprised of $4.2 million of lower equity in earnings
of TIMET offset by a $1.5 million deferred income tax benefit) and the Company's
consolidated income from continuing operations and net income in 2004 are
approximately $2.1 million, or $.02 per diluted share, higher than previously
reported (comprised of $3.2 million of higher equity in earnings of TIMET offset
by a $1.1 million deferred income tax provision).
Summary of significant accounting policies.
Organization and basis of presentation. Valhi, Inc. (NYSE: VHI) is a
subsidiary of Contran Corporation. At December 31, 2005, Contran held, directly
or through subsidiaries, approximately 92% of Valhi's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is sole trustee, or is held by Mr. Simmons or
persons or other entities related to Mr. Simmons. Consequently, Mr. Simmons may
be deemed to control such companies.
Management's estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America ("GAAP") requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ significantly from previously-estimated amounts under
different assumptions or conditions.
Principles of consolidation. The consolidated financial statements include
the accounts of Valhi and its majority-owned subsidiaries (collectively, the
"Company"). All material intercompany accounts and balances have been
eliminated.
Increases in the Company's ownership interest of its consolidated
subsidiaries, either through the Company's purchase of additional shares of the
subsidiary's common stock or the subsidiary's purchase of its own shares of
common stock, are accounted for by the purchase method (step acquisition).
Unless otherwise noted, such purchase accounting generally results in an
adjustment to the carrying amount of goodwill. The effect of decreases in the
Company's ownership interest of its consolidated subsidiaries through the
Company's or the subsidiary's sale of the subsidiary's common stock to third
parties is reflected in net income, with a gain or loss recognized equal to the
difference between the proceeds from such sale and the carrying value of the
shares sold. The effect of other decreases in the Company's ownership interest
of its consolidated subsidiaries, which usually result from the exercise of
options granted by such subsidiaries to purchase their shares of common stock to
employees, is generally not material.
Translation of foreign currencies. Assets and liabilities of subsidiaries
and affiliates whose functional currency is other than the U.S. dollar are
translated at year-end rates of exchange and revenues and expenses are
translated at average exchange rates prevailing during the year. Resulting
translation adjustments are accumulated in stockholders' equity as part of
accumulated other comprehensive income, net of related deferred income taxes and
minority interest. Currency transaction gains and losses are recognized in
income currently.
Derivatives and hedging activities. Derivatives are recognized as either
assets or liabilities and measured at fair value in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. The accounting for changes in
fair value of derivatives depends upon the intended use of the derivative, and
such changes are recognized either in net income or other comprehensive income.
As permitted by the transition requirements of SFAS No. 133, the Company has
exempted from the scope of SFAS No. 133 all host contracts containing embedded
derivatives which were issued or acquired prior to January 1, 1999.
Cash and cash equivalents. Cash equivalents include bank time deposits and
government and commercial notes and bills with original maturities of three
months or less.
Restricted cash equivalents and marketable debt securities. Restricted cash
equivalents and marketable debt securities, primarily invested in U.S.
government securities and money market funds that invest primarily in U.S.
government securities, includes $19 million at December 31, 2004 held by special
purpose trusts (2005 - nil) formed by NL Industries, the assets of which could
only be used to pay for certain of NL's future environmental remediation and
other environmental expenditures. Such restricted amounts were generally
classified as either a current or noncurrent asset depending on the
classification of the liability to which the restricted amount relates.
Additionally, the restricted marketable debt securities are generally classified
as either a current or noncurrent asset depending upon the maturity date of each
such debt security. See Notes 5 and 8.
Marketable securities; securities transactions. Marketable debt and equity
securities are carried at fair value based upon quoted market prices or as
otherwise disclosed. Unrealized and realized gains and losses on trading
securities are recognized in income currently. Unrealized gains and losses on
available-for-sale securities are accumulated in stockholders' equity as part of
accumulated other comprehensive income, net of related deferred income taxes and
minority interest. Realized gains and losses are based upon the specific
identification of the securities sold.
Accounts receivable. The Company provides an allowance for doubtful
accounts for known and estimated potential losses arising from sales to
customers based on a periodic review of these accounts.
Inventories and cost of sales. Inventories are stated at the lower of cost
or market, net of allowance for obsolete and slow-moving inventories ($10.2
million and $9.5 million at December 31, 2004 and 2005, respectively). Inventory
costs are generally based on average cost or the first-in, first-out method.
Cost of sales includes costs for materials, packing and finishing, utilities,
salary and benefits, maintenance and depreciation.
Investment in affiliates and joint ventures. Investments in more than
20%-owned but less than majority-owned companies are accounted for by the equity
method. See Note 7. Differences between the cost of each investment and the
Company's pro rata share of the entity's separately-reported net assets, if any,
are allocated among the assets and liabilities of the entity based upon
estimated relative fair values. Such differences approximate a $32 million
credit at December 31, 2005, relate principally to the Company's investment in
TIMET and are charged or credited to income as the entities depreciate, amortize
or dispose of the related net assets.
Goodwill and other intangible assets; amortization expense. Goodwill
represents the excess of cost over fair value of individual net assets acquired
in business combinations accounted for by the purchase method. Goodwill is not
subject to periodic amortization. Other intangible assets, amortized by the
straight-line method over their estimated lives, are stated net of accumulated
amortization. Goodwill and other intangible assets are assessed for impairment
in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. See Note
9.
Capitalized operating permits. Direct costs related to the acquisition or
renewal of operating permits related to the Company's waste management
operations are capitalized and are amortized by the straight-line method over
the term of the applicable permit. Amortization of capitalized operating permit
costs was $357,000 in 2003, $623,000 in 2004 and $126,000 in 2005. At December
31, 2005, net operating permit costs include (i) $1.0 million related to costs
to renew certain permits for which the renewal application is pending with the
applicable regulatory agency and (ii) $9.7 million related to costs to apply for
certain new permits which have not yet been issued by the applicable regulatory
authority. Renewal of the permits for which the application is still pending is
currently expected to occur in the ordinary course of business, and costs
related to such renewals are being amortized from the date the prior permit
expired. Costs related to the new permits which have not yet been issued will
either be (i) amortized from the date the permit is issued or (ii) written off
to expense at the earlier of (a) the date the applicable regulatory authority
rejects the permit application or (b) the date the Company determines that
issuance of the permit to the Company is not probable of occurring. All
operating permits are generally subject to renewal at the option of the issuing
governmental agency.
Property and equipment; depreciation expense. Property and equipment are
stated at cost. The Company has a governmental concession with an unlimited term
to operate an ilmenite mine in Norway. Mining properties consist of buildings
and equipment used in the Company's Norwegian ilmenite mining operations. While
the Company owns the land and ilmenite reserves associated with the mine, such
land and reserves were acquired for nominal value and the Company has no
material asset recognized for the land and reserves related to such mining
operations. Depreciation of property and equipment for financial reporting
purposes (including mining properties) is computed principally by the
straight-line method over the estimated useful lives of ten to 40 years for
buildings and three to 20 years for equipment. Accelerated depreciation methods
are used for income tax purposes, as permitted. Upon sale or retirement of an
asset, the related cost and accumulated depreciation are removed from the
accounts and any gain or loss is recognized in income currently.
Expenditures for maintenance, repairs and minor renewals are expensed;
expenditures for major improvements are capitalized. The Company performs
certain planned major maintenance activities during the year, primarily with
respect to the chemicals segment. Repair and maintenance costs estimated to be
incurred in connection with such planned major maintenance activities are
accrued in advance and are included in cost of goods sold. At December 31, 2005,
accrued repair and maintenance costs, included in other current liabilities and
consisting primarily of materials and supplies, were $5.0 million (2004 - $5.4
million).
Interest costs related to major long-term capital projects and renewals are
capitalized as a component of construction costs. Interest costs capitalized
related to the Company's consolidated business segments were not significant in
2003, 2004 or 2005.
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances include, among other things, (i) significant
current and prior periods or current and projected periods with operating
losses, (ii) a significant decrease in the market value of an asset or (iii) a
significant change in the extent or manner in which an asset is used. All
relevant factors are considered. The test for impairment is performed by
comparing the estimated future undiscounted cash flows (exclusive of interest
expense) associated with the asset to the asset's net carrying value to
determine if a write-down to market value or discounted cash flow value is
required. The Company assesses impairment of property and equipment in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.
Long-term debt. Long-term debt is stated net of any unamortized original
issue premium or discount. Amortization of deferred financing costs and any
premium or discount associated with the issuance of indebtedness, all included
in interest expense, is computed by the interest method over the term of the
applicable issue.
Employee benefit plans. Accounting and funding policies for retirement
plans are described in Note 16.
Income taxes. Valhi and its qualifying subsidiaries are members of
Contran's consolidated U.S federal income tax group (the "Contran Tax Group"),
and Valhi and certain of its qualifying subsidiaries also file consolidated
income tax returns with Contran in various U.S. state jurisdictions. As a member
of the Contran Tax Group, the Company is jointly and severally liable for the
federal income tax liability of Contran and the other companies included in the
Contran Tax Group for all periods in which the Company is included in the
Contran Tax Group. See Note 18. Contran's policy for intercompany allocation of
income taxes provides that subsidiaries included in the Contran Tax Group
compute their provision for income taxes on a separate company basis. Generally,
subsidiaries make payments to or receive payments from Contran in the amounts
they would have paid to or received from the Internal Revenue Service or the
applicable state tax authority had they not been members of the Contran Tax
Group. The separate company provisions and payments are computed using the tax
elections made by Contran. The Company made net cash payments to Contran for
income taxes of $1.5 million in 2003, nil in 2004 and $.5 million in 2005.
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the income tax and
financial reporting carrying amounts of assets and liabilities, including
investments in the Company's subsidiaries and affiliates who are not members of
the Contran Tax Group and undistributed earnings of foreign subsidiaries which
are not permanently reinvested. In addition, the Company commenced recognizing
deferred income taxes with respect to the excess of the financial reporting
carrying amount over the income tax basis of Valhi's investment in Kronos
Worldwide, Inc. common stock beginning in December 2003 following NL's pro-rata
distribution of shares of Kronos' common stock to NL's shareholders, including
Valhi, because as of such date the Company could not avail itself of the
exemption otherwise available under GAAP to avoid recognition of such deferred
income taxes. See Note 3. Earnings of foreign subsidiaries subject to permanent
reinvestment plans aggregated $713 million at December 31, 2005 (2004 - $558
million). Determination of the amount of the unrecognized deferred income tax
liability related to such earnings is not practicable due to the complexities
associated with the U.S. taxation on earnings of foreign subsidiaries
repatriated to the U.S. The Company periodically evaluates its deferred tax
assets in the various taxing jurisdictions in which it operates and adjusts any
related valuation allowance based on the estimate of the amount of such deferred
tax assets which the Company believes does not meet the "more-likely-than-not"
recognition criteria.
NL and Kronos are members of the Contran Tax Group. CompX, previously a
separate U.S. federal income taxpayer, became a member of the Contran Tax Group
for federal income tax purposes in October 2004 with the formation of CompX
Group, Inc. See Note 3. Most members of the Contran Tax Group also file
consolidated unitary state income tax returns in qualifying U.S. jurisdictions.
NL, Kronos and CompX are each a party to a tax sharing agreement with Valhi and
Contran pursuant to which they generally compute their provision for income
taxes on a separate-company basis, and make payments to or receive payments from
Valhi in amounts that it would have paid to or received from the U.S. Internal
Revenue Service or the applicable state tax authority had they not been a member
of the Contran Tax Group. Tremont and Waste Control Specialists are also members
of the Contran Tax Group. The Amalgamated Sugar Company LLC is treated as a
partnership for income tax purposes.
Environmental remediation costs. The Company records liabilities related to
environmental remediation obligations when estimated future expenditures are
probable and reasonably estimable. Such accruals are adjusted as further
information becomes available or circumstances change. Estimated future
expenditures are generally not discounted to their present value. Recoveries of
remediation costs from other parties, if any, are recognized as assets when
their receipt is deemed probable. At December 31, 2004 and 2005, no receivables
for recoveries have been recognized.
Closure and post closure costs. Through December 31, 2002, the Company
provided for the estimated closure and post-closure monitoring costs for its
waste disposal site over the operating life of the facility as airspace was
consumed. Effective January 1, 2003, the Company adopted SFAS No. 143,
Accounting for Asset Retirement Obligations, and commenced accounting for such
costs in accordance with SFAS No. 143. See Note 19. At December 31, 2004,
refundable insurance deposits (see Note 8) collateralized certain of the
Company's closure and post-closure obligations. Such deposits were refunded to
the Company during 2005 when the related policy terminated.
Net sales. Sales are recorded when products are shipped and title and other
risks and rewards of ownership have passed to the customer, or when services are
performed. Shipping terms of products shipped in both the Company's chemicals
and components products segments are generally F.O.B. shipping point, although
in some instances shipping terms are FOB destination point (for which sales are
not recognized until the product is received by the customer). Amounts charged
to customers for shipping and handling are included in net sales. Sales are
stated net of price, early payment and distributor discounts and volume rebates.
Selling, general and administrative expenses; shipping and handling costs.
Selling, general and administrative expenses include costs related to marketing,
sales, distribution, shipping and handling, research and development, legal,
environmental remediation and administrative functions such as accounting,
treasury and finance, and includes costs for salaries and benefits, travel and
entertainment, promotional materials and professional fees. Shipping and
handling costs of the Company's chemicals segment were approximately $63 million
in 2003, $70 million in 2004 and $76 million in 2005. Shipping and handling
costs of the Company's component products and waste management segments are not
material. Advertising costs related to continuing operations, expensed as
incurred, were approximately $2 million in each of 2003, 2004 and 2005.
Research, development and certain sales technical support costs related to
continuing operations, expensed as incurred, were approximately $7 million in
2003, $8 million in 2004 and $9 million in 2005.
Earnings per share. Basic earnings per share of common stock is based upon
the weighted average number of common shares actually outstanding during each
period. Diluted earnings per share of common stock includes the impact of
outstanding dilutive stock options. The weighted average number of outstanding
stock options excluded from the calculation of diluted earnings per share
because their impact would have been antidilutive aggregated approximately
410,000 in 2003, 62,000 in 2004 and nil in 2005.
Stock options. The Company currently accounts for stock-based employee
compensation in accordance with Accounting Principles Board Opinion ("APBO") No.
25, Accounting for Stock Issued to Employees, and its various interpretations.
See Note 20. Under APBO No. 25, no compensation cost is generally recognized for
fixed stock options in which the exercise price is greater than or equal to the
market price on the grant date. Prior to 2003, and following the cash settlement
of certain stock options held by employees of NL, NL and the Company commenced
accounting for NL's remaining stock options using the variable accounting method
because NL could not overcome the presumption that it would not similarly cash
settle its remaining stock options. Under the variable accounting method, the
intrinsic value of all unexercised stock options (including those with an
exercise price at least equal to the market price on the date of grant) are
accrued as an expense over their vesting period, with subsequent increases
(decreases) in the market price of the underlying common stock resulting in
additional compensation expense (income). Compensation cost related to stock
options recognized by the Company in accordance with APBO No. 25 was
approximately $1.9 million in 2003 and $3.4 million in 2004, and compensation
income was $1.1 million in 2005. The total income tax benefit related to such
compensation cost recognized by the Company was approximately $.7 million in
2003 and $1.2 million in 2004, and the total income tax provision related to the
compensation income was $.4 million in 2005. No compensation cost was
capitalized as part of assets (inventories or fixed assets) during 2003, 2004
and 2005.
The following table presents what the Company's consolidated net income
(loss), and related per share amounts, would have been in 2003, 2004 and 2005 if
Valhi and its subsidiaries and affiliates had each elected to account for their
respective stock-based employee compensation related to stock options in
accordance with the fair value-based recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, for all awards granted subsequent to
January 1, 1995.
Years ended December 31,
--------------------------------------
2003 2004 2005
---- ---- -----
(Restated) (Restated)
(In millions, except
share amounts)
Net income (loss) as reported $(87.7) $230.0 $ 81.4
Adjustments, net of applicable income tax
effects and minority interest - stock based
employee compensation expense determined under:
APBO No. 25 .9 1.7 (.4)
SFAS No. 123 (1.4) (.7) (.2)
------ ------ ------
Pro forma net income (loss) $(88.2) $231.0 $ 80.8
====== ====== ======
Basic earnings per share:
As reported $ (.73) $ 1.91 $ .69
Pro forma (.74) 1.92 .68
Diluted earnings per share:
As reported $ (.73) $ 1.91 $ .68
Pro forma (.74) 1.92 .68
Note 2 - Business and geographic segments:
% owned at
Business segment Entity December 31, 2005
---------------- ------ -----------------
Chemicals Kronos Worldwide, Inc. 93%
Component products CompX International Inc. 70%
Waste management Waste Control Specialists LLC 100%
Titanium metals TIMET 39%
The Company's ownership of Kronos includes 57% held directly by Valhi and
36% held directly by NL Industries, Inc., an 83%-owned subsidiary of Valhi.
The Company's ownership of CompX is principally held directly by CompX
Group, Inc, a majority-owned subsidiary of NL. NL owns 82.4% of CompX Group, and
TIMET owns the remaining 17.6% of CompX Group. CompX Group's sole asset consists
of shares of CompX common stock representing approximately 83% of the total
number of CompX shares outstanding, and the percentage ownership of CompX shown
above includes NL's ownership interest in CompX Group multiplied by CompX
Group's ownership interest in CompX, or 68%. NL also owns an additional 2% of
CompX directly. See Note 3.
The company's ownership of TIMET includes 35% owned directly by Tremont
LLC, a wholly-owned subsidiary of the Company, and 4% owned directly by Valhi.
In addition, the Combined Master Retirement Trust ("CMRT"), a collective
investment trust sponsored by Contran to permit the collective investment by
certain master trusts which fund certain employee benefits plans sponsored by
Contran and certain of its affiliates, owned an additional 11% of TIMET's
outstanding common stock at December 31, 2005. See Note 16.
TIMET owns directly an additional 3% of CompX, .5% of NL and less than .1%
of Kronos, and TIMET accounts for such CompX, NL and Kronos shares, as well as
its shares of CompX Group, as available-for-sale marketable securities carried
at fair value (with the fair value of TIMET's shares of CompX Group determined
based on the fair value of the underlying CompX shares held by CompX Group).
Because the Company does not consolidate TIMET, the shares of CompX Group,
CompX, NL and Kronos owned by TIMET are not considered as part of the Company's
consolidated investment in such companies.
The Company is organized based upon its operating subsidiaries. The
Company's operating segments are defined as components of our consolidated
operations about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in determining how to
allocate resources and in assessing performance. The Company's chief operating
decision maker is Mr. Harold C. Simmons. Each operating segment is separately
managed, and each operating segment represents a strategic business unit
offering different products.
The Company's reportable operating segments are comprised of the chemicals
business conducted by Kronos, the component products business conducted by CompX
and the waste management business conducted by Waste Control Specialists.
Kronos manufactures and sells titanium dioxide pigments ("TiO2"). TiO2 is
used to impart whiteness, brightness and opacity to a wide variety of products,
including paints, plastics, paper, fibers and ceramics. Kronos has production
facilities located throughout North America and Europe. Kronos also owns a
one-half interest in a TiO2 production facility located in Louisiana. See Note
7.
CompX manufactures and sells component products (security products,
precision ball bearing slides and ergonomic computer support systems) for office
furniture, computer related applications and a variety of other applications.
CompX has production facilities in North America and Asia.
Waste Control Specialists operates a facility in West Texas for the
processing, treatment and storage of hazardous, toxic and low-level and mixed
radioactive wastes, and for the disposal of hazardous and toxic and certain
types of low-level and mixed low-level radioactive wastes. Waste Control
Specialists is seeking additional regulatory authorizations to expand its
treatment and disposal capabilities for low-level and mixed radioactive wastes
at its facility in West Texas.
TIMET is a vertically integrated producer of titanium sponge, melted
products (ingot and slab) and a variety of titanium mill products for aerospace,
industrial and other applications with production facilities located in the U.S.
and Europe.
The Company evaluates segment performance based on segment operating
income, which is defined as income before income taxes and interest expense,
exclusive of certain non-recurring items (such as gains or losses on disposition
of business units and other long-lived assets outside the ordinary course of
business and certain legal settlements) and certain general corporate income and
expense items (including securities transactions gains and losses and interest
and dividend income) which are not attributable to the operations of the
reportable operating segments. The accounting policies of the reportable
operating segments are the same as those described in Note 1. Segment operating
income includes the effect of amortization of any intangible assets attributable
to the segment. Chemicals operating income, as presented below, differs from
amounts separately reported by Kronos due to amortization of purchase accounting
basis adjustments recorded by the Company. Similarly, the Company's equity in
earnings of TIMET differs from the Company's pro-rata share of TIMET's
separately-reported results. Equity in earnings of TIMET for 2003 and 2004 have
been restated for TIMET's change in accounting principle related to its
inventories. See Note 1. Component products operating income, as presented
below, may differ from amounts separately reported by CompX because the Company
defines operating income differently than CompX.
Interest income included in the calculation of segment operating income is
not material in 2003, 2004 or 2005. Capital expenditures include additions to
property and equipment but exclude amounts paid for business units acquired in
business combinations accounted for by the purchase method. See Note 3.
Depreciation and amortization related to each reportable operating segment
includes amortization of any intangible assets attributable to the segment.
Amortization of deferred financing costs and any premium or discount associated
with the issuance of indebtedness is included in interest expense. There are no
intersegment sales or any other significant intersegment transactions.
Segment assets are comprised of all assets attributable to each reportable
operating segment, including goodwill and other intangible assets. The Company's
investment in the TiO2 manufacturing joint venture (see Note 7) is included in
the chemicals business segment assets. Corporate assets are not attributable to
any operating segment and consist principally of cash and cash equivalents,
restricted cash equivalents, marketable securities and loans to third parties.
At December 31, 2005, approximately 17% of corporate assets were held by NL
(2004 - 23%), with substantially all of the remainder held by Valhi.
For geographic information, net sales are attributed to the place of
manufacture (point-of-origin) and the location of the customer
(point-of-destination); property and equipment are attributed to their physical
location. At December 31, 2005, the net assets of non-U.S. subsidiaries included
in consolidated net assets approximated $599 million (2004 - $653 million).
Years ended December 31,
------------------------------------------
2003 2004 2005
---- ---- ----
(Restated) (Restated)
(In millions)
Net sales:
Chemicals $1,008.2 $1,128.6 $1,196.7
Component products 173.9 182.6 186.3
Waste management 4.1 8.9 9.8
-------- -------- --------
Total net sales $1,186.2 $1,320.1 $1,392.8
======== ======== ========
Operating income:
Chemicals $ 122.3 $ 103.5 $ 164.9
Component products 9.1 16.2 19.3
Waste management (11.5) (10.2) (12.1)
-------- -------- --------
Total operating income 119.9 109.5 172.1
Equity in:
TIMET (2.3) 22.7 64.9
Other .8 2.2 3.6
General corporate items:
Interest and dividend income 33.7 34.6 57.8
Securities transaction gains, net .5 2.1 20.2
Write-off of accrued interest - - (21.6)
Gain on disposal of fixed assets 10.3 .6 -
Insurance recoveries .8 .5 3.0
General expenses, net (64.0) (28.0) (33.2)
Interest expense (58.5) (62.9) (69.2)
-------- -------- --------
Income before income taxes $ 41.2 $ 81.3 $ 197.6
======== ======== ========
Net sales - point of origin:
United States $ 409.0 $ 558.1 $ 618.8
Germany 510.1 576.1 613.1
Belgium 150.7 186.4 186.9
Norway 131.5 144.5 160.5
Canada 249.6 244.4 266.0
Taiwan 13.4 15.8 14.2
Eliminations (278.1) (405.2) (466.7)
-------- -------- --------
$1,186.2 $1,320.1 $1,392.8
======== ======== ========
Net sales - point of destination:
United States $ 427.7 $ 462.9 $ 511.8
Europe 574.5 671.8 693.6
Canada 85.5 80.8 77.4
Asia and other 98.5 104.6 110.0
-------- -------- --------
$1,186.2 $1,320.1 $1,392.8
======== ======== ========
Years ended December 31,
-------------------------------------------
2003 2004 2005
---- ---- ----
(In millions)
Depreciation and amortization:
Chemicals $ 54.5 $ 60.2 $ 60.1
Component products 14.8 14.2 10.9
Waste management 2.7 3.3 2.8
Corporate 1.0 .7 .7
-------- -------- --------
$ 73.0 $ 78.4 $ 74.5
======== ======== ========
Capital expenditures:
Chemicals $ 35.2 $ 39.3 $ 43.4
Component products 8.9 5.4 10.5
Waste management .4 3.7 7.0
Corporate .2 .1 1.9
-------- -------- --------
$ 44.7 $ 48.5 $ 62.8
======== ======== ========
December 31,
---------------------------------------------
2003 2004 2005
---- ---- ----
(Restated) (Restated)
(In millions)
Total assets:
Operating segments:
Chemicals $1,542.2 $1,773.5 $1,694.1
Component products 209.4 170.2 155.2
Waste management 24.5 36.4 49.6
Investment in:
TIMET common stock 28.1 55.4 138.7
TIMET preferred stock - .2 .2
TIMET debt securities .3 - -
Other joint ventures 12.2 13.9 16.5
Corporate and eliminations 490.5 640.9 524.1
-------- -------- --------
$2,307.2 $2,690.5 $2,578.4
======== ======== ========
Net property and equipment:
United States $ 72.3 $ 69.8 $ 75.2
Germany 319.7 331.3 278.9
Canada 91.7 91.4 87.9
Norway 67.4 72.5 64.4
Belgium 71.1 73.8 61.7
Taiwan 5.7 5.7 8.3
Netherlands 9.6 8.3 -
-------- -------- --------
$ 637.5 $ 652.8 $ 576.4
======== ======== ========
Note 3 - Business combinations and related transactions:
NL Industries, Inc. At the beginning of 2003, Valhi held 63% of NL's
outstanding common stock, and Tremont held an additional 21% of NL. The
Company's aggregate ownership of NL was reduced to 83% at December 31, 2005 due
to NL's issuance of shares of its common stock upon the exercise of options to
purchase NL common stock. In January 2005, Tremont distributed to Valhi its
ownership interest in NL.
Kronos Worldwide, Inc. Prior to December 2003, Kronos was a wholly-owned
subsidiary of NL. In December 2003, and in conjunction with a recapitalization
of Kronos, NL completed the distribution of approximately 48.8% of Kronos'
common stock to NL shareholders (including Valhi and Tremont LLC) in the form of
a pro-rata dividend. Shareholders of NL received one share of Kronos common
stock for every two shares of NL held. During 2004 and the first quarter of
2005, NL paid an aggregate of five quarterly dividends in the form of shares of
Kronos common stock, in which an aggregate of approximately 1.5 million shares
of Kronos common stock (3.0% of Kronos' outstanding shares) were distributed to
NL shareholders (including Valhi and Tremont) in the form of pro-rata dividends.
Valhi and Tremont received an aggregate of approximately 1.2 million shares of
Kronos with respect to these distributions. In January 2005, Tremont distributed
to Valhi its ownership interest in Kronos.
NL's December 2003, 2004 and 2005 quarterly distributions of shares of
common stock of Kronos are taxable to NL, and NL is required to recognize a
taxable gain equal to the difference between the fair market value of the shares
of Kronos common stock distributed on the various dates of distribution and NL's
adjusted tax basis in such stock at such dates of distribution. The amount of
such tax liability related to the shares of Kronos distributed to NL
shareholders other than Valhi and Tremont was approximately $22.5 million in
2003, $2.5 million in 2004 and $664,000 in 2005, and such amounts are recognized
as a component of the Company's consolidated provision for income taxes in such
periods. Other than the Company's recognition of such NL tax liabilities, the
completion of the December 2003 and 2004 and 2005 quarterly distributions of
Kronos common stock had no other impact on the Company's consolidated financial
position, results of operations or cash flows.
The amount of NL's separate tax liability with respect to the shares of
Kronos distributed to Valhi and Tremont, while recognized by NL at its separate
company level, is not recognized in the Company's consolidated financial
statements because the separate tax liability is eliminated at the Valhi level
due to Valhi, Tremont and NL all being members of the Contran Tax Group. With
respect to such shares of Kronos distributed to Valhi and Tremont, effective
December 1, 2003, Valhi and NL amended the terms of their tax sharing agreement
to not require NL to pay up to Valhi the separate tax liability generated from
the distribution of such Kronos shares to Valhi and Tremont. On November 30,
2004 Valhi and NL agreed to further amend the terms of their tax sharing
agreement to provide that NL would now be required to pay up to Valhi the
separate tax liability generated from the distribution of shares of Kronos
common stock to Valhi and Tremont, including the tax related to such shares
distributed to Valhi and Tremont in December 2003 and the tax related to the
shares distributed to Valhi and Tremont during all of 2004. In determining to so
amend the terms of the tax sharing agreement, NL and Valhi considered, among
other things, the changed expectation for the generation of taxable income at
the NL level resulting from the inclusion of CompX in NL's consolidated taxable
income effective in the fourth quarter of 2004, as discussed in Note 1. Valhi
and NL further agreed that in lieu of a cash income tax payment, such separate
tax liability could be paid by NL to Valhi in the form of shares of Kronos
common stock held by NL. Such tax liability related to the shares of Kronos
distributed to Valhi and Tremont in December 2003 and 2004, including the tax
liability resulting from the use of Kronos common stock to settle such
liability, aggregated approximately $227 million. Accordingly, in the fourth
quarter of 2004 NL transferred approximately 5.5 million shares of Kronos common
stock to Valhi in satisfaction of such separate tax liability and the tax
liability generated from the use of such Kronos shares to settle such tax
liability. In agreeing to settle such tax liability with such 5.5 million shares
of Kronos common stock, the Kronos shares were valued at an agreed-upon price of
$41 per share. Kronos' average closing market prices during the months of
November and December 2004 were $41.53 and $41.77, respectively. NL also
considered the fact that the shares of Kronos held by non-affiliates are very
thinly traded, and consequently an average price over a period of days mitigates
the effect of the thinly-traded nature of Kronos' common stock. The transfer of
such 5.5 million shares of Kronos common stock, accounted for under GAAP as a
transfer of net assets among entities under common control at carryover basis,
had no effect on the Company's consolidated financial statements, and as noted
above such tax liability is not recognized in the Company's consolidated
financial statements because it is eliminated at the Valhi level due to Valhi,
Tremont and NL all being members of Valhi's tax group on a separate-company
basis and of the Contran Tax Group. Such tax liability related to the shares of
Kronos distributed to Valhi in the first quarter of 2005 aggregated $3.3
million, and such tax liability was paid by NL to Valhi in cash. This aggregate
$230 million tax liability has not been paid by Valhi to Contran, nor has
Contran paid such tax liability to the applicable tax authority. Such income tax
liability would become payable by Valhi to Contran, and by Contran to the
applicable tax authority, when the shares of Kronos transferred or distributed
by NL to Valhi and Tremont are sold or otherwise transferred outside the Contran
Tax Group or in the event of certain restructuring transactions involving NL and
Valhi. However, as discussed in Note 1, the Company does recognize deferred
income taxes with respect to its investment in Kronos, and in accordance with
GAAP the amount of such deferred income taxes recognized by Valhi ($184 million
at December 31, 2005) is limited to this $230 million tax liability.
During 2003 and 2004 and 2005, Valhi purchased an aggregate of 1.1 million
shares of Kronos common stock in market transactions for an aggregate of $30.5
million. During the fourth quarter of 2004 and 2005, NL sold an aggregate of
534,000 shares of Kronos common stock in market transactions for an aggregate of
$21.9 million, and the Company recognized pre-tax gains related to the reduction
of its ownership interest in Kronos related to such sales ($2.2 million in 2004
and $14.7 million in 2005). See Note 12.
During 2004, Kronos acquired additional shares of its majority-owned
subsidiary in France for approximately $575,000. See Note 13.
TIMET. At the beginning of 2003, the Company owned 39% of TIMET. During
2003 and 2005, the Company purchased an aggregate of 1.4 million shares of TIMET
common stock (as adjusted for certain TIMET stock splits discussed in Note 7) in
market transactions for an aggregate of $18.9 million. During 2003, the Company
also purchased certain convertible debt securities issued by a wholly-owned
subsidiary of TIMET, and during 2004 such convertible debt securities were
exchanged for convertible preferred stock of TIMET. See Note 7.
CompX International Inc. At the beginning of 2003, the Company held 69% of
CompX's common stock. Of such 69%, 66% was held by Valcor, Inc., a wholly-owned
subsidiary of Valhi, and 3% was owned by Valhi directly. Prior to September
2004, the Company's aggregate ownership in CompX was reduced to 68% due to
CompX's issuance of shares of its common stock upon the exercise of options to
purchase CompX common stock. On September 24, 2004, NL completed the acquisition
of the CompX shares previously held by Valhi and Valcor at a purchase price of
$16.25 per share, or an aggregate of $168.6 million. The purchase price was paid
by NL's transfer to Valhi and Valcor of an aggregate $168.6 million of NL's $200
million long-term note receivable from Kronos (which long-term note was
eliminated in the preparation of the Company's consolidated financial
statements). The acquisition was approved by a special committee of NL's board
of directors comprised of directors who were not affiliated with Valhi, and such
special committee retained their own legal and financial advisors who rendered
an opinion to the special committee that the purchase price was fair, from a
financial point of view, to NL. NL's acquisition was accounted for under GAAP as
a transfer of net assets among entities under common control at carryover basis,
and such transaction had no effect on the Company's consolidated financial
statements.
Effective October 1, 2004, NL and TIMET contributed shares of CompX common
stock representing 68% and 15%, respectively, of CompX's outstanding common
stock to newly-formed CompX Group in return for their 82.4% and 17.6% ownership
interests in CompX Group, respectively, and CompX Group became the owner of the
83% of CompX that NL and TIMET had previously owned in the aggregate. These
CompX shares are the sole asset of CompX Group. CompX Group recorded the shares
of CompX received from NL at NL's carryover basis. The shares of CompX
contributed to CompX Group by TIMET are excluded from the Company's consolidated
investment in CompX. See Note 2. During 2005, NL purchased 233,500 additional
shares of CompX common stock in market transactions for an aggregate of
approximately $3.6 million, increasing NL's aggregate ownership of CompX to 70%
at December 31, 2005.
In August 2005, CompX completed the acquisition of a components products
business for aggregate cash consideration of $7.3 million, net of cash acquired.
The purchase price has been allocated among the tangible and intangible net
assets acquired (including goodwill) based upon an estimate of the fair value of
such net assets. The pro forma effect on the Company's results of operations for
2005, assuming such acquisition had been completed as of January 1, 2005, is not
material.
Tremont Corporation, Tremont Group, Inc. and Tremont LLC. At the beginning
of 2003, Valhi and NL owned 80% and 20%, respectively, of Tremont Group, Inc.
Tremont Group was a holding company which owned 80% of Tremont Corporation. In
February 2003, Valhi completed two consecutive merger transactions pursuant to
which Tremont Group and Tremont both became wholly-owned subsidiaries of Valhi.
Under these merger transactions, (i) Valhi issued 3.5 million shares of its
common stock to NL in exchange for NL's 20% ownership interest in Tremont Group
and (ii) Valhi issued 3.4 shares of its common stock (plus cash in lieu of
fractional shares) to Tremont stockholders (other than Valhi and Tremont Group)
in exchange for each share of Tremont common stock held by such stockholders, or
an aggregate of 4.3 million shares of Valhi common stock, in each case in a
tax-free exchange. A special committee of Tremont's board of directors,
consisting of members unrelated to Valhi who retained their own independent
financial and legal advisors, recommended approval of the second merger.
Subsequent to these two mergers, Tremont Group and Tremont merged to form
Tremont LLC, also wholly owned by Valhi. The number of shares of Valhi common
stock issued to NL in exchange for NL's 20% ownership interest in Tremont Group
was equal to NL's 20% pro-rata interest in the shares of Tremont common stock
held by Tremont Group, adjusted for the 3.4 exchange ratio in the second merger.
For financial reporting purposes, the Tremont shares previously held by NL
(either directly or indirectly through NL's ownership interest in Tremont Group)
were already considered as part of the Valhi consolidated group's ownership of
Tremont to the extent of Valhi's ownership interest in NL. Therefore, that
portion of such Tremont shares was not considered as held by the Tremont
minority stockholders. As a result, the Valhi shares issued to NL in the merger
transactions described above were deemed to have been issued in exchange for the
Tremont shares held by the Tremont minority interest only to the extent that
Valhi did not have an ownership interest in NL. At December 31, 2003 and 2004,
NL and its subsidiaries owned an aggregate of 4.7 million shares of Valhi common
stock, including 3.5 million shares received by NL in the merger transactions
described above and 1.2 million shares previously acquired by NL. As discussed
in Note 14, the amount shown as treasury stock in the Company's consolidated
balance sheet for financial reporting purposes includes the Company's
proportional interest in the shares of Valhi common stock held by NL.
Accordingly, a portion of the 3.5 million shares of Valhi common stock issued to
NL in the merger transactions were reported as treasury stock, and were not
deemed to have been issued in exchange for Tremont shares held by the minority
interest, since they represent shares issued to "acquire" the portion of the
Tremont shares already held directly or indirectly by NL that were considered as
part of the Valhi consolidated group's ownership of Tremont.
The following table presents the number of Valhi common shares that were
issued pursuant to the merger transactions described above.
Equivalent
Tremont Valhi
shares shares(1)
------- ---------
Valhi shares issued to NL in exchange for
NL's ownership interest in Tremont Group:
Valhi shares issued to NL(2) 3,495,200
Less shares deemed Valhi has issued to itself based
on Valhi's ownership interest in NL (2,957,288)
----------
537,912
----------
Valhi shares issued to the Tremont stockholders:
Total number of Tremont shares outstanding 6,424,858
Less Tremont shares held by Tremont Group and Valhi(3) (5,146,421)
----------
1,278,437 4,346,686
==========
Less fractional shares converted into cash (1,758)
Less shares deemed Valhi has issued to itself based on
Valhi's ownership interest in NL(4) (23,494)
----------
4,321,434
----------
Net Valhi shares issued to acquire the Tremont minority interest 4,859,346
==========
(1) Based on the 3.4 exchange ratio.
(2) Represents 5,141,421 shares of Tremont held by Tremont Group, multiplied by
NL's 20% ownership interest in Tremont Group, adjusted for the 3.4 exchange
ratio in the merger.
(3) The Tremont shares held by Tremont Group and Valhi were cancelled in the
merger transactions.
(4) Represents shares of Tremont held directly by NL, multiplied by Valhi's
ownership interest in NL and adjusted for the 3.4 exchange ratio.
For financial reporting purposes, the merger transactions described above
were accounted for by the purchase method (step acquisition of Tremont). The
shares of Valhi common stock issued to the Tremont minority interest were valued
at $10.49 per share, representing the average of Valhi's closing NYSE stock
price for the period beginning two trading days prior to the November 5, 2002
public announcement of the signing of the definitive merger agreement and ending
two trading days following such public announcement. The shares of Valhi common
stock issued to acquire the Tremont shares held by NL that were already
considered as part of the Valhi's consolidated group ownership of Tremont, which
were reported as treasury stock, were valued at carryover cost basis of
approximately $19.2 million. The following presents the purchase price for the
step acquisition of Tremont. The value assigned to the shares of Valhi common
stock issued is $10.49 per share, as discussed above.
Valhi
shares Assigned
issued value
--------- ----------
(In millions)
Net Valhi shares issued 4,859,346 $51.0
=========
Plus cash fees and expenses 0.9
-----
Total purchase price $51.9
=====
The purchase price was allocated based upon an estimate of the fair value
of the net assets acquired as follows:
Amount
-------------
(In millions)
Book value of historical minority interest in Tremont's net
assets acquired $28.7
Remaining purchase price allocation:
Increase property and equipment to fair value 4.0
Reduce Tremont's accrued OPEB costs to accumulated benefit
Obligations 4.4
Adjust deferred income taxes 8.9
Goodwill 5.9
-----
Purchase price $51.9
=====
The adjustments to increase the carrying value of property and equipment
relate to such assets of NL and Kronos, and gives recognition to the effect that
Valhi's acquisition of the minority interest in Tremont results in an increase
in Valhi's effective ownership of NL due to Tremont's ownership of NL. The
reduction in Tremont's accrued OPEB costs to an amount equal to the accumulated
benefit obligations eliminates the unrecognized prior service credit and the
unrecognized actuarial gains. The adjustment to deferred income taxes includes
(i) the deferred income tax effect of the estimated purchase price allocated to
property and equipment and accrued OPEB costs and (ii) the effect of adjusting
the deferred income taxes separately-recognized by Tremont (principally an
elimination of a deferred income tax asset valuation allowance
separately-recognized by Tremont which Valhi does not believe is required to be
recognized at the Valhi level under the "more-likely-than-not" recognition
criteria).
As noted above, the Company's proportional interest in shares of Valhi
common stock held by NL are reported as treasury stock in the Company's
consolidated balance sheet. As a result of the merger transactions discussed
above, the acquisition of minority interest in Tremont effectively resulted in
an increase in the Company's overall ownership of NL due to Tremont's 21%
ownership interest in NL. Accordingly, as a result of the merger transactions
noted above, the Company also recognized a $7.6 million increase in its treasury
stock attributable to the shares of Valhi common stock held by NL. At December
31, 2004 and 2005, the amount reported as treasury stock, at cost, in the
Company's consolidated balance sheet includes an aggregate of $37.9 million
attributable to the 4.7 million shares of Valhi common stock held by NL (or 85%
of NL's aggregate original cost basis in such shares of $44.8 million).
Waste Control Specialists LLC. In 1995, the Company acquired a 50% interest
in newly-formed Waste Control Specialists LLC. The Company's ownership of Waste
Control Specialists is held by Andrews County Holding, Inc., a subsidiary of
Valhi. The Company contributed $25 million to Waste Control Specialists at
various dates through early 1997 for its 50% interest. The Company contributed
an additional aggregate $50 million to Waste Control Specialists' equity during
1997 through 2000, thereby increasing its membership interest from 50% to 90%. A
substantial portion of such equity contributions were used by Waste Control
Specialists to reduce the then-outstanding balance of its revolving intercompany
borrowings from the Company. At formation in 1995, the other owner of Waste
Control Specialists, KNB Holdings, Ltd., contributed certain assets, primarily
land and certain operating permits for the facility site, and Waste Control
Specialists also assumed certain indebtedness of the other owner. The
liabilities of the other owner assumed by Waste Control Specialists in 1995
exceeded the carrying value of the assets contributed by the other owner.
Accordingly, all of Waste Control Specialists' cumulative net losses to date
accrued to the Company for financial reporting purposes. See Note 13.
Andrews County had also previously loaned approximately $1.5 million to an
individual who controlled KNB Holdings, and such loan was collateralized by KNB
Holdings' subordinated 10% membership interest in Waste Control Specialists.
During 2004, KNB Holdings entered into an agreement with Andrews County in
which, among other things, Andrews County acquired the remaining 10% ownership
interest in Waste Control Specialists and the outstanding balance of such loan
($2.5 million, including accrued and unpaid interest), was cancelled. As a
result, Waste Control Specialists became wholly owned by Andrews County. Valhi
owns 100% of the outstanding common stock of Andrews County.
Other. NL (NYSE: NL), Kronos (NYSE: KRO), CompX (NYSE: CIX) and TIMET
(NYSE: TIE) each file periodic reports with the Securities and Exchange
Commission ("SEC") pursuant to the Securities Exchange Act of 1934, as amended.
Note 4 - Accounts and other receivables:
December 31,
--------------------
2004 2005
---- ----
(In thousands)
Accounts receivable $219,749 $211,156
Notes receivable 1,993 4,267
Accrued interest and dividends receivable 15 6,158
Allowance for doubtful accounts (3,826) (2,815)
-------- --------
$217,931 $218,766
======== ========
Accrued interest and dividends receivable at December 31, 2005 includes
$6.0 million of distributions from the Amalgamated Sugar Company LLC declared in
December 2005 but not paid to the Company until January 3, 2006. See Note 5.
Note 5 - Marketable securities:
December 31,
--------------------
2004 2005
---- ----
(In thousands)
Current assets (available for sale):
Restricted debt securities $ 9,446 $ 9,265
Other debt securities - 2,490
-------- --------
$ 9,446 $ 11,755
======== ========
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC $250,000 $250,000
Restricted debt securities 6,725 2,572
Other debt securities and common stocks 45 6,133
-------- --------
$256,770 $258,705
======== ========
Amalgamated. Prior to 2003, the Company transferred control of the refined
sugar operations previously conducted by the Company's wholly-owned subsidiary,
The Amalgamated Sugar Company, to Snake River Sugar Company, an Oregon
agricultural cooperative formed by certain sugarbeet growers in Amalgamated's
areas of operations. Pursuant to the transaction, Amalgamated contributed
substantially all of its net assets to the Amalgamated Sugar Company LLC, a
limited liability company controlled by Snake River, on a tax-deferred basis in
exchange for a non-voting ownership interest in the LLC. The cost basis of the
net assets transferred by Amalgamated to the LLC was approximately $34 million.
When the Company transferred control of such operations to Snake River in return
of its interest in the LLC, the Company recognized a gain in earnings equal to
the difference between $250 million (the fair value of the Company's investment
in the LLC as evidenced by its $250 million redemption price, as discussed
below) and the $34 million cost basis of the net assets contributed to the LLC,
net of applicable deferred income taxes. Therefore, the cost basis of the
Company's investment in the LLC is $250 million. As part of such transaction,
Snake River made certain loans to Valhi aggregating $250 million. Such loans
from Snake River were collateralized by the Company's interest in the LLC. Snake
River's sources of funds for its loans to Valhi, as well as for the $14 million
it contributed to the LLC for its voting interest in the LLC, included cash
capital contributions by the grower members of Snake River and $180 million in
debt financing provided by Valhi, of which $100 million was repaid prior to 2002
when Snake River obtained an equal amount of third-party term loan financing,
and the remaining $80 million was repaid during 2005 when Snake River obtained
new third-party term loan financing following its complete repayment of its
original third-party term loan financing. See Notes 8 and 10.
The Company and Snake River share in distributions from the LLC up to an
aggregate of $26.7 million per year (the "base" level), with a preferential 95%
share going to the Company. To the extent the LLC's distributions are below this
base level in any given year, the Company is entitled to an additional 95%
preferential share of any future annual LLC distributions in excess of the base
level until such shortfall is recovered. Under certain conditions, the Company
is entitled to receive additional cash distributions from the LLC, including
amounts discussed in Note 8. The Company may, at its option, require the LLC to
redeem the Company's interest in the LLC beginning in 2012, and the LLC has the
right to redeem the Company's interest in the LLC beginning in 2027. The
redemption price is generally $250 million plus the amount of certain
undistributed income allocable to the Company. In the event the Company requires
the LLC to redeem the Company's interest in the LLC, Snake River has the right
to accelerate the maturity of and call Valhi's $250 million loans from Snake
River.
The LLC Company Agreement contains certain restrictive covenants intended
to protect the Company's interest in the LLC, including limitations on capital
expenditures and additional indebtedness of the LLC. The Company also has the
ability to temporarily take control of the LLC in the event the Company's
cumulative distributions from the LLC fall below specified levels, subject to
satisfaction of certain conditions imposed by Snake River's current third-party
senior lenders.
Prior to 2003, Snake River agreed that the annual amount of (i) the
distributions paid by the LLC to the Company plus (ii) the debt service payments
paid by Snake River to the Company on the $80 million loan will at least equal
the annual amount of interest payments owed by Valhi to Snake River on the
Company's $250 million in loans from Snake River. In 2005, and following the
complete repayment of the Company's $80 million loan to Snake River, Snake River
agreed that the annual amount of distributions paid by the LLC to the Company
would at least exceed, by approximately $1.8 million, the annual amount of
interest payments owed by Valhi to Snake River on the Company's $250 million in
loans from Snake River. In the event that such cash flows to the Company are
less than the required minimum amount, certain agreements previously made among
the Company, Snake River and the LLC, including a reduction in the amount of
cumulative distributions which must be paid by the LLC to the Company in order
to prevent the Company from having the ability to temporarily take control of
the LLC, would retroactively become null and void. Through December 31, 2005,
Snake River and the LLC maintained the applicable minimum required levels of
cash flows to the Company.
The Company reports the cash distributions received from the LLC as
dividend income. Such distributions are recognized when declared by the LLC,
which is generally the same months that such distributions are received by the
Company, although such distributions may in certain cases be paid on the first
business day of the following month. See Note 12. The amount of such future
distributions is dependent upon, among other things, the future performance of
the LLC's operations. Because the Company receives preferential distributions
from the LLC and has the right to require the LLC to redeem its interest in the
LLC for a fixed and determinable amount beginning at a fixed and determinable
date, the Company accounts for its investment in the LLC as an
available-for-sale marketable security carried at estimated fair value, with
fair value determined to be the $250 million redemption price of the Company's
investment in the LLC. The Company also provides certain services to the LLC.
See Note 17. The Company does not expect to report a gain in earnings for
financial reporting purposes at the time its LLC interest is redeemed, as the
redemption price of $250 million is expected to equal the carrying value of its
investment in the LLC at the time of redemption.
Other. During 2003, Valhi sold approximately 2,500 shares of Halliburton
Company common stock in market transactions for aggregate proceeds of
approximately $50,000. The aggregate cost of the restricted and unrestricted
debt securities and other available-for-sale marketable securities approximates
their net carrying value at December 31, 2004 and 2005. During 2005, the Company
purchased other available-for-sale marketable securities (primarily common
stocks and debt securities) for an aggregate of $29.4 million, and subsequently
sold a portion of such securities for an aggregate of $19.7 million for a net
securities transaction gain of approximately $200,000. See Note 12.
Note 6 - Inventories:
December 31,
------------------------
2004 2005
---- ----
(In thousands)
Raw materials:
Chemicals $ 45,961 $ 52,343
Component products 8,193 7,022
-------- --------
54,154 59,365
-------- --------
In process products:
Chemicals 16,612 17,959
Component products 10,827 9,898
-------- --------
27,439 27,857
-------- --------
Finished products:
Chemicals 131,161 150,675
Component products 9,696 5,542
-------- --------
140,857 156,217
-------- --------
Supplies (primarily chemicals) 40,964 39,718
-------- --------
$263,414 $283,157
======== ========
Note 7 - Investment in affiliates:
December 31,
------------------------
2004 2005
------ --------
(Restated)
(In thousands)
TIMET:
Common stock $ 55,425 $138,677
Preferred stock 183 183
-------- --------
55,608 138,860
Ti02 manufacturing joint venture 120,251 115,308
Basic Management and Landwell 13,867 16,464
-------- --------
$189,726 $270,632
======== ========
TiO2 manufacturing joint venture. A Kronos TiO2 subsidiary (Kronos
Louisiana, Inc., or "KLA") and another Ti02 producer are equal owners of a
manufacturing joint venture (Louisiana Pigment Company, L.P., or "LPC") that
owns and operates a TiO2 plant in Louisiana. KLA and the other Ti02 producer are
both required to purchase one-half of the TiO2 produced by LPC. LPC operates on
a break-even basis, and consequently the Company reports no equity in earnings
of LPC. Each owner's acquisition transfer price for its share of the TiO2
produced is equal to its share of the joint venture's production costs and
interest expense, if any. Kronos' share of the joint ventures production costs
are reported as cost of sales as the related Ti02 acquired from LPC is sold.
Distributions from LPC, which generally relate to excess cash generated by LPC
from its non-cash production costs, and contributions to LPC, which generally
relate to cash required by LPC when it builds working capital, are reported as
part of cash generated by operating activities in the Company's Consolidated
Statements of Cash Flows. Such distributions are reported net of any
contributions made to LPC during the periods. Net distributions of $900,000 in
2003, $8.6 million in 2004 and $4.9 million in 2005 are stated net of
contributions of $13.1 million in 2003, $15.6 million in 2004 and $10.1 million
in 2005.
LPC's net sales aggregated $202.9 million in 2003, $210.4 million in 2004
and $219.8 million in 2005, of which $101.3 million, $104.8 million and $109.4
million, respectively, represented sales to Kronos and the remainder represented
sales to LPC's other owner. Substantially all of LPC's operating costs during
the past three years represented costs of sales.
At December 31, 2005, LPC reported total assets and partners' equity of
$263.3 million and $233.4 million, respectively (2004 - $269.8 million and
$243.3 million, respectively). Approximately 76% of LPC's assets at December 31,
2005 are comprised of property and equipment (2004 - 78%). Substantially all of
LPC's liabilities at December 31, 2004 and 2005 are current. LPC has no
indebtedness at December 31, 2004 and 2005.
On September 22, 2005, LPC's facility temporarily halted production due to
Hurricane Rita. Although storm damage to core processing facilities was not
extensive, a variety of factors, including loss of utilities, limited access and
availability of employees and raw materials, prevented the resumption of partial
operations until October 9, 2005 and full operations until late 2005. LPC
expects the majority of its property damage and unabsorbed fixed costs for
periods in which normal production levels were not achieved will be covered by
insurance, and Kronos believes insurance will cover its lost profits (subject to
applicable deductibles) resulting from its share of the lost production from
LPC. Insurance proceeds from the lost profit for product that Kronos was not
able to sell as a result of the loss of production from LPC are expected to be
recognized by Kronos during 2006, although the amount and timing of such
insurance recoveries is not presently determinable. The effect on Kronos'
financial results will depend on the timing and amount of insurance recoveries.
Kronos' warehouse and slurry facilities located near LPC's facility were also
temporarily closed due to the storm, but property damage to these facilities was
not significant.
TIMET. At December 31, 2005, the Company held 14.0 million shares of TIMET
with a quoted market price of $63.26 per share, or an aggregate market value of
$885.5 million (2004 - 13.0 million shares with an aggregate market value of
$157 million). In 2003, TIMET effected a reverse split of its common stock at a
ratio of one share of post-split common stock for each outstanding ten shares of
pre-split common stock, in 2004 TIMET effected a 5:1 split of its common stock
and in 2005 TIMET effected an additional 2:1 split of its common stock. Such
stock splits had no financial statement impact to the Company, and the Company's
ownership interest in TIMET did not change as a result of such splits. The share
disclosures related to TIMET common stock as of December 31, 2004 have been
adjusted to give effect to the 2:1 split in 2005.
At December 31, 2005, TIMET reported total assets of $907.3 million and
stockholders' equity of $562.2 million (2004 - $692.3 million and $406.4
million, respectively). TIMET's total assets at December 31, 2005 include
current assets of $550.3 million, property and equipment of $253.0 million,
marketable securities of $46.5 million and investment in joint ventures of $26.0
million (2004 - $370.4 million, $228.2 million, $47.2 million and $22.6 million,
respectively). TIMET's total liabilities at December 31, 2005 include current
liabilities of $166.9 million, accrued OPEB and pension costs aggregating $74.0
million, long-term debt of $51.4 million and debt payable to TIMET Capital Trust
I (the subsidiary of TIMET that issued the convertible preferred securities) of
$5.9 million (2004 - $162.2 million, $92.0 million, nil and $12.0 million,
respectively). During 2005, TIMET reported net sales of $749.8 million,
operating income of $171.1 million and income before cumulative effect of change
in accounting principle attributable to common stockholders of $143.7 million
(2004 - net sales of $501.8 million, operating income of $43.0 million and
income before cumulative effect of change in accounting principle of $43.3
million; 2003 - net sales of $385.3 million, operating loss of $6.0 million and
a loss before cumulative effect of change in accounting principle attributable
to common stockholders of $24.3 million). All of such amounts for 2003 and 2004
have been restated for TIMET's change in accounting principle related to its
inventories discussed in Note 1.
During 2003, the Company purchased 14,700 of TIMET's 6.625% convertible
preferred securities (with an aggregate liquidation amount of $735,000) for an
aggregate cost of $238,000, including expenses. The securities were issued by
TIMET Capital Trust I, a wholly-owned subsidiary of TIMET, and have been
guaranteed by TIMET. Such securities represented less than 1% of the aggregate 4
million convertible preferred securities that are outstanding. Each share of
TIMET's convertible preferred securities is convertible into .1339 shares of
TIMET's common stock. TIMET has the right to defer payments of distributions on
the convertible preferred securities for up to 20 consecutive quarters, although
distributions continue to accrue at the coupon rate during the deferral period
on the liquidation amount and any unpaid distributions. In October 2002, TIMET
exercised such deferral rights starting with the quarterly distribution payable
in December 2002. In April 2004, TIMET paid all previously-deferred
distributions with respect to the convertible preferred debt securities and
resumed quarterly distributions with the next scheduled distribution in June
2004. The convertible preferred securities mature in 2026, and do not require
any amortization prior to maturity. The convertible preferred securities are
accounted for as available-for-sale marketable securities carried at estimated
fair value.
In August 2004, TIMET completed an exchange offer in which approximately
3.9 million shares of the outstanding convertible preferred debt securities
issued by TIMET Capital Trust I were exchanged for an aggregate of 3.9 million
shares of a newly-created Series A Preferred Stock of TIMET at the exchange rate
of one share of Series A Preferred Stock for each convertible preferred debt
security. Dividends on the Series A shares accumulate at the rate of 6 3/4% of
their liquidation value of $50 per share, and are convertible into shares of
TIMET common stock at the rate of one and two-thirds of a share of TIMET common
stock per Series A share. The Series A shares are not mandatorily redeemable,
but are redeemable at the option of TIMET in certain circumstances. Valhi
exchanged its 14,700 shares of the convertible preferred debt securities in the
exchange offer for 14,700 Series A shares, and recognized a nominal gain related
to such exchange. The Series A shares are accounted for as available-for-sale
marketable securities carried at estimated fair value. At December 31, 2005, the
cost basis of the Series A shares approximated their carrying amount, and Mr.
Simmons' spouse held an additional 54% of such Series A shares outstanding at
that date.
Basic Management and Landwell. At December 31, 2004 and 2005, other joint
ventures, held by TRECO LLC, a wholly-owned subsidiary of Tremont, are comprised
of (i) a 32% interest in Basic Management, Inc., which, among other things,
provides utility services in the industrial park where one of TIMET's plants is
located, and (ii) a 12% interest in The Landwell Company, which is actively
engaged in efforts to develop certain real estate. Basic Management owns an
additional 50% interest in Landwell.
At September 30, 2005, the combined balance sheets of Basic Management and
Landwell reflected total assets and partners' equity of $118.8 million and $68.1
million, respectively (2004 - $124.8 million and $57.3 million, respectively).
The combined total assets at September 30, 2005 include current assets of $36.9
million, property and equipment of $12.7 million, prepaid costs and expenses of
$5.4 million, land and development costs of $18.7 million, long-term notes and
other receivables of $3.7 million and investment in undeveloped land and water
rights of $41.4 million (2004 - $44.4 million, $15.9 million, $19.3 million,
$16.7 million, $4.6 million and $21.9 million, respectively). Combined total
liabilities at September 30, 2005 include current liabilities of $20.9 million,
long-term debt of $22.7 million and deferred income taxes of $6.3 million (2004
- $31.2 million, $29.8 million and $5.7 million, respectively).
During the 12 months ended September 30, 2005, Basic Management and
Landwell reported combined revenues of $30.4 million, income before income taxes
of $14.9 million and net income of $12.8 million (2004 - $27.5 million, $8.9
million and $7.7 million, respectively; 2003 - $20.1 million, $3.3 million and
$2.9 million, respectively). Landwell is treated for federal income tax purposes
as a partnership, and accordingly the combined results of operations of Basic
Management and Landwell include a provision for income taxes on Landwell's
earnings only to the extent that such earnings accrue to Basic Management.
Other. The Company has certain transactions with certain of these
affiliates, as more fully described in Note 17. The Company records equity in
earnings of Basic Management and Landwell on a one-quarter lag because their
financial statements are generally not available on a timely basis. The Company
records equity in earnings for all other equity method investees without such a
lag because their financial statements are available on a timely basis.
Note 8 - Other noncurrent assets:
December 31,
-----------------------
2004 2005
------ -------
(In thousands)
Loans and other receivables:
Snake River Sugar Company:
Principal $ 80,000 $ -
Interest 38,294 -
Other 3,151 6,769
--------- --------
121,445 6,769
Less current portion 1,993 4,267
--------- --------
Noncurrent portion $119,452 $ 2,502
======== ========
Other assets:
IBNR receivables $ 11,646 $ 16,735
Deferred financing costs 10,933 8,278
Waste disposal site operating permits, net 9,269 14,133
Refundable insurance deposit 2,483 -
Restricted cash equivalents 494 382
Other 17,501 19,609
--------- --------
$ 52,326 $ 59,137
======== ========
Valhi's loan to Snake River was subordinate to Snake River's third-party
senior term loan and bore interest at a fixed rate of 6.49%. Covenants contained
in Snake River's prior third-party senior term loan allowed Snake River, under
certain conditions, to pay periodic installments for debt service on the $80
million loan prior to the maturity of the senior term loan in 2007. The Company
did not expect to receive any significant debt service payments from Snake River
during 2004, and accordingly all accrued and unpaid interest was classified as a
noncurrent asset as of December 31, 2004.
Prior to 2003, the Company amended its loan to Snake River to, among other
things, reduce the interest rate from 12.99% to 6.49%. The reduction of interest
income resulting from such interest rate reduction will be recouped and paid to
the Company via additional future LLC distributions from The Amalgamated Sugar
Company LLC upon achievement of specified levels of future LLC profitability.
In August 2005, Snake River repaid its prior third-party senior loan, and
Snake River commenced to make debts service payments to Valhi under its $80
million loan from Valhi. Such debt service payments, all of which were applied
to accrued and unpaid interest, aggregated $5.5 million in August and September
2005. In October 2005, the Company and Snake River entered into an agreement
pursuant to which, among other things, Snake River agreed to make an additional
$94.8 million prepayment on its loan payable to Valhi ($80 million of which was
applied to principal and the remainder to accrued interest), in return for which
Valhi agreed to forgive and cancel all remaining amounts Snake River otherwise
owed Valhi under such loan. Snake River subsequently made such prepayment to
Valhi in October 2005. Accordingly, in the fourth quarter of 2005 Valhi has
recognized a $21.6 million charge to earnings related to the accrued interest on
its loan to Snake River that was forgiven and cancelled by Valhi in October. See
Note 12.
The IBNR receivables relate to certain insurance liabilities, the risk of
which has been reinsured with certain third party insurance carriers. The
insurance liabilities which have been reinsured are reported as part of
noncurrent accrued insurance claims and expenses. See Notes 11 and 17.
Note 9 - Goodwill and other intangible assets:
Goodwill. Changes in the carrying amount of goodwill during the past three
years by operating segment is presented in the table below. Substantially all of
the goodwill related to the chemicals operating segment was generated from the
Company's various step acquisitions of its interest in NL and Kronos.
Substantially all of the goodwill related to the component products operating
segment was generated from CompX's acquisitions of certain business units
completed prior to 2002, and to a 2005 acquisition. See Note 3.
Operating segment
-----------------------------
Component
Chemicals products Total
--------- ---------- -----
(In millions)
Balance at December 31, 2002 $321.3 $ 43.7 $365.0
Goodwill acquired during the year 10.0 - 10.0
Changes in foreign exchange rates - 2.6 2.6
------ ------ ------
Balance at December 31, 2003 331.3 46.3 377.6
Goodwill acquired during the year 8.4 - 8.4
Elimination of deferred income taxes - (26.9) (26.9)
Impairment charge - (6.5) (6.5)
Changes in foreign exchange rates - 1.5 1.5
------ ------ ------
Balance at December 31, 2004 339.7 14.4 354.1
Goodwill acquired during the year 1.3 8.0 9.3
Assets sold - (1.4) (1.4)
Changes in foreign exchange rates - (.2) (.2)
------ ------ ------
Balance at December 31, 2005 $341.0 $ 20.8 $361.8
====== ====== ======
The Company has assigned its goodwill to four reporting units (as that term
is defined in SFAS No. 142). Goodwill attributable to the chemicals operating
segment was assigned to the reporting unit consisting of Kronos in total.
Goodwill attributable to the component products operating segment was assigned
to three reporting units within that operating segment, one consisting of
CompX's security products operations, one consisting of CompX's European
operations and one consisting of CompX's Michigan, Canadian and Taiwanese
operations. Under SFAS No. 142, such goodwill is deemed to not be impaired if
the estimated fair value of the applicable reporting unit exceeds the respective
net carrying value of such reporting unit, including the allocated goodwill. If
the fair value of the reporting unit is less than carrying value, then a
goodwill impairment loss would be recognized equal to the excess, if any, of the
net carrying value of the reporting unit goodwill over its implied fair value
(up to a maximum impairment equal to the carrying value of the goodwill). The
implied fair value of reporting unit goodwill would be the amount equal to the
excess of the estimated fair value of the reporting unit over the amount that
would be allocated to the tangible and intangible net assets of the reporting
unit (including unrecognized intangible assets) as if such reporting unit had
been acquired in a purchase business combination accounted for in accordance
with GAAP as of the date of the impairment testing.
In determining the estimated fair value of the Kronos reporting unit, the
Company considers quoted market prices for Kronos' common stock, as adjusted for
an appropriate control premium. The Company uses other appropriate valuation
techniques, such as discounted cash flows, to estimate the fair value of the
three CompX reporting units.
In accordance with the requirements of SFAS No. 142, the Company reviews
goodwill of its four reporting units for impairment during the third quarter of
each year. Goodwill is also reviewed for impairment at other times during each
year when events or changes in circumstances indicate that an impairment might
be present. No goodwill impairments related to continuing operations were deemed
to exist as a result of the Company's annual impairment reviews completed during
2003, 2004 and 2005. However, in December 2004 CompX's board of directors
committed to a formal plan to dispose of CompX's European operations. As a
result, the Company recognized a non-cash charge of $6.5 million in the fourth
quarter of 2004, representing an impairment of goodwill associated with such
operations, to write-down the Company's investment in such operations to its
estimated realizable value based upon the expected net proceeds resulting from
the sale of such operations. See Note 22.
As discussed in Note 1, the Company provides deferred income taxes for the
expected future tax consequences of temporary differences between the income tax
and financial reporting carrying amounts of investments in subsidiaries that are
not members of the Contran Tax Group. Also as discussed in Note 1, prior to
October 2004 CompX was not a member of the Contran Tax Group, and the Company
provided deferred income taxes with respect to its investment in CompX.
Effective October 2004, CompX became a member of the Contran Tax Group, and the
Company no longer provides such deferred income taxes as it was no longer
required to do so under applicable GAAP. In accordance with GAAP, and as a
result of CompX becoming a member of the Contran Tax Group, a net $26.9 million
deferred tax liability, previously provided with respect to the Company's
investment in CompX, was eliminated through a reduction in goodwill at December
31, 2004.
Other intangible assets.
December 31,
-----------------------
2004 2005
------ ------
(In millions)
CompX - patents and other:
Cost $3.4 $4.4
Less accumulated amortization 1.7 2.1
---- ----
Net 1.7 2.3
---- ----
NL - customer list:
Cost 2.6 2.6
Less accumulated amortization 1.1 1.5
---- ----
Net 1.5 1.1
---- ----
$3.2 $3.4
==== ====
CompX's intangible assets relate principally to the estimated fair value of
certain patents acquired in connection with the acquisition of certain business
units by CompX. NL's intangible asset relates to its acquisition of an insurance
broker acquired prior to 2003. CompX's intangible assets are amortized by the
straight-line method over their estimated useful lives (approximately 10 years
remaining at December 31, 2005), with no assumed residual value at the end of
the life of the intangible assets. The customer list intangible asset is
amortized by the straight-line method over the estimated seven-year life of such
intangible asset (approximately 3 years remaining at December 31, 2005), with no
assumed residual value at the end of the life of the intangible asset.
Amortization expense of intangible assets was approximately $600,000 in each of
2003 and 2004 and approximately $700,000 in 2005, and amortization expense of
intangible assets is expected to be approximately $700,000 in each of calendar
2006 through 2008 and $300,000 in each of 2009 and 2010.
Note 10 - Long-term debt:
December 31,
-------------------------
2004 2005
------ -------
(In thousands)
Valhi - Snake River Sugar Company $250,000 $250,000
-------- --------
Subsidiaries:
Kronos International Senior Secured Notes 519,225 449,298
Kronos U.S. bank credit facility - 11,500
Kronos European bank credit facility 13,622 -
Other 1,090 6,637
-------- --------
533,937 467,435
-------- --------
783,937 717,435
Less current maturities 14,412 1,615
-------- --------
$769,525 $715,820
======== ========
Valhi. Valhi's $250 million in loans from Snake River Sugar Company bear
interest at a weighted average fixed interest rate of 9.4%, are collateralized
by the Company's interest in The Amalgamated Sugar Company LLC and are due in
January 2027. At December 31, 2005, $37.5 million of such loans are recourse to
Valhi and the remaining $212.5 million is nonrecourse to Valhi. Under certain
conditions, Snake River has the ability to accelerate the maturity of these
loans. See Note 5.
At December 31, 2005, Valhi has a $100 million revolving bank credit
facility which matures in October 2006, generally bears interest at LIBOR plus
1.5% (for LIBOR-based borrowings) or prime (for prime-based borrowings), and is
collateralized by 15 million shares of Kronos common stock held by Valhi. The
agreement limits dividends and additional indebtedness of Valhi and contains
other provisions customary in lending transactions of this type. In the event of
a change of control of Valhi, as defined, the lenders would have the right to
accelerate the maturity of the facility. The maximum amount which may be
borrowed under the facility is limited to one-third of the aggregate market
value of the shares of Kronos common stock pledged as collateral. Based on
Kronos' December 31, 2005 quoted market price of $29.01 per share, the shares of
Kronos common stock pledged under the facility provide more than sufficient
collateral coverage to allow for borrowings up to the full amount of the
facility. At December 31, 2005, Valhi would only have become limited to
borrowing less than the full $100 million amount of the facility, or would be
required to pledge additional collateral if the full amount of the facility had
been borrowed, if the quoted market price of Kronos' common stock was less than
$20 per share. At December 31, 2005, no amounts have been borrowed, letters of
credit aggregating $1.5 million had been issued and $98.5 million was available
for borrowing under the facility.
Kronos and its subsidiaries. In June 2002, Kronos International ("KII"),
which conducts Kronos' TiO2 operations in Europe, issued at par value euro 285
million principal amount ($280 million when issued) of its 8.875% Senior Secured
Notes due 2009, and in November 2004 KII issued at 107% of par an additional
euro 90 million principal amount ($130 million when issued) of the KII Senior
Secured Notes. The KII Senior Secured Notes are collateralized by a pledge of
65% of the common stock or other ownership interests of certain of KII's
first-tier operating subsidiaries. Such operating subsidiaries are Kronos Titan
GmbH, Kronos Denmark ApS, Kronos Limited and Societe Industrielle Du Titane,
S.A. The KII Senior Secured Notes are issued pursuant to an indenture which
contains a number of covenants and restrictions which, among other things,
restricts the ability of KII and its subsidiaries to incur debt, incur liens,
pay dividends or merge or consolidate with, or sell or transfer all or
substantially all of their assets to, another entity. The KII Senior Secured
Notes are redeemable, at KII's option, at redemption prices ranging from
104.437% of the principal amount, declining to 100% on or after December 30,
2008. In the event of a change of control of KII, as defined, KII would be
required to make an offer to purchase its Senior Secured Notes at 101% of the
principal amount. KII would also be required to make an offer to purchase a
specified portion of its Senior Secured Notes at par value in the event KII
generates a certain amount of net proceeds from the sale of assets outside the
ordinary course of business, and such net proceeds are not otherwise used for
specified purposes within a specified time period. At December 31, 2005, the
market price of the KII Senior Secured Notes was approximately euro 1,045 per
euro 1,000 principal amount (2004 - euro 1,075 per euro 1,000 principal amount).
At December 31, 2005, the carrying amount of the KII Senior Secured Notes
includes euro 4.8 million ($5.7 million) of unamortized premium associated with
the November 2004 issuance (2004 - euro 6.2 million, or $8.4 million).
KII's operating subsidiaries in Germany, Belgium and Norway have a euro 80
million secured revolving bank credit facility (nil outstanding at December 31,
2005) that matures in June 2008. Borrowings may be denominated in euros,
Norwegian kroners or U.S. dollars, and bear interest at the applicable interbank
market rate plus 1.125%. The facility also provides for the issuance of letters
of credit up to euro 5 million. The KII bank credit facility is collateralized
by the accounts receivable and inventories of the borrowers, plus a limited
pledge of all of the other assets of the Belgian borrower. The KII bank credit
facility contains certain restrictive covenants that, among other things,
restricts the ability of the borrowers to incur debt, incur liens, pay dividends
or merge or consolidate with, or sell or transfer all or substantially all of
their assets to, another entity. At December 31, 2005, the equivalent of $92.3
million was available for additional borrowing by the subsidiaries.
Certain of Kronos' U.S. subsidiaries have a $50 million revolving credit
facility ($11.5 million outstanding at December 31, 2005) that matures in
September 2008. The facility is collateralized by the accounts receivable,
inventories and certain fixed assets of the borrowers. Borrowings under this
facility are limited to the lesser of $45 million or a formula-determined amount
based upon the accounts receivable and inventories of the borrowers. Borrowings
bear interest at either the prime rate or rates based upon the eurodollar rate
(7.0% at December 31, 2005). The facility contains certain restrictive covenants
which, among other things, restricts the abilities of the borrowers to incur
debt, incur liens, pay dividends in certain circumstances, sell assets or enter
into mergers. At December 31, 2005, $33.5 million was available for borrowing
under the facility.
Kronos' Canadian subsidiary has a Cdn. $30 million revolving credit
facility (nil outstanding at December 31, 2005) that matures in January 2009.
The facility is collateralized by the accounts receivable and inventories of the
borrower. Borrowings under this facility are limited to the lesser of Cdn. $26
million or a formula-determined amount based upon the accounts receivable and
inventories of the borrower. Borrowings bear interest at rates based upon either
the Canadian prime rate, the U.S. prime rate or LIBOR. The facility contains
certain restrictive covenants which, among other things, restricts the ability
of the borrower to incur debt, incur liens, pay dividends in certain
circumstances, sell assets or enter into mergers. At December 31, 2005, the
equivalent of $12.8 million was available for additional borrowing by the
subsidiary.
Under the cross-default provisions of the KII Senior Secured Notes, the
notes may be accelerated prior to their stated maturity if KII or any of KII's
subsidiaries default under any other indebtedness in excess of $20 million due
to a failure to pay such other indebtedness at its due date (including any due
date that arises prior to the stated maturity as a result of a default under
such other indebtedness). Under the cross-default provisions of KII's European
revolving credit facility, any outstanding borrowings under such facility may be
accelerated prior to their stated maturity if the borrowers or KII default under
any other indebtedness in excess of euro 5 million due to a failure to pay such
other indebtedness at its due date (including any due date that arises prior to
the stated maturity as a result of a default under such other indebtedness).
Under the cross-default provisions of the U.S. revolving credit facility, any
outstanding borrowing under such facility may be accelerated prior to their
stated maturity in the event of the bankruptcy of Kronos. The Canadian revolving
credit facility contains no cross-default provisions. The European, U.S. and
Canadian revolving credit facilities each contain provisions that allow the
lender to accelerate the maturity of the applicable facility in the event of a
change of control, as defined, of the applicable borrower. In the event any of
these cross-default or change-of-control provisions become applicable, and such
indebtedness is accelerated, Kronos would be required to repay such indebtedness
prior to their stated maturity.
CompX. At December 31, 2005, CompX has a $50.0 million secured revolving
bank credit facility maturing in January 2009 with interest at rates based on
the prime rate or LIBOR. The credit facility is collateralized by a pledge of
65% of the ownership interests in CompX's first-tier foreign subsidiaries. The
facility contains certain covenants and restrictions customary in lending
transactions of this type which, among other things, restricts the ability of
CompX and its subsidiaries to incur debt, incur liens, pay dividends or merge or
consolidate with, or transfer all or substantially all of their assets, to
another entity. In the event of a change of control of CompX, as defined, the
lenders would have the right to accelerate the maturity of the facility. At
December 31, 2005, no amounts were outstanding and $50 million was available for
additional borrowing under the facility.
Other indebtedness. In February 2003, Valcor redeemed for par value the
remaining $2.4 million principal amount of its 9 5/8% Senior Notes due November
2003.
Aggregate maturities of long-term debt at December 31, 2005:
Years ending December 31, Amount
-------------------------- -------------
(In thousands)
2006 $ 1,615
2007 1,048
2008 12,526
2009 450,349
2010 1,897
2011 and thereafter (all due in 2027) 250,000
--------
$717,435
========
Restrictions. Certain of the credit facilities described above require the
respective borrower to maintain minimum levels of equity, require the
maintenance of certain financial ratios, limit dividends and additional
indebtedness and contain other provisions and restrictive covenants customary in
lending transactions of this type. At December 31, 2005, none of the net assets
of Valhi's consolidated subsidiaries were restricted.
At December 31, 2005, amounts available for the payment of Valhi dividends
pursuant to the terms of Valhi's revolving bank credit facility aggregated $.10
per Valhi share outstanding per quarter, plus an additional $67.9 million. Any
purchases of treasury stock subsequent to December 31, 2005 would reduce this
$67.9 million amount.
Note 11 - Accrued liabilities:
December 31,
--------------------------
2004 2005
------ --------
(In thousands)
Current:
Employee benefits $ 53,295 $ 48,341
Environmental costs 21,316 16,565
Deferred income 5,276 5,101
Interest 243 1,067
Other 50,989 58,355
-------- --------
$131,119 $129,429
======== ========
Noncurrent:
Insurance claims and expenses $ 22,718 $ 24,257
Employee benefits 5,380 4,998
Deferred income 1,427 573
Asset retirement obligations 1,357 1,381
Other 10,179 8,119
-------- --------
$ 41,061 $ 39,328
======== ========
The asset retirement obligations are discussed in Note 19. The risks
associated with certain of the Company's accrued insurance claims and expenses
have been reinsured, and the related IBNR receivable are recognized as
noncurrent assets. See Note 8.
Note 12 - Other income, net:
Years ended December 31,
----------------------------------------
2003 2004 2005
---- ---- ----
(In thousands)
Securities earnings:
Dividends and interest $33,724 $34,576 $ 57,843
Securities transactions, net 487 2,113 20,259
Write-off of accrued interest - - (21,638)
------- ------- --------
34,211 36,689 56,464
Contract dispute settlement - 6,289 -
Insurance recoveries 823 552 2,970
Currency transactions, net (8,288) (3,764) 5,163
Disposal of property and equipment, net 9,845 (855) (1,555)
Other, net 4,836 5,333 4,947
------- ------- --------
$41,427 $44,244 $67,989
======= ======= =======
Dividends and interest income includes distributions from The Amalgamated
Sugar Company LLC of $23.7 million in 2003, $23.8 million in 2004 and $45.0
million in 2005, and interest income of $5.2 million in each of 2003 and 2004
and $3.9 million in 2005 related to the Company's loan to Snake River Sugar
Company. The $21.6 million write-off of accrued interest receivable in 2005
relates to accrued interest on Valhi's loan to Snake River that was forgiven and
cancelled by Valhi in October 2005. See Notes 5 and 8. Dividends and interest
income also includes interest of $1.4 million in 2003 and $1.5 million in 2004
of interest on certain intercompany receivables of CompX related to its
operations in The Netherlands. The related interest expense on such intercompany
indebtedness is included as a component of discontinued operations. See Note 22.
Net securities transaction gains in 2005 relate primarily to (i) NL's $14.7
million pre-tax gain from the sale of approximately 470,000 shares of Kronos
common stock in market transactions for aggregate proceeds of $19.2 million and
(ii) Kronos' $5.4 million pre-tax gain from the sale of its passive interest in
a Norwegian smelting operation, which had a nominal carrying value for financial
reporting purposes, for aggregate consideration of approximately $5.4 million
consisting of cash of $3.5 million and inventories with a value of $1.9 million.
Net securities transactions gains in 2004 includes a $2.2 million gain related
to NL's sale of shares of Kronos common stock in market transactions.
The contract dispute settlement relates to Kronos' settlement with a
customer. As part of the settlement, the customer agreed to make payments to
Kronos through 2007 aggregating $7.3 million. The $6.3 million gain recognized
in 2004 represents the present value of the future payments to be paid by the
customer to Kronos. Of such $7.3 million, $1.5 million was paid to Kronos in
2004 and $1.75 million was paid in 2005, and $1.75 million is due in 2006 and
$2.25 million is due in 2007. At December 31, 2005, the present value of the
remaining amounts due to be paid to Kronos aggregated approximately $3.7
million, of which $1.7 million is included in accounts receivable and $2.0
million is included in other noncurrent assets.
Insurance recoveries of $823,000 in 2003, $552,000 in 2004 and $804,000 in
2005 relate to NL's settlements with certain of its former insurance carriers.
These settlements, as well as similar prior settlements NL reached prior to
2003, resolved court proceedings in which NL had sought reimbursement from the
carriers for legal defense costs and indemnity coverage for certain of its
environmental remediation expenditures. No further material settlements relating
to litigation concerning environmental remediation coverages are expected.
Insurance recoveries in 2005 also include $2.2 million received by NL in 2005 in
recovery from certain insolvent former insurance carriers relating to settlement
of excess insurance coverage claims that were paid to NL. See Note 19. Net gains
from the disposal of property and equipment in 2003 includes $10.3 million
related primarily to the sale of certain real property of NL not associated with
Kronos' TiO2 operations.
Note 13 - Minority interest:
December 31,
-----------------------
2004 2005
---- -----
(In thousands)
Minority interest in net assets:
NL Industries $ 51,662 $ 51,177
Kronos Worldwide 29,569 28,167
CompX International 49,153 45,630
Subsidiary of NL 9,250 -
Subsidiary of Kronos 76 75
-------- --------
$139,710 $125,049
======== ========
Years ended December 31,
-------------------------------------
2003 2004 2005
---- ---- ----
(In thousands)
Minority interest in net earnings (losses) -
continuing operations:
NL Industries $ (8,149) $24,891 $ 6,336
Kronos Worldwide 246 19,659 5,057
CompX International 1,814 2,993 290
Subsidiary of NL 371 747 61
Subsidiary of Kronos 72 53 12
Tremont Corporation (217) - -
------- ------- -------
$(5,863) $48,343 $11,756
======= ======= =======
Kronos Worldwide. The Company commenced recognizing minority interest in
Kronos' net assets and net earnings following NL's December 2003 distribution of
a portion of the shares of Kronos common stock to its shareholders. See Note 3.
Subsidiary of NL. Minority interest in NL's subsidiary related to NL's
majority-owned environmental management subsidiary, NL Environmental Management
Services, Inc. ("EMS"). EMS was established in 1998, at which time EMS
contractually assumed certain of NL's environmental liabilities. EMS' earnings
were based, in part, upon its ability to favorably resolve these liabilities on
an aggregate basis. NL continues to consolidate EMS and provides accruals for
the reasonably estimable costs for the settlement of EMS' environmental
liabilities, as discussed in Note 18.
In June 2005, EMS, received notices from the three minority shareholders of
EMS indicating they were each exercising their right, which became exercisable
on June 1, 2005, to require EMS to purchase their shares in EMS as of June 30,
2005 for a formula-determined amount as provided in EMS' certificate of
incorporation. In accordance with the certificate of incorporation, EMS made a
determination in good faith of the amount payable to the three former minority
shareholders to purchase their shares of EMS stock, which amount may be subject
to review by a third party. In June 2005, EMS set aside funds as payment for the
shares of EMS, but as of December 31, 2005, the former minority shareholders
have not tendered their shares, and accordingly the liability owed to these
former minority shareholders, which has not been extinguished for financial
reporting purposes as of December 31, 2005, has been classified as a current
liability at such date. Similarly, the funds which have been set aside are
classified as a current asset at such date.
Tremont Corporation. The Company no longer reports minority interest in
Tremont's net assets or net earnings (losses) subsequent to the February 2003
mergers of Valhi and Tremont. See Note 3.
Waste Control Specialists. Waste Control Specialists was formed by Valhi
and another entity in 1995. See Note 3. Waste Control Specialists assumed
certain liabilities of the other owner and such liabilities exceeded the
carrying value of the assets contributed by the other owner. Consequently, all
of Waste Control Specialists aggregate inception-to-date net losses prior to the
time when Waste Control Specialists became a wholly-owned subsidiary of the
Company in the second quarter of 2004 have accrued to the Company for financial
reporting purposes. Accordingly, no minority interest in Waste Control
Specialists has been recognized in the Company's consolidated financial
statements.
Subsidiary of Kronos. Minority interest in Kronos' subsidiary relates to
Kronos' majority-owned subsidiary in France, which conducts Kronos' sales and
marketing activities in that country.
Discontinued operations. Minority interest in losses of discontinued
operations was $1.4 million in 2003, $4.1 million in 2004 and $205,000 in 2005.
See Note 22.
Note 14 - Stockholders' equity:
Shares of common stock
------------------------------------------
Issued Treasury Outstanding
------ -------- -----------
(In thousands)
Balance at December 31, 2002 126,161 (10,570) 115,591
Issued:
Tremont merger 7,840 (2,981) 4,859
Other 26 - 26
Other - (290) (290)
------- -------- -------
Balance at December 31, 2003 134,027 (13,841) 120,186
Issued 25 - 25
Retired (9,857) 9,857 -
------- -------- -------
Balance at December 31, 2004 124,195 (3,984) 120,211
Issued 65 - 65
Acquired - (3,512) (3,512)
Retired (3,512) 3,512 -
------- -------- -------
Balance at December 31, 2005 120,748 (3,984) 116,764
======= ======== =======
The shares of Valhi issued in 2003 pursuant to the Tremont merger are
discussed in Note 3. Other shares of Valhi common stock issued during 2003, 2004
and 2005 consist of (i) shares issued upon exercise of stock options and (ii)
stock awards issued to members of Valhi's board of directors.
In 2005, the Company's board of directors authorized the repurchase of up
to 5.0 million shares of Valhi's common stock in open market transactions,
including block purchases, or in privately negotiated transactions, which may
include transactions with affiliates of Valhi. The stock may be purchased from
time to time as market conditions permit. The stock repurchase program does not
include specific price targets or timetables and may be suspended at any time.
Depending on market conditions, the program could be terminated prior to
completion. The Company will use its cash on hand to acquire the shares.
Repurchased shares will be retired and cancelled or may be added to Valhi's
treasury and used for employee benefit plans, future acquisitions or other
corporate purposes. Subsequently during 2005, the Company purchased an aggregate
of 3.5 million shares of its common stock pursuant to this repurchase program in
market or other transactions for an aggregate of $62.1 million. See Note 17.
During 2004 and 2005, the Company cancelled 9.9 million shares and 3.5
million shares, respectively, of its common stock that had either previously
been reported as treasury stock in the Company's consolidated financial
statements (for the shares cancelled in 2004) or had been acquired by Valhi in
market or other transactions (for the shares cancelled in 2005). Of such 9.9
million shares cancelled in 2004, 8.9 million shares were held in treasury by
Valhi, and 1 million shares had been held by a wholly-owned subsidiary of Valhi.
During 2004, these 1 million Valhi shares previously held by a subsidiary of
Valhi were distributed to Valhi and cancelled. The aggregate $64.6 million cost
of such treasury shares cancelled in 2004 and the $62.1 million cost of such
treasury shares cancelled in 2005 have been allocated to common stock at par
value, additional paid in capital and retained earnings in accordance with GAAP.
Such cancellations had no impact on the net Valhi shares outstanding for
financial reporting purposes. The 4.0 million shares of treasury stock reported
for financial reporting purposes at December 31, 2004 and 2005 represents the
Company's proportional interest in 4.7 million Valhi shares held by NL. Under
Delaware Corporation Law, 100% (and not the proportionate interest) of a parent
company's shares held by a majority-owned subsidiary of the parent are
considered to be treasury stock. As a result, Valhi common shares outstanding
for financial reporting purposes differ from those outstanding for legal
purposes.
Valhi options. Valhi has an incentive stock option plan that provides for
the discretionary grant of, among other things, qualified incentive stock
options, nonqualified stock options, restricted common stock, stock awards and
stock appreciation rights. Up to 5 million shares of Valhi common stock may be
issued pursuant to this plan. Options are generally granted at a price not less
than fair market value on the date of grant, generally vest ratably over a
five-year period beginning one year from the date of grant and expire 10 years
from the date of grant. Restricted stock, when granted, is generally forfeitable
unless certain periods of employment are completed and held in escrow in the
name of the grantee until the restriction period expires. No stock appreciation
rights have been granted. Shares issued under the incentive stock plan are
generally newly-issued shares (i.e., not the re-issuance of treasury shares).
Outstanding options at December 31, 2005 represent less than 1% of Valhi's
outstanding shares at that date and expire at various dates through 2013, with a
weighted-average remaining term of 2.7 years. At December 31, 2005, all of the
options outstanding to purchase 814,000 Valhi shares were exercisable, with an
aggregate amount payable upon exercise of $8.1 million and an aggregate
intrinsic value (defined as the excess of the market price of Valhi's common
stock over the exercise price) of $7.0 million. All of such outstanding options
are exercisable at various dates through 2013 at prices lower than the Company's
December 31, 2005 market price of $18.50 per share. At December 31, 2005, an
aggregate of 4.1 million shares were available for future grants.
The following table sets forth changes in outstanding options during the
past three years under all Valhi option plans in effect during such periods.
Amount Weighted
payable Exercise average
upon price per exercise
Shares exercise share price
------ -------- --------- ------
(In thousands, except per share amounts)
Outstanding at December 31, 2002 1,181 $10,663 $4.96-$12.45 $ 9.03
Granted 8 80 10.05 10.05
Exercised (20) (210) 9.50- 12.00 10.50
Canceled (76) (417) 4.96- 6.56 5.49
----- -------
Outstanding at December 31, 2003 1,093 10,116 5.48- 12.45 9.26
Exercised (20) (177) 5.72- 12.00 8.85
Canceled (198) (1,231) 5.48- 12.45 6.22
----- -------
Outstanding at December 31, 2004 875 8,708 6.38- 12.45 9.95
Exercised (61) (648) 6.38- 12.00 10.64
----- -------
Balance at December 31, 2005 814 $ 8,060 $6.38-$12.45 9.90
===== =======
The intrinsic value of Valhi options exercised aggregated approximately
$85,000 in 2003, $135,000 in 2004 and $535,000 in 2005, and the related income
tax benefit from such exercises was approximately $30,000 in 2003, $50,000 in
2004 and $190,000 in 2005.
Stock option plans of subsidiaries and affiliate. NL, Kronos, CompX and
TIMET each maintain plans which provide for the grant of options to purchase
their respective common stocks. Provisions of these plans vary by company.
Outstanding options to purchase common stock of NL, CompX and TIMET at December
31, 2005 are summarized below. There are no outstanding options to purchase
Kronos common stock at December 31, 2005.
Amount
Exercise payable
price per upon
Shares share exercise
------ --------- --------
(In thousands, except
per share amounts)
NL Industries 120 $ 2.66 -$11.49 $ 1,097
CompX 470 10.00 -$20.00 8,637
TIMET 1,038 .83 -$17.66 12,664
Other. Prior to and within six months of Contran's sale of the 2.0 million
shares of Valhi common stock to Valhi described in Note 17, Contran had
purchased shares of Valhi common stock in market transactions. In settlement of
any alleged short-swing profit derived from these transactions as calculated
pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended,
Contran remitted approximately $645,000 to the Company in 2005, which amount,
net of $226,000 of related income taxes, has been recorded by the Company as a
capital contribution, increasing additional paid-in capital.
The pro forma information included in Note 1, required by SFAS No. 123,
Accounting for Stock-Based Compensation, as amended, is based on an estimation
of the fair value of options issued subsequent to January 1, 1995 using the
Black-Scholes stock option valuation model. The aggregate fair value of the
nominal number of Valhi options granted during 2003 (no options were granted
during 2004 or 2005) was not material. The Black-Scholes model was not developed
for use in valuing employee stock options, but was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, it requires the use of subjective
assumptions including expectations of future dividends and stock price
volatility. Such assumptions are only used for making the required fair value
estimate and should not be considered as indicators of future dividend policy or
stock price appreciation. Because changes in the subjective assumptions can
materially affect the fair value estimate, and because employee stock options
have characteristics significantly different from those of traded options, the
use of the Black-Scholes option-pricing model may not provide a reliable
estimate of the fair value of employee stock options. The pro forma impact on
net income and basic earnings per share disclosed in Note 1 is not necessarily
indicative of future effects on net income or earnings per share. For purposes
of such pro forma disclosure, the estimated fair value of options is amortized
to expense over the options' vesting period. See also Note 21.
Note 15 - Income taxes:
Years ended December 31,
--------------------------------------
2003 2004 2005
-------- ------ -----
(Restated) (Restated)
(In millions)
Components of pre-tax income - income (loss) from continuing
operations:
United States:
Contran Tax Group $(39.0) $ 78.9 $ 80.1
CompX tax group 6.3 6.1 -
------ ------- -------
(32.7) 85.0 80.1
Non-U.S. subsidiaries 73.9 (3.7) 117.5
------ ------- -------
$ 41.2 $ 81.3 $ 197.6
====== ======= =======
Expected tax expense (benefit), at U.S.
federal statutory income tax rate of 35% $ 14.4 $ 28.4 $ 69.1
Non-U.S. tax rates (1.5) (.3) (.1)
Incremental U.S. tax and rate differences
On equity in earnings 106.8 93.0 23.4
Excess of book basis over tax basis of
shares of Kronos common stock sold - .2 1.9
Loss of German income tax attribute - - 17.5
Income tax on distribution of shares of Kronos 22.5 2.5 .7
Change in deferred income tax valuation
allowance, net (7.2) (311.8) -
Assessment (refund) of prior year income
taxes, net (38.0) (2.5) 2.3
U.S. state income taxes, net (.6) 1.0 4.3
Tax contingency reserve adjustment, net 30.5 (16.5) (19.1)
Nondeductible expenses 3.7 5.1 5.2
Other, net 1.8 7.6 (1.1)
------ ------- -------
$ 132.4 $(193.3) $ 104.1
====== ======= =======
Components of income tax expense (benefit):
Currently payable (refundable):
U.S. federal and state $ 15.2 $ .9 $ 25.9
Non-U.S. (34.0) 17.6 35.9
------ ------- -------
(18.8) 18.5 61.8
------ ------- -------
Deferred income taxes (benefit):
U.S. federal and state 120.0 69.4 20.6
Non-U.S. 31.2 (281.2) 21.7
------ ------- -------
151.2 (211.8) 42.3
------ ------- -------
$132.4 $(193.3) $ 104.1
====== ======= =======
Comprehensive provision for
income taxes (benefit) allocable to:
Income from continuing operations $132.4 $(193.3) $ 104.1
Discontinued operations (2.6) (4.6) (.4)
Additional paid-in capital - - .2
Cumulative effect of change in
accounting principle .3 - -
Other comprehensive income:
Marketable securities 2.1 2.1 -
Currency translation 4.9 (8.2) (8.6)
Pension liabilities (15.4) (6.9) (38.7)
------ ------- -------
$121.7 $(210.9) $ 56.6
====== ======= =======
The components of the net deferred tax liability at December 31, 2004 and
2005, and changes in the deferred income tax valuation allowance during the past
three years, are summarized in the following tables.
December 31,
---------------------------------------------------------
2004 2005
--------------------------- ---------------------------
Assets Liabilities Assets Liabilities
------ ----------- ----------- -----------
(Restated) (Restated)
(In millions)
Tax effect of temporary differences
related to:
Inventories $ 2.6 $ (6.3) $ 3.0 $ (3.6)
Marketable securities - (107.5) - (106.9)
Property and equipment 38.3 (104.6) 26.4 (87.8)
Accrued OPEB costs 13.9 - 12.7 -
Accrued environmental liabilities and
other deductible differences 120.1 - 111.1 -
Other taxable differences - (185.8) - (125.8)
Investments in subsidiaries and
affiliates 24.9 (202.0) - (209.6)
Tax loss and tax credit carryforwards 245.3 - 199.4 -
------- ------- ------- -------
Adjusted gross deferred tax assets
(liabilities) 445.1 (606.2) 352.6 (533.7)
Netting of items by tax jurisdiction (195.9) 195.9 (128.4) 128.4
------- ------- ------- -------
249.2 (410.3) 224.2 (405.3)
Less net current deferred tax asset
(liability) 9.7 (24.2) 10.5 (4.3)
------- ------- ------- -------
Net noncurrent deferred tax asset
(liability) $ 239.5 $(386.1) $ 213.7 $(401.0)
======= ======= ======= =======
Years ended December 31,
-------------------------------------
2003 2004 2005
---- ---- ----
(In millions)
Increase (decrease) in valuation allowance:
Increase in certain deductible temporary
differences which the Company believes do
not meet the "more-likely-than-not"
recognition criteria $ - $ - $ -
Recognition of certain deductible tax
attributes for which the benefit had not
previously been recognized under the
"more-likely-than-not" recognition criteria (7.2) (311.8) -
Foreign currency translation 28.2 (3.0) -
Offset to the change in gross deferred
income tax assets due principally to
redeterminations of certain tax attributes
and implementation of certain tax
planning strategies (11.8) 121.0 -
Valhi/Tremont merger (10.8) - -
Other, net (.1) - -
------ ------- -------
$ (1.7) $(193.8) $ -
====== ======= =======
Certain of the Company's U.S. and non-U.S. tax returns are being examined
and tax authorities have or may propose tax deficiencies, including penalties
and interest. For example:
o Kronos received a preliminary tax assessment related to 1993 from the
Belgian tax authorities proposing tax deficiencies, including related
interest, of approximately euro 6 million ($7 million at December 31,
2005). Kronos filed a protest to this assessment, and believes that a
significant portion of the assessment was without merit. The Belgian
tax authorities have filed a lien on the fixed assets of Kronos'
Belgian TiO2 operations in connection with this assessment. In April
2003, Kronos received a notification from the Belgian tax authorities
of their intent to assess a tax deficiency related to 1999 that,
including interest, would have aggregated approximately euro 9 million
($11 million). Kronos filed a written response to the assessment, and
in September 2005 the Belgian tax authorities withdrew the assessment.
o The Norwegian tax authorities have notified Kronos of their intent to
assess tax deficiencies of approximately kroner 12 million ($2
million) relating to the years 1998 through 2000. Kronos has objected
to this proposed assessment.
o Kronos has received a tax assessment from the Canadian tax authorities
related to the years 1998 and 1999 proposing tax deficiencies,
including interest, of approximately Cdn. $5 million ($4 million).
Kronos filed a protest, and in October 2005, the Canadian tax
authorities agreed to reduce the assessment and settle all issues,
including interest, for approximately Cdn. $2 million ($1.7 million).
During the third quarter of 2005, Kronos reached an agreement in principle
with the German tax authorities regarding such tax authorities' objection to the
value assigned to certain intellectual property rights held by Kronos' operating
subsidiary in Germany. Under the agreement in principle, the value assigned to
such intellectual property for German income tax purposes will be reduced
retroactively, resulting in a reduction in the amount of Kronos' net operating
loss carryforwards in Germany as well as a future reduction in the amount of
amortization expense attributable to such intellectual property. As a result,
Kronos recognized a $17.5 million non-cash deferred income tax expense in the
third quarter of 2005 related to such agreement. The $19.1 million non-cash tax
contingency adjustment income tax benefit in 2005 relates primarily to the
withdrawal of the Belgium tax authorities' assessment related to 1999 and the
Canadian tax authorities' reduction of one of its assessments, both as discussed
above, as well as favorable developments with respect to certain income tax
items of NL in the U.S.
No assurance can be given that these tax matters will be resolved in the
Company's favor in view of the inherent uncertainties involved in settlement
initiatives and court and tax proceedings. The Company believes that it has
provided adequate accruals for additional taxes and related interest expense
which may ultimately result from all such examinations and believes that the
ultimate disposition of such examinations should not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity.
Under GAAP, a company is required to recognize a deferred income tax
liability with respect to the incremental U.S. taxes (federal and state) and
foreign withholding taxes that would be incurred when undistributed earnings of
a foreign subsidiary are subsequently repatriated, unless management has
determined that those undistributed earnings are permanently reinvested for the
foreseeable future. Prior to the third quarter of 2005, CompX had not recognized
a deferred tax liability related to such incremental income taxes on the
undistributed earnings of its foreign operations, as those earnings were subject
to specific permanent reinvestment plans. GAAP requires a company to reassess
the permanent reinvestment conclusion on an ongoing basis to determine if
management's intentions have changed. As of September 30, 2005, and based
primarily upon changes in CompX management's strategic plans for certain of its
non-U.S. operations, CompX's management has determined that the undistributed
earnings of such subsidiaries can no longer be considered to be permanently
reinvested, except for the pre-2005 earnings of its Taiwanese subsidiary.
Accordingly, and in accordance with GAAP, CompX recognized an aggregate $9.0
million provision for deferred income taxes on the aggregate undistributed
earnings of these foreign subsidiaries.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law provided for a special 85% deduction for certain dividends
received from a controlled foreign corporation in 2005. In the third quarter of
2005, the Company completed its evaluation of this new provision and determined
that it would not benefit from such special dividends received deduction.
At December 31, 2003, Kronos had a significant amount of net operating loss
carryforwards for German corporate and trade tax purposes, all of which have no
expiration date. These net operating loss carryforwards were generated by KII
principally during the 1990's when KII had a significantly higher level of
outstanding indebtedness than is currently outstanding. For financial reporting
purposes, however, the benefit of such net operating loss carryforwards had not
previously been recognized because Kronos did not believe they met the
"more-likely-than-not" recognition criteria, and accordingly Kronos had a
deferred income tax asset valuation allowance offsetting the benefit of such net
operating loss carryforwards and Kronos' other tax attributes in Germany. At the
end of the second quarter of 2004, and based on all available evidence, Kronos
concluded that the benefit of the net operating loss carryforwards and other
German tax attributes now met the "more-likely-than-not" recognition criteria,
and that reversal of the deferred income tax asset valuation allowance related
to Germany was appropriate. Given the magnitude of the German net operating loss
carryforwards and the fact that current provisions of German law limit the
annual utilization of net operating loss carryforwards to 60% of taxable income
after the first euro 1 million of taxable income, KII believes it will take
several years to fully utilize the benefit of such loss carryforwards. However,
given that Kronos generated positive taxable income in Germany, combined with
the fact that the net operating loss carryforwards have no expiration date,
Kronos concluded, among other things, it was now appropriate to reverse all of
the valuation allowance related to the net operating loss carryforwards because
the benefit of such operating loss carryforwards now meet the
"more-likely-than-not" recognition criteria. Of the $280.7 million valuation
allowance related to Germany which was reversed during 2004, and in accordance
with the applicable GAAP related to accounting for income taxes at interim
periods, (i) $8.7 million was reversed during the first six months of 2004 that
related primarily to the utilization of the German net operating loss
carryforwards during such period, (ii) $268.6 million was reversed as of June
30, 2004 and (iii) $3.4 million was reversed during the last six months of 2004.
NL's and NL's subsidiary EMS, 1998 U.S. federal income tax returns were
being examined by the U.S. tax authorities, and NL and EMS granted extensions of
the statute of limitations for assessments of tax with respect to their 1998,
1999 and 2000 income tax returns until September 30, 2005. During the course of
the examination, the IRS proposed a substantial tax deficiency, including
interest, related to a restructuring transaction. In an effort to avoid
protracted litigation and minimize the hazards of such litigation, NL applied to
take part in an IRS settlement initiative applicable to transactions similar to
the restructuring transaction, and in April 2003 NL received notification from
the IRS that NL had been accepted into such settlement initiative. Under the
initiative, a final settlement with the IRS is to be reached through expedited
negotiations and, if necessary, through a specified arbitration procedure. NL
reached an agreement with the IRS concerning the settlement of this matter
pursuant to which, among other things, the Company agreed to pay approximately
$21 million, including interest, up front as a partial payment of the settlement
amount (which amount was paid during 2005 and was classified as a current
liability at December 31, 2004), and NL will be required to recognize the
remaining settlement amount in its taxable income over the 15-year time period
beginning in 2004. NL had previously provided accruals to cover its estimated
additional tax liability (and related interest) concerning this matter. As a
result of the settlement, NL decreased its previous estimate of the amount of
additional income taxes and interest it will be required to pay, and NL
recognized an $17.4 million tax benefit in 2004 related to the revised estimate.
In addition, during 2004, the Company recognized a $31.1 million tax benefit
related to the reversal of a deferred income tax asset valuation allowance
related to certain tax attributes of EMS which NL believed now met the
"more-likely-than-not" recognition criteria. A majority of the deferred income
tax asset valuation allowance at December 31, 2003, related to net operating
loss carryforwards of EMS. As a result of the settlement agreement, NL (which
previously was not allowed to utilize such net operating loss carryforwards of
EMS) utilized such carryforwards in its 2003 taxable year, eliminating the need
for a valuation allowance related to such carryforwards. The remainder of the
deferred income tax asset valuation allowance reversed related to deductible
temporary differences associated with accrued environmental obligations of EMS
which NL now believed met the "more-likely-than-not" recognition criteria since,
as a result of the settlement agreement, such obligations and the related tax
deductions have been or will be included in NL's taxable income.
In the first quarter of 2003, KII was notified by the German Federal Fiscal
Court that the Court had ruled in KII's favor concerning a claim for refund suit
in which KII sought refunds of prior taxes paid during the periods 1990 through
1997. KII and KII's German operating subsidiary were required to file amended
tax returns with the German tax authorities to receive refunds for such years,
and all of such amended returns were filed during 2003. Such amended returns
reflected an aggregate net refund of taxes and related interest to KII and its
German operating subsidiary of euro 26.9 million ($32.1 million), and the
Company recognized the benefit of these net refunds in its 2003 results of
operations. During 2004, Kronos recognized a net refund of euro 2.5 million
($3.1 million) related to additional net interest which has accrued on the
outstanding refund amount. Through December 2004, KII and its German operating
subsidiary had received net refunds of euro 35.6 million ($44.7 million when
received). All refunds relating to the periods 1990 to 1997 were received by
December 31, 2004. In addition to the refunds for the 1990 to 1997 periods, the
court ruling also resulted in a refund of 1999 income taxes and interest, and
Kronos recognized euro 21.5 million (24.6 million) in 2003.
At December 31, 2005, (i) Kronos had the equivalent of $593 million and
$104 million of the net operating loss carryforwards for German corporate and
trade tax purposes, respectively, all of which have no expiration date, (ii)
Tremont had $6 million of U.S. net operating loss carryforwards expiring in 2018
through 2020, (iii) CompX had $1.6 million of U.S. net operating loss
carryforwards expiring in 2007 through 2017 and (iv) Valhi had $36 million of
U.S. net operating loss carryforwards expiring in 2019 through 2025 and $6
million of capital loss carry forwards expiring in 2009. At December 31, 2005,
the U.S. net operating loss carryforwards of CompX are limited in utilization to
approximately $400,000 per year. In addition, approximately $6 million of
Valhi's net operating loss carryforwards may only be used to offset taxable
income of NL and are not available to offset future taxable income of other
members of the Contran Tax Group.
Note 16 - Employee benefit plans:
Defined benefit plans. The Company maintains various U.S. and foreign
defined benefit pension plans. Variances from actuarially assumed rates will
result in increases or decreases in accumulated pension obligations, pension
expense and funding requirements in future periods. The funded status of the
Company's defined benefit pension plans and, the components of net periodic
defined benefit pension cost are presented in the tables below. At December 31,
2005, the Company currently expects to contribute the equivalent of $18 million
to all of its defined benefit pension plans during 2006, and aggregate benefit
payments to plan participants out of plan assets are expected to be the
equivalent of $25 million in 2006, $24 million in 2007, $26 million in 2008, $25
million in 2009, $26 million in 2010 and $140 million during 2011 through 2015.
Years ended December 31,
------------------------
2004 2005
---- ----
(In thousands)
Change in projected benefit obligations ("PBO"):
Benefit obligations at beginning of the year $ 409,517 $ 454,911
Service cost 6,758 7,373
Interest cost 22,219 22,589
Participant contributions 1,420 1,538
Actuarial losses 7,218 101,416
Change in foreign currency exchange rates 30,820 (42,292)
Benefits paid (23,041) (25,001)
--------- ---------
Benefit obligations at end of the year $ 454,911 $ 520,534
========= =========
Change in plan assets:
Fair value of plan assets at beginning of the year $ 263,773 $ 311,898
Actual return on plan assets 31,951 54,083
Employer contributions 17,812 19,244
Participant contributions 1,420 1,538
Change in foreign currency exchange rates 19,983 (23,613)
Benefits paid (23,041) (25,001)
--------- ---------
Fair value of plan assets at end of year $ 311,898 $ 338,149
========= =========
Funded status at end of the year:
Plan assets less than PBO $(143,013) $(182,385)
Unrecognized actuarial losses 147,264 194,783
Unrecognized prior service cost 8,757 7,441
Unrecognized net transition obligations 4,878 4,603
--------- ---------
$ 17,886 $ 24,442
========= =========
Amounts recognized in the balance sheet:
Unrecognized net pension obligations $ 13,518 $ 11,916
Prepaid pension cost - 3,529
Accrued pension costs:
Current (9,090) (12,756)
Noncurrent (77,360) (140,742)
Accumulated other comprehensive loss 90,818 162,495
--------- ---------
$ 17,886 $ 24,442
========= =========
Years ended December 31,
----------------------------------------
2003 2004 2005
----- ---- ----
(In thousands)
Net periodic pension cost:
Service cost benefits $ 5,347 $ 6,758 $ 7,373
Interest cost on PBO 20,063 22,219 22,589
Expected return on plan assets (19,294) (20,975) (22,223)
Amortization of prior service cost 354 502 597
Amortization of net transition obligations 733 657 350
Recognized actuarial losses 2,423 4,361 4,450
-------- -------- --------
$ 9,626 $ 13,522 $ 13,136
======== ======== ========
The weighted-average rate assumptions used in determining the actuarial
present value of benefit obligations as of December 31, 2004 and 2005 are
presented in the table below. Such weighted-average rates were determined using
the projected benefit obligations at each date.
December 31,
-------------------------
Rate 2004 2005
---- ---- ----
Discount rate 5.3% 4.5%
Increase in future compensation levels 2.3% 2.3%
The weighted-average rate assumptions used in determining the net periodic
pension cost for 2003, 2004 and 2005 are presented in the table below. The
weighted-average discount rate and the weighted-average increase in future
compensation levels were determined using the projected benefit obligations at
the beginning of each year, and the weighted-average long-term return on plan
assets was determined using the fair value of plan assets at the beginning of
each year.
Years ended December 31,
---------------------------------------------
Rate 2003 2004 2005
---- ---- ----
Discount rate 6.0% 5.6% 5.3%
Increase in future compensation levels 2.7% 2.2% 2.3%
Long-term return on plan assets 7.4% 7.8% 7.2%
At December 31, 2005, the accumulated benefit obligations for all defined
benefit pension plans was approximately $482 million (2004 - $403 million). At
December 31, 2005, the projected benefit obligations for all defined benefit
pension plans was comprised of $98 million related to U.S. plans and $422
million related to non-U.S. plans (2004 - $100 million and $355 million,
respectively). At December 31, 2004 and 2005, substantially all of the projected
benefit obligations attributable to non-U.S. plans relates to plans maintained
by Kronos. At December 31, 2005, approximately 49% and 15% of the projected
benefit obligations attributable to U.S. plans relate to plans maintained by NL
and Kronos, respectively, and 36% relates to a plan maintained by a disposed
business unit of Valhi (2004 - 52% relates to NL, 14% to Kronos and 34% to the
disposed business unit). Kronos and NL use a September 30th measurement date for
their defined benefit pension plans, and all other plans use a December 31st
measurement date.
At December 31, 2005, the fair value of plan assets for all defined benefit
pension plans was comprised of $112 million related to U.S. plans and $226
million related to non-U.S. plans (2004 - $82 million and $230 million,
respectively). At December 31, 2004 and 2005, substantially all of the plan
assets attributable to non-U.S. plans relates to plans maintained by Kronos. At
December 31, 2005, approximately 46% and 16% of the plan assets attributable to
U.S. plans relates to plans maintained by NL and Kronos, respectively, and 38%
relates to a plan maintained by a disposed business unit of Valhi (2004 - 54%
relates to NL, 15% relate to Kronos and 31% to the disposed business unit).
At December 31, 2005, the projected benefit obligations, accumulated
benefit obligations and fair value of plan assets for all defined benefit
pension plans for which the accumulated benefit obligation exceeded the fair
value of plan assets were $415 million, $377 million and $220 million,
respectively (2004 - $455 million, $403 million and $312 million, respectively).
At December 31, 2004 and 2005, approximately 78% and 100%, respectively, of such
unfunded amount relates to non-U.S. plans maintained by Kronos, and most of the
remainder at December 31, 2004 relates to U.S. plans maintained by NL and the
disposed business unit of Valhi.
At December 31, 2004 and 2005, substantially all of the assets attributable
to U.S. plans were invested in the CMRT, a collective investment trust sponsored
by Contran to permit the collective investment by certain master trusts which
fund certain employee benefits plans sponsored by Contran and certain of its
affiliates. At December 31, 2005, the asset mix of the CMRT was 86% in U.S.
equity securities, 3% in U.S. fixed income securities, 7% in international
equity securities and 4% in cash and other investments (2004 - 77%, 14%, 7% and
2%, respectively).
The CMRT's long-term investment objective is to provide a rate of return
exceeding a composite of broad market equity and fixed income indices (including
the S&P 500 and certain Russell indicies) utilizing both third-party investment
managers as well as investments directed by Mr. Harold Simmons. Mr. Harold
Simmons is the sole trustee of the CMRT. The trustee of the CMRT, along with the
CMRT's investment committee, of which Mr. Simmons is a member, actively manage
the investments of the CMRT. Such parties have in the past, and may in the
future, periodically change the asset mix of the CMRT based upon, among other
things, advice they receive from third-party advisors and their expectations as
to what asset mix will generate the greatest overall return. For the years ended
December 31, 2003, 2004 and 2005, the assumed long-term rate of return for plan
assets invested in the CMRT was 10%. In determining the appropriateness of such
long-rate of return assumption, the Company considered, among other things, the
historical rates of return for the CMRT, the current and projected asset mix of
the CMRT and the investment objectives of the CMRT's managers. During the
18-year history of the CMRT from its inception in 1987 through December 31,
2005, the average annual rate of return has been approximately 14% (with a 36%
return for 2005).
At December 31, 2004 and 2005, plan assets attributable to Kronos' non-U.S.
plans related primarily to Germany, Canada and Norway. In determining the
expected long-term rate of return on plan asset assumptions for its non-U.S.
plans, the Company considers the long-term asset mix (e.g. equity vs. fixed
income) for the assets for each of its plans and the expected long-term rates of
return for such asset components. In addition, the Company receives advice about
appropriate long-term rates of return from the Company's third-party actuaries.
Such assumed asset mixes are summarized below:
o In Germany, the composition of Kronos' plan assets is established to
satisfy the requirements of the German insurance commissioner. The
plan asset allocation at December 31, 2005 was 23% to equity managers,
48% to fixed income managers and 29% to real estate (2004 - 23%, 48%
and 29%, respectively).
o In Canada, Kronos currently has a plan asset target allocation of 65%
to equity managers and 35% to fixed income managers, with an expected
long-term rate of return for such investments to average approximately
125 basis points above the applicable equity or fixed income index.
The plan asset allocation at December 31, 2005 was 64% to equity
managers, 32% to fixed income managers and 4% to other investments
(2004 - 60%, 40% and nil, respectively).
o In Norway, Kronos currently has a plan asset target allocation of 14%
to equity managers and 64% to fixed income managers and the remainder
to liquid investments such as money markets. The expected long-term
rate of return for such investments is approximately 8%, 4.5% to 6.5%
and 2.5%, respectively. The plan asset allocation at December 31, 2005
was 16% to equity managers, 62% to fixed income managers and the
remainder invested primarily in cash and liquid investments (2004 -
16%, 64% and 20%, respectively).
The Company regularly reviews its actual asset allocation for each of its
plans, and periodically rebalances the investments in each plan to more
accurately reflect the targeted allocation when considered appropriate.
Postretirement benefits other than pensions. Certain subsidiaries currently
provide certain health care and life insurance benefits for eligible retired
employees. The components of the periodic OPEB cost and accumulated OPEB
obligations are presented in the tables below. Variances from
actuarially-assumed rates will result in additional increases or decreases in
accumulated OPEB obligations, net periodic OPEB cost and funding requirements in
future periods. At December 31, 2005, the expected rate of increase in future
health care costs ranges from 8.0% to 9.0% in 2006, declining to rates of
between 4% to 5.5% in 2010 and thereafter (2004 - 8% to 9.3% in 2005, declining
to 4% to 5.5% in 2010 and thereafter). If the health care cost trend rate was
increased (decreased) by one percentage point for each year, OPEB expense would
have increased by $221,000 (decreased by $188,000) in 2005, and the actuarial
present value of accumulated OPEB obligations at December 31, 2005 would have
increased by $2.7 million (decreased by $2.4 million). At December 31, 2005, the
Company currently expects to contribute the equivalent of approximately $3.9
million to all of its OPEB plans during 2006, and aggregate benefit payments to
OPEB plan participants are expected to be the equivalent of $3.9 million in
2006, $3.4 million in 2007, $3.3 million in 2008, $3.2 million in 2009, $3.1
million in 2010 and $13.4 million during 2011 through 2015.
Years ended December 31,
-------------------------
2004 2005
------ --------
(In thousands)
Change in accumulated OPEB obligations:
Obligations at beginning of the year $ 46,177 $ 36,603
Service cost 232 222
Interest cost 2,418 2,010
Actuarial losses (gains) (4,925) 1,901
Plan amendments (2,044) -
Change in foreign currency exchange rates 411 286
Benefits paid (5,666) (5,026)
-------- --------
Obligations at end of the year $ 36,603 $ 35,996
======== ========
Change in plan assets:
Employer contributions $ 5,666 $ 5,026
Benefits paid (5,666) (5,026)
-------- --------
Fair value of plan assets at end of the year $ - $ -
======== ========
Funded status at end of the year:
Plan assets less than benefit obligations $(36,603) $(35,996)
Unrecognized net actuarial losses (gains) (606) 1,531
Unrecognized prior service credit (2,818) (1,893)
-------- --------
$(40,027) $(36,358)
======== ========
Accrued OPEB costs recognized in the balance sheet:
Current $ (5,039) $ (4,079)
Noncurrent (34,988) (32,279)
-------- --------
$(40,027) $(36,358)
======== ========
Years ended December 31,
--------------------------------------
2003 2004 2005
------ ---- -------
(In thousands)
Net periodic OPEB cost:
Service cost $ 152 $ 232 $ 222
Interest cost 2,820 2,418 2,010
Amortization of prior service credit (2,075) (859) (925)
Recognized actuarial losses (gains) 38 192 (135)
------- ------ -------
$ 935 $1,983 $ 1,172
======= ====== =======
The weighted average discount rate used in determining the actuarial
present value of benefit obligations as of December 31, 2005 was 5.5% (2004 -
5.7%). Such weighted average rate was determined using the projected benefit
obligations as of such dates. The impact of assumed increases in future
compensation levels does not have a material effect on the actuarial present
value of the benefit obligations as substantially all of such benefits relate
solely to eligible retirees, for which compensation is not applicable.
The weighted average discount rate used in determining the net periodic
OPEB cost for 2005 was 5.7% (2004 - 5.9%; 2003 - 6.4%). Such weighted average
rate was determined using the projected benefit obligations as of the beginning
of each year. The impact of assumed increases in future compensation levels does
not have a material effect on the net periodic OPEB cost as substantially all of
such benefits relate solely to eligible retirees, for which compensation is not
applicable.
As of December 31, 2004 and 2005, the accumulated benefit obligations for
all OPEB plans were equal to the projected benefit obligations. At December 31,
2005, the projected benefit obligations for all OPEB plans was comprised of
$29.1 million related to U.S. plans and $6.9 million related to non-U.S. plans
(2004 - $31.2 million and $5.4 million, respectively). At December 31, 2004 and
2005, all of the projected benefit obligations attributable to non-U.S. plans
relates to plans maintained by Kronos. At December 31, 2005, approximately 48%
and 15% of the projected benefit obligations attributable to U.S. plans relates
to plans maintained by NL and Kronos, respectively, and 36% relates to a plan
maintained by Tremont (2004 - 51% maintained by NL, 16% maintained by Kronos and
32% maintained by Tremont). Kronos and NL use a September 30th measurement date
for their OPEB plans, and Tremont uses a December 31st measurement date.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the "Medicare 2003 Act") introduced a prescription drug benefit under Medicare
(Medicare Part D) as well as a federal subsidy to sponsors of retiree health
care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. During the third quarter of 2004, the Company
determined that benefits provided by its two U.S. plans are actuarially
equivalent to the Medicare Part D benefit and therefore the Company is eligible
for the federal subsidy provided for by the Medicare 2003 Act for those plans.
The effect of such subsidy, which is accounted for prospectively from the date
actuarial equivalence was determined, as permitted by and in accordance with
FASB Staff Position No. 106-2, did not have a material impact on the applicable
accumulated postretirement benefit obligation, and will not have a material
impact on the net periodic OPEB cost going forward.
Defined contribution plans. The Company maintains various defined
contribution pension plans with Company contributions based on matching or other
formulas. Defined contribution plan expense related to the Company's
consolidated business segments approximated $2 million in each of 2003 and 2004
and $3 million in 2005.
Note 17 - Related party transactions:
The Company may be deemed to be controlled by Mr. Harold C. Simmons. See
Note 1. Corporations that may be deemed to be controlled by or affiliated with
Mr. Simmons sometimes engage in (a) intercorporate transactions such as
guarantees, management and expense sharing arrangements, shared fee
arrangements, joint ventures, partnerships, loans, options, advances of funds on
open account, and sales, leases and exchanges of assets, including securities
issued by both related and unrelated parties, and (b) common investment and
acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly-held minority equity interest in another related party. The
Company continuously considers, reviews and evaluates, and understands that
Contran and related entities consider, review and evaluate such transactions.
Depending upon the business, tax and other objectives then relevant, it is
possible that the Company might be a party to one or more such transactions in
the future.
Receivables from and payables to affiliates are summarized in the table
below.
December 31,
--------------------
2004 2005
---- ----
(In thousands)
Current receivables from affiliates:
Contran:
Demand loan $ 4,929 $ -
Income taxes, net 578 33
TIMET 24 1
------- -------
$ 5,531 $ 34
======= =======
Noncurrent receivable from affiliate -
loan to Contran family trust $10,000 $ -
======= =======
Current payables to affiliates:
Louisiana Pigment Company $ 8,844 $ 9,803
Contran - trade items 2,753 3,940
Other 10 11
------- -------
$11,607 $13,754
======= =======
From time to time, loans and advances are made between the Company and
various related parties, including Contran, pursuant to term and demand notes.
These loans and advances are entered into principally for cash management
purposes. When the Company loans funds to related parties, the lender is
generally able to earn a higher rate of return on the loan than the lender would
earn if the funds were invested in other instruments. While certain of such
loans may be of a lesser credit quality than cash equivalent instruments
otherwise available to the Company, the Company believes that it has evaluated
the credit risks involved, and that those risks are reasonable and reflected in
the terms of the applicable loans. When the Company borrows from related
parties, the borrower is generally able to pay a lower rate of interest than the
borrower would pay if it borrowed from other parties.
Prior to 2003, EMS, NL's environmental management subsidiary, entered into
a $25 million revolving credit facility with one of the family trusts discussed
in Note 1 ($10 million outstanding at December 31, 2004). The loan bore interest
at prime, was due on demand with 60 days notice and was collateralized by
certain shares of Contran's Class A common stock and Class E cumulative
preferred stock held by the trust. The terms of this loan were approved by
special committees of both NL's and EMS' respective board of directors composed
of independent directors. During 2005, the family trust repaid the $10 million
balance outstanding at December 31, 2004, and the loan facility was terminated.
At December 31, 2004, the loan was classified as a noncurrent asset because EMS
did not intend to demand repayment within the next 12 months.
During 2003 and 2004, Valhi borrowed varying amounts from Contran, and
during 2004 and 2005 Contran borrowed varying amounts from Valhi, pursuant to
the terms of demand notes. Such unsecured borrowings bear interest at a rate of
prime less .5%.
Interest income on all loans to related parties, including EMS' loan to one
of the Contran family trusts, was $723,000 in 2003, $645,000 in 2004 and
$572,000 in 2005. Interest expense on all loans from related parties was
$154,000 in 2003, $131,000 in 2004 and nil in 2005 and relates solely to
borrowings from Contran.
Payables to Louisiana Pigment Company are primarily for the purchase of
TiO2 (see Note 7). Purchases in the ordinary course of business from the
unconsolidated TiO2 manufacturing joint venture are disclosed in Note 7.
Under the terms of various intercorporate services agreements ("ISAs")
entered into between the Company and various related parties, including Contran,
employees of one company will provide certain management, tax planning,
financial and administrative services to the other company on a fee basis. Such
charges are based upon estimates of the time devoted by the employees of the
provider of the services to the affairs of the recipient, and the compensation
and other expenses associated with such persons. Because of the large number of
companies affiliated with Contran, the Company believes it benefits from cost
savings and economies of scale gained by not having certain management,
financial and administrative staffs duplicated at each entity, thus allowing
certain individuals to provide services to multiple companies but only be
compensated by one entity.
The net ISA fees charged by Contran to the Company, including NL, Kronos,
Tremont, TIMET, CompX and Waste Control Specialists, included in selling,
general and administrative expense, aggregated approximately $10.0 million in
2003, $17.3 million in 2004 and $20.0 million in 2005. The increase in the
aggregate ISA fee charged to the Company from 2003 to 2004 is due primarily to
approximately 30 staff positions who had previously been compensated by NL and
Kronos, who in 2004 commenced being compensated by Contran. TIMET had an ISA
with Tremont whereby TIMET provided certain services to Tremont for
approximately $180,000 in 2003. NL had an ISA with TIMET whereby NL provided
certain services to TIMET for approximately $14,000 in 2003. Both of the
TIMET/Tremont ISA and the NL/TIMET ISA have been terminated. Certain other
subsidiaries of the Company are also parties to similar ISAs among themselves,
and expenses associated with these agreements are eliminated in Valhi's
consolidated financial statements.
Tall Pines Insurance Company (including a predecessor company, Valmont
Insurance Company, which was merged into Tall Pines in December 2004) and EWI
RE, Inc. provide for or broker certain insurance policies for Contran and
certain of its subsidiaries and affiliates, including the Company. Tall Pines is
wholly-owned by Tremont, and EWI is wholly-owned by NL. Consistent with
insurance industry practices, Tall Pines and EWI receive commissions from the
insurance and reinsurance underwriters and/or access fees for the policies that
they provide or broker. Tall Pines purchases reinsurance for substantially all
of the risks it underwrites. The Company expects that these relationships with
Tall Pines and EWI will continue in 2006.
Contran and certain of its subsidiaries and affiliates, including the
Company, purchase certain of their insurance policies as a group, with the costs
of the jointly-owned policies apportioned among the participating companies.
With respect to certain of such policies, it is possible that unusually large
losses incurred by one or more insureds during a given policy period could leave
the other participating companies without adequate coverage under that policy
for the balance of the policy period. As a result, Contran and certain of its
subsidiaries and affiliates, including the Company, have entered into a loss
sharing agreement under which any uninsured loss is shared by those entities who
have submitted claims under the relevant policy. The Company believes the
benefits in the form of reduced premiums and broader coverage associated with
the group coverage for such policies justifies the risk associated with the
potential of any uninsured loss.
Basic Management, Inc., among other things, provides utility services
(primarily water distribution, maintenance of a common electrical facility and
sewage disposal monitoring) to TIMET and other manufacturers within an
industrial complex located in Nevada. The other owners of BMI are generally the
other manufacturers located within the complex. Power transmission and sewer
services are provided on a cost reimbursement basis, similar to a cooperative,
while water delivery is currently provided at the same rates as are charged by
BMI to an unrelated third party. Amounts paid by TIMET to BMI for these utility
services were $1.2 million in 2003, $1.3 million in 2004 and $1.4 million in
2005. TIMET also paid BMI an electrical facilities upgrade fee of $1.3 million
in each of 2003 and 2004 and $800,000 in 2005. Such $800,000 annual fee is
scheduled to terminate after January 2010.
In 2005, the Company purchased 2.0 million shares of its common stock, at a
discount to the then-current market price, from Contran for $17.50 per share or
an aggregate purchase price of $35.0 million. Valhi's independent directors
approved such purchase. During the third quarter of 2005, the Company purchased
175,000 shares of its common stock for an aggregate of $3.1 million from The
Simmons Family Foundation, a charitable organization of which Mr. Simmons is a
trustee, based on the market price of Valhi common stock on the date of
purchase. All of such shares were purchased under the Company's stock repurchase
program described in Note 14.
COAM Company is a partnership which has a sponsored research agreement with
the University of Texas Southwestern Medical Center at Dallas to develop and
commercially market patents and technology resulting from a cancer research
program (the "Cancer Research Agreement"). At December 31, 2005, COAM partners
are Contran, Valhi and another Contran subsidiary. Mr. Harold C. Simmons is the
manager of COAM. The Cancer Research Agreement, as amended through December 31,
2005, provides for funds of up to $70 million through 2015. Funding requirements
pursuant to the Cancer Research Agreement is without recourse to the COAM
partners and the partnership agreement provides that no partner shall be
required to make capital contributions. Capital contributions are expensed as
paid. The Company's contributions to COAM were nil in each of the past three
years, and the Company does not currently expect it will make any capital
contributions to COAM in 2006.
Amalgamated Research, Inc., a wholly-owned subsidiary of the Company,
provides certain research, laboratory and quality control services within and
outside the sweetener industry for The Amalgamated Sugar Company LLC and others.
Amalgamated Research has also granted to The Amalgamated Sugar Company LLC a
non-exclusive, royalty-free perpetual license to use all currently existing or
hereafter developed technology which is applicable to sugar operations and
provides for payment of certain royalties to The Amalgamated Sugar Company LLC
from future sales or licenses of the subsidiary's technology to third parties.
Research and development services charged to The Amalgamated Sugar Company LLC,
included in other income, were $865,000 in 2003, $956,000 in 2004 and $1.0
million in 2005. The Amalgamated Sugar Company LLC provides certain
administrative services to Amalgamated Research, and the cost of such services
(based upon estimates of the time devoted by employees of the LLC to the affairs
of Amalgamated Research, and the compensation of such persons) is considered in
the agreed-upon research and development services fee paid by the LLC to
Amalgamated Research and is not separately quantified.
Note 18 - Commitments and contingencies:
Lead pigment litigation - NL.
NL's former operations included the manufacture of lead pigments for use in
paint and lead-based paint. NL, other former manufacturers of lead pigments for
use in paint and lead-based paint, and the Lead Industries Association (which
discontinued business operations prior to 2003) have been named as defendants in
various legal proceedings seeking damages for personal injury, property damage
and governmental expenditures allegedly caused by the use of lead-based paints.
Certain of these actions have been filed by or on behalf of states, large U.S.
cities or their public housing authorities and school districts, and certain
others have been asserted as class actions. These lawsuits seek recovery under a
variety of theories, including public and private nuisance, negligent product
design, negligent failure to warn, strict liability, breach of warranty,
conspiracy/concert of action, aiding and abetting, enterprise liability, market
share or risk contribution liability, intentional tort, fraud and
misrepresentation, violations of state consumer protection statutes, supplier
negligence and similar claims.
The plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and health concerns associated with the
use of lead-based paints, including damages for personal injury, contribution
and/or indemnification for medical expenses, medical monitoring expenses and
costs for educational programs. A number of cases are inactive or have been
dismissed or withdrawn. Most of the remaining cases are in various pre-trial
stages. Some are on appeal following dismissal or summary judgment rulings in
favor of either the defendants or the plaintiffs. In addition, various other
cases are pending (in which NL is not a defendant) seeking recovery for injury
allegedly caused by lead pigment and lead-based paint. Although NL is not a
defendant in these cases, the outcome of these cases may have an impact on
additional cases being filed against NL in the future.
NL believes these actions are without merit, intends to continue to deny
all allegations of wrongdoing and liability and to defend against all actions
vigorously. NL has never settled any of these cases, nor have any final adverse
judgments against NL been entered. NL has not accrued any amounts for pending
lead pigment and lead-based paint litigation. Liability that may result, if any,
cannot currently be reasonably estimated. There can be no assurance that NL will
not incur liability in the future in respect of this pending litigation in view
of the inherent uncertainties involved in court and jury rulings in pending and
possible future cases. If any such future liability were to be incurred, it
could have a material adverse effect on the Company's consolidated financial
statements, results of operations and liquidity.
In one of these lead pigment cases (State of Rhode Island v. Lead
Industries Association), a trial before a Rhode Island state court jury began in
September 2002 on the question of whether lead pigment in paint on Rhode Island
buildings is a public nuisance. In October 2002, the trial judge declared a
mistrial in the case when the jury was unable to reach a verdict on the
question, with the jury reportedly deadlocked 4-2 in the defendants' favor. In
November 2005, the State of Rhode Island began a retrial of the case on the
State's claims of public nuisance, indemnity and unjust enrichment against NL
and three other defendants. Following the state's presentation of its case, the
trial court dismissed the state's claims of indemnity and unjust enrichment. The
public nuisance claim was sent to the jury in February 2006, and the jury found
that NL and two other defendants substantially contributed to the creation of a
public nuisance as a result of the collective presence of lead pigments in
paints and coatings on buildings in Rhode Island. The jury also found that NL
and the two other defendants should be ordered to abate the public nuisance.
Following the jury verdict, the trial court dismissed the state's claim for
punitive damages. The scope of the abatement remedy will be determined by the
judge. The extent, nature and cost of such remedy is not currently known and
will be determined only following additional proceedings. Various motions remain
pending before the trial court, including NL's motion to dismiss. NL intends to
appeal any adverse judgment which the trial court may enter against NL.
The Rhode Island case is unique in that this is the first time that an
adverse verdict in the lead pigment litigation has been entered against NL. NL
does not believe it is currently possible to determine the nature or extent of
any potential liability resulting from the verdict. In addition, liability that
might result to NL, if any, with respect to this and the other lead pigment
litigation can not currently be reasonably estimated. However, as with any legal
proceeding, there is no assurance that any of these appeals would be successful,
and it is reasonably possible, based on the outcome of the appeals process, that
NL would in the near term conclude that it was probable NL had incurred some
liability in this Rhode Island matter that would result in the recognition of a
loss contingency accrual. Such potential liability could have a material adverse
impact on net income for the interim or annual period during which such
liability is recognized, and a material adverse impact on NL's financial
condition and liquidity. NL believes it is reasonably possible that additional
legal proceedings in these matter could be scheduled for trial in 2006 and
beyond in other jurisdictions, including cases in which NL is currently a
defendant or in cases not yet filed against NL, the resolution of which could
also result in recognition of a loss contingency accrual that could have a
material adverse impact on net income for the interim or annual period during
which such liability is recognized, and a material adverse impact on NL's
financial condition and liquidity. An estimate of the potential impact on NL's
results of operations, financial condition or liquidity related to these matters
can not currently be reasonably estimated.
Environmental matters and litigation.
General. The Company's operations are governed by various environmental
laws and regulations. Certain of the Company's businesses are and have been
engaged in the handling, manufacture or use of substances or compounds that may
be considered toxic or hazardous within the meaning of applicable environmental
laws and regulations. As with other companies engaged in similar businesses,
certain past and current operations and products of the Company have the
potential to cause environmental or other damage. The Company has implemented
and continues to implement various policies and programs in an effort to
minimize these risks. The Company's policy is to maintain compliance with
applicable environmental laws and regulations at all of its plants and to strive
to improve its environmental performance. From time to time, the Company may be
subject to environmental regulatory enforcement under U.S. and foreign statutes,
resolution of which typically involves the establishment of compliance programs.
It is possible that future developments, such as stricter requirements of
environmental laws and enforcement policies thereunder, could adversely affect
the Company's production, handling, use, storage, transportation, sale or
disposal of such substances. The Company believes all of its plants are in
substantial compliance with applicable environmental laws.
Certain properties and facilities used in the Company's former businesses,
including divested primary and secondary lead smelters and former mining
locations of NL, are the subject of civil litigation, administrative proceedings
or investigations arising under federal and state environmental laws.
Additionally, in connection with past disposal practices, the Company has been
named as a defendant, potentially responsible party ("PRP") or both, pursuant to
the Comprehensive Environmental Response, Compensation and Liability Act, as
amended by the Superfund Amendments and Reauthorization Act ("CERCLA"), and
similar state laws in various governmental and private actions associated with
waste disposal sites, mining locations, and facilities currently or previously
owned, operated or used by the Company or its subsidiaries, or their
predecessors, certain of which are on the U.S. EPA's Superfund National
Priorities List or similar state lists. These proceedings seek cleanup costs,
damages for personal injury or property damage and/or damages for injury to
natural resources. Certain of these proceedings involve claims for substantial
amounts. Although the Company may be jointly and severally liable for such
costs, in most cases it is only one of a number of PRPs who may also be jointly
and severally liable.
Environmental obligations are difficult to assess and estimate for numerous
reasons including the complexity and differing interpretations of governmental
regulations, the number of PRPs and the PRPs' ability or willingness to fund
such allocation of costs, their financial capabilities and the allocation of
costs among PRPs, the solvency of other PRPs, the multiplicity of possible
solutions, and the years of investigatory, remedial and monitoring activity
required. In addition, the imposition of more stringent standards or
requirements under environmental laws or regulations, new developments or
changes respecting site cleanup costs or allocation of such costs among PRPs,
solvency of other PRPs, the results of future testing and analysis undertaken
with respect to certain sites or a determination that the Company is potentially
responsible for the release of hazardous substances at other sites, could result
in expenditures in excess of amounts currently estimated by the Company to be
required for such matters. In addition, with respect to other PRPs and the fact
that the Company may be jointly and severally liable for the total remediation
cost at certain sites, the Company could ultimately be liable for amounts in
excess of its accruals due to, among other things, reallocation of costs among
PRPs or the insolvency of one or more PRPs. No assurance can be given that
actual costs will not exceed accrued amounts or the upper end of the range for
sites for which estimates have been made, and no assurance can be given that
costs will not be incurred with respect to sites as to which no estimate
presently can be made. Further, there can be no assurance that additional
environmental matters will not arise in the future. If any such future liability
were to be incurred, it could have a material adverse effect on the Company's
consolidated financial statements, results of operations and liquidity.
The Company records liabilities related to environmental remediation
obligations when estimated future expenditures are probable and reasonably
estimable. Such accruals are adjusted as further information becomes available
or circumstances change. Estimated future expenditures are generally not
discounted to their present value. Recoveries of remediation costs from other
parties, if any, are recognized as assets when their receipt is deemed probable.
At December 31, 2005, no receivables for such recoveries have been recognized.
The exact time frame over which the Company makes payments with respect to
its accrued environmental costs is unknown and is dependent upon, among other
things, the timing of the actual remediation process that in part depends on
factors outside the control of the Company. At each balance sheet date, the
Company makes an estimate of the amount of its accrued environmental costs that
will be paid out over the subsequent 12 months, and the Company classifies such
amount as a current liability. The remainder of the accrued environmental costs
is classified as a noncurrent liability.
A summary of the activity in the Company's accrued environmental costs
during the past three years is presented in the table below. The amount shown in
the table below for payments against the Company's accrued environmental costs
in 2004 is net of a $1.5 million recovery of remediation costs previously
expended by NL that was paid to NL by other PRPs in 2004 pursuant to an
agreement entered into by NL and the other PRPs.
Years ended December 31,
------------------------------------------
2003 2004 2005
---- ---- -----
(In thousands)
Balance at the beginning of the year $101,166 $ 86,681 $ 76,766
Additions charged to expense, net 29,524 2,477 5,703
Payments, net (44,009) (12,392) (16,743)
-------- -------- --------
Balance at the end of the year $ 86,681 $ 76,766 $ 65,726
======== ======== ========
Amounts recognized in the balance sheet:
Current liability $ 21,316 $ 16,565
Noncurrent liability 55,450 49,161
-------- --------
$ 76,766 $ 65,726
======== ========
NL. Certain properties and facilities used in NL's former businesses,
including divested primary and secondary lead smelters and former mining
locations of NL, are the subject of civil litigation, administrative proceedings
or investigations arising under federal and state environmental laws.
Additionally, in connection with past disposal practices, NL has been named as a
defendant, PRP, or both, pursuant to CERCLA, and similar state laws in
approximately 60 governmental and private actions associated with waste disposal
sites, mining locations and facilities currently or previously owned, operated
or used by NL, or its subsidiaries or their predecessors, certain of which are
on the U.S. EPA's Superfund National Priorities List or similar state lists.
These proceedings seek cleanup costs, damages for personal injury or property
damage and/or damages for injury to natural resources. Certain of these
proceedings involve claims for substantial amounts. Although NL may be jointly
and severally liable for such costs, in most cases, it is only one of a number
of PRPs who may also be jointly and severally liable.
On a quarterly basis, NL evaluates the potential range of its liability at
sites where it has been named as a PRP or defendant, including sites for which
EMS has contractually assumed NL's obligation. At December 31, 2005, NL had
accrued $54.9 million for those environmental matters which NL believes are
reasonably estimable. NL believes it is not possible to estimate the range of
costs for certain sites. The upper end of the range of reasonably possible costs
to NL for sites for which NL believes it is possible to estimate costs is
approximately $80 million. NL's estimates of such liabilities have not been
discounted to present value.
At December 31, 2005, there are approximately 20 sites for which NL is
currently unable to estimate a range of costs. For these sites, generally the
investigation is in the early stages, and it is either unknown as to whether or
not NL actually had any association with the site, or if NL had association with
the site, the nature of its responsibility, if any, for the contamination at the
site and the extent of contamination. The timing on when information would
become available to NL to allow NL to estimate a range of loss is unknown and
dependent on events outside the control of NL, such as when the party alleging
liability provides information to NL. On certain of these sites that had
previously been inactive, NL has received general and special notices of
liability from the EPA alleging that NL, along with other PRPs, is liable for
past and future costs of remediating environmental contamination allegedly
caused by former operations conducted at such sites. These notifications may
assert that NL, along with other PRP's, is liable for past clean-up costs that
could be material to NL if liability for such amounts ultimately were determined
against NL.
At December 31, 2004, NL had $19 million in restricted cash equivalents and
debt securities held by special purpose trusts, the assets of which can only be
used to pay for certain of NL's future environmental remediation and other
environmental expenditures. During 2005, all of such restricted balances had
been so utilized. Use of such restricted balances did not affect the Company's
consolidated net cash flows.
Tremont. Prior to 2003, Tremont, entered into a voluntary settlement
agreement with the Arkansas Department of Environmental Quality and certain
other PRPs pursuant to which Tremont and the other PRPs will undertake certain
investigatory and interim remedial activities at a former mining site located in
Hot Springs County, Arkansas. Tremont currently believes that it has accrued
adequate amounts ($3.8 million at December 31, 2005) to cover its share of
probable and reasonably estimable environmental obligations for these
activities. Tremont has entered into an agreement with another PRP of this site,
Halliburton Energy Services, Inc., that provides for, among other thing, the
interim sharing of remediation costs associated with the site pending a final
allocation of costs and an agreed-upon procedure through arbitration to
determine such final allocation of costs. On December 9, 2005, Halliburton and
DII Industries, LLC, another PRP of this site, filed suit in the United States
District Court for the Southern District of Texas, Houston Division, Case No.
H-05-4160, against NL, Tremont and certain of its subsidiaries, M-I, L.L.C.,
Milwhite, Inc. and Georgia-Pacific Corporation seeking (i) to recover response
and remediation costs incurred at the site, (ii) a declaration of the parties'
liability for response and remediation costs incurred at the site, (iii) a
declaration of the parties' liability for response and remediation costs to be
incurred in the future at the site and (iv) a declaration regarding the
obligation of Tremont to indemnify Halliburton and DII for costs and expenses
attributable to the site. On December 27, 2005, a subsidiary of Tremont filed
suit in the United States District Court for the Western District of Arkansas,
Hot Springs Division, Case No. 05-6089, against Georgia-Pacific, seeking to
recover response costs it has incurred and will incur at the site. Subsequently,
plaintiffs in the Houston litigation verbally agreed to stay that litigation and
enter into with NL, Tremont and its affiliates an amendment to the arbitration
agreement previously agreed upon for resolving the allocation of costs at the
site. Tremont has also agreed to stay the Arkansas litigation. Tremont has based
its accrual for this site based upon the agreed-upon interim cost sharing
allocation. Tremont currently expects that the nature and extent of any final
remediation measures that might be imposed with respect to this site will not be
known until 2008. Currently, no reasonable estimate can be made of the cost of
any such final remediation measures, and accordingly Tremont has accrued no
amounts at December 31, 2005 for any such cost. The amount accrued at December
31, 2005 represents Tremont's estimate of the costs to be incurred through 2008
with respect to the interim remediation measures.
TIMET. At December 31, 2005, TIMET had accrued approximately $3.2 million
for environmental cleanup matters, principally related to TIMET's facility in
Nevada. The upper end of the range of reasonably possible costs related to these
matters is approximately $5.4 million.
Other. The Company has also accrued approximately $7.0 million at December
31, 2005 in respect of other environmental cleanup matters. Such accrual is near
the upper end of the range of the Company's estimate of reasonably possible
costs for such matters.
Other litigation.
NL has been named as a defendant in various lawsuits in a variety of
jurisdictions, alleging personal injuries as a result of occupational exposure
primarily to products manufactured by formerly-owned operations of NL containing
asbestos, silica and/or mixed dust. Approximately 500 of these types of cases
involving a total of approximately 12,500 plaintiffs and their spouses remain
pending. NL has not accrued any amounts for this litigation because liability
that might result to NL, if any, cannot currently be reasonably estimated. To
date, NL has not been adjudicated liable in any of these matters. Based on
information available to NL, including facts concerning its historical
operations, the rate of new claims, the number of claims from which NL has been
dismissed and NL's prior experience in the defense of these matters, NL believes
that the range of reasonably possible outcomes of these matters will be
consistent with NL's historical costs with respect to these matters (which are
not material), and no reasonably possible outcome is expected to involve amounts
that are material to NL. NL has and will continue to vigorously seek dismissal
from each claim and/or a finding of no liability by NL in each case. In
addition, from time to time, NL has received notices regarding asbestos or
silica claims purporting to be brought against former subsidiaries of NL,
including notices provided to insurers with which NL has entered into
settlements extinguishing certain insurance policies. These insurers may seek
indemnification from NL.
Kronos' Belgian subsidiary and certain of its employees are the subject of
civil and criminal proceedings relating to an accident that resulted in two
fatalities at NL's Belgian facility in 2000. In May 2004, the court ruled and,
among other things, imposed a fine of euro 200,000 against Kronos and fines
aggregating less than euro 40,000 against various Kronos employees. Kronos and
the individual employees have appealed the ruling.
In addition to the litigation described above, the Company and its
affiliates are also involved in various other environmental, contractual,
product liability, patent (or intellectual property), employment and other
claims and disputes incidental to its present and former businesses. In certain
cases, the Company has insurance coverage for such items, although the Company
does not currently expect any additional material insurance coverage for its
environmental claims. The Company currently believes that the disposition of all
claims and disputes, individually or in the aggregate, and including the lead
pigment litigation and environmental matters discussed above, should not have a
material adverse effect on its consolidated financial position, results of
operations and liquidity.
Insurance coverage claims
In October 2005, NL was served with a complaint in OneBeacon American
Insurance Company v. NL Industries, Inc., et. al. (Supreme Court of the State of
New York, County of New York, Index No. 603429-05). The plaintiff, a former
insurance carrier, seeks a declaratory judgment of its obligations to NL under
insurance policies issued to NL by the plaintiff's predecessor with respect to
certain lead pigment lawsuits. NL filed a motion to dismiss the New York action.
NL filed an action against OneBeacon and certain other former insurance
companies, captioned NL Industries, Inc. v. OneBeacon America Insurance Company,
et. al. (District Court for Dallas County, Texas, Case No. 05-11347) asserting
that OneBeacon has breached its obligations to NL under such insurance policies
and seeking a declaratory judgment of OneBeacon's obligations to NL under such
policies. Certain of the former insurance companies have filed a petition to
remove the Texas action to federal court.
In February 2006, NL was served with a complaint in Certain Underwriters at
Lloyds, London v. Millennium Holdings LLC et. al (Supreme Court of the State of
New York, County of New York, Index No. 06/60026). The plaintiff, a former
insurance carrier of NL, seeks a declaratory judgment of its obligations to
defendants under insurance policies issued to defendants by plaintiff with
respect to certain lead pigment lawsuits.
NL has reached an agreement with a former insurance carrier in which such
carrier would reimburse NL for a portion of its past and future lead pigment
litigation defense costs, although the amount that NL will ultimately recover
from such carrier with respect to such defense costs incurred by NL is not yet
determinable. In addition, during 2005, NL recognized $2.2 million of recoveries
from certain insolvent former insurance carriers relating to settlement of
excess insurance claims that were paid to NL. See Note 12. While NL continues to
seek additional insurance recoveries, there can be no assurance that NL will be
successful in obtaining reimbursement for either defense costs or indemnity. Any
such additional insurance recoveries would be recognized when their receipt is
deemed probable and the amount is determinable.
The issue of whether insurance coverage for defense costs or indemnity or
both will be found to exist for NL's lead pigment litigation depends upon a
variety of factors, and there can be no assurance that such insurance coverage
will be available. NL has not considered any potential insurance recoveries for
lead pigment or environmental litigation matters in determining related
accruals.
NL has settled insurance coverage claims concerning environmental claims
with certain of its principal former carriers. A portion of the proceeds from
these settlements were placed into special purpose trusts, as discussed above.
No further material settlements relating to environmental remediation coverage
are expected.
Other matters
Concentrations of credit risk. Sales of TiO2 accounted for substantially
all of Kronos' sales during the past three years. TiO2 is generally sold to the
paint, plastics and paper industries, which are generally considered
"quality-of-life" markets whose demand for TiO2 is influenced by the relative
economic well-being of the various geographic regions. TiO2 is sold to over
4,000 customers and the ten largest customers accounted for about one-fourth of
chemicals sales. In each of the past three years, approximately one-half of NL's
TiO2 sales volume were to Europe with about 40% attributable to North America.
Component products are sold primarily to original equipment manufacturers
in North America and Europe. In 2003, 2004 and 2005, the ten largest customers
accounted for approximately 43% of component products sales. In 2004 and 2005,
one customer accounted for 11% and 10%, respectively of component products
sales. No single customer accounted for more than 10% of such sales in 2003.
The majority of TIMET's sales are to customers in the aerospace industry,
including airframe and engine manufacturers. TIMET's ten largest customers
accounted for about 44% in 2003, 48% in 2004 and 45% in 2005.
At December 31, 2005, consolidated cash, cash equivalents and restricted
cash includes $56.0 million invested in U.S. Treasury securities purchased under
short-term agreements to resell (2004 - $120.9 million), substantially all of
which were held in trust for the Company by a single U.S. bank. At December 31,
2005, consolidated cash, cash equivalents and restricted cash includes
approximately $125 million on deposit at a single U.S. bank (2004 - $96
million).
Royalties. Royalty expense, which relates principally to the volume of
certain component products manufactured in Canada and sold in the United States
under the terms of a third-party patent license agreement approximated $450,000
in 2003, $222,000 in 2004 and $66,000 in 2005.
Long-term contracts. Kronos has long-term supply contracts that provide for
Kronos' TiO2 feedstock requirements through 2010. The agreements require Kronos
to purchase certain minimum quantities of feedstock with minimum purchase
commitments aggregating approximately $681 million at December 31, 2005.
Waste Control Specialists has agreed to pay an independent consultant fees
for performing certain services based on specified percentages of certain of
Waste Control Specialists' revenues through 2009. Expense related to this
agreement was not significant during the past three years.
Operating leases. Kronos' principal German operating subsidiary, Kronos
Titan GmbH, leases the land under its Leverkusen TiO2 production facility
pursuant to a lease with Bayer AG that expires in 2050. The Leverkusen facility
itself, which is owned by Kronos and which represents approximately one-third of
Kronos' current TiO2 production capacity, is located within Bayer's extensive
manufacturing complex. Rent for the land lease associated with the Leverkusen
facility is periodically established by agreement with Bayer for periods of at
least two years at a time. The lease agreement provides for no formula, index or
other mechanism to determine changes in the rent for such land lease; rather,
any change in the rent is subject solely to periodic negotiation between Bayer
and Kronos. Any change in the rent based on such negotiations is recognized as
part of lease expense starting from the time such change is agreed upon by both
parties, as any such change in the rent is deemed "contingent rentals" under
GAAP. Under a separate supplies and services agreement expiring in 2011, the
lessor provides some raw materials, including chlorine, auxiliary and operating
materials, utilities and services necessary to operate the Leverkusen facility.
The Company also leases various other manufacturing facilities and
equipment. Some of the leases contain purchase and/or various term renewal
options at fair market and fair rental values, respectively. In most cases the
Company expects that, in the normal course of business, such leases will be
renewed or replaced by other leases. Rent expense related to continuing
operations approximated $13 million in 2003, $12 million in each of 2004 and
2005. At December 31, 2005, future minimum payments under noncancellable
operating leases having an initial or remaining term of more than one year were
as follows:
Years ending December 31, Amount
--------------
(In thousands)
2006 $ 5,396
2007 3,850
2008 3,111
2009 2,303
2010 1,400
2011 and thereafter 21,083
-------
$37,143
=======
Approximately $20.1 million of the $37.1 million aggregate future minimum
rental commitments at December 31, 2005 relates to Kronos' Leverkusen facility
lease discussed above. The minimum commitment amounts for such lease included in
the table above for each year through the 2050 expiration of the lease are based
upon the current annual rental rate as of December 31, 2005. As discussed above,
any change in the rent is based solely on negotiations between Bayer and Kronos,
and any such change in the rent is deemed "contingent rentals" under GAAP which
is excluded from the future minimum lease payments disclosed above.
Income taxes. Contran and Valhi have agreed to a policy providing for the
allocation of tax liabilities and tax payments as described in Note 1. Under
applicable law, the Company, as well as every other member of the Contran Tax
Group, are each jointly and severally liable for the aggregate federal income
tax liability of Contran and the other companies included in the Contran Tax
Group for all periods in which the Company is included in the Contran Tax Group.
Contran has agreed, however, to indemnify the Company for any liability for
income taxes of the Contran Tax Group in excess of the Company's tax liability
previously computed and paid by Valhi in accordance with the tax allocation
policy.
Note 19 - Accounting principles newly adopted in 2003 and 2004:
Asset retirement obligations; closure and post closure costs. Through
December 31, 2002, the Company provided for the estimated closure and
post-closure monitoring costs of its waste disposal facility over the operating
life of the facility as airspace was consumed. Such costs were estimated based
on the technical requirements of applicable state or federal regulations,
whichever were stricter, and included such items as final cap and cover on the
site, methane gas and leachate management and groundwater monitoring. Cost
estimates were based on management's judgment and experience and information
available from regulatory agencies as to costs of remediation. These estimates
were sometimes a range of possible outcomes. In such cases, the Company provided
for the amount within the range which constituted its best estimate. If no
amount within the range appeared to be a better estimate than any other amount,
the Company provided for at least the minimum amount within the range.
Effective January 1, 2003, the Company adopted SFAS No. 143, Accounting for
Asset Retirement Obligations. Under SFAS No. 143, the fair value of a liability
for an asset retirement obligation covered under the scope of SFAS No. 143 is
recognized in the period in which the liability is incurred, with an offsetting
increase in the carrying amount of the related long-lived asset. Over time, the
liability is accreted to its future value, and the capitalized cost is
depreciated over the useful life of the related asset. Future revisions in the
estimated fair value of the asset retirement obligation, due to changes in the
amount and/or timing of the expected future cash flows to settle the retirement
obligation, are accounted for prospectively as an adjustment to the
previously-recognized asset retirement cost. Upon settlement of the liability,
an entity will either settle the obligation for its recorded amount or incur a
gain or loss upon settlement. The Company's closure and post closure obligations
related to its waste disposal facility are covered by the scope of SFAS No. 143.
The Company also has certain other obligations covered by the scope of SFAS No.
143.
Under the transition provisions of SFAS No. 143, at the date of adoption on
January 1, 2003 the Company recognized (i) an asset retirement cost capitalized
as an increase to the carrying value of its property and equipment, (ii)
accumulated depreciation on such capitalized cost and (iii) a liability for the
asset retirement obligation. Amounts resulting from the initial application of
SFAS No. 143 were measured using information, assumptions and interest rates all
as of January 1, 2003. The amount recognized as the asset retirement cost was
measured as of the date the asset retirement obligation was incurred. Cumulative
accretion on the asset retirement obligation, and accumulated depreciation on
the asset retirement cost, was recognized for the time period from the date the
asset retirement cost and liability would have been recognized had the
provisions of SFAS No. 143 been in effect at the date the liability was
incurred, through January 1, 2003. The difference, if any, between the amounts
to be recognized as described above and any associated amounts recognized in the
Company's balance sheet as of December 31, 2002 was recognized as a cumulative
effect of a change in accounting principles as of the date of adoption. The
effect of adopting SFAS No. 143 as of January 1, 2003 was a net gain of
approximately $600,000 as summarized in the table below. Such change in
accounting relates principally to accounting for closure and post-closure
obligations at the Company's waste management operations.
Amount
-------------
(In millions)
Increase in carrying value of net property and equipment:
Cost $ .8
Accumulated depreciation (.2)
Investment in TIMET (.1)
Decrease in carrying value of previously-accrued closure and
post-closure activities 1.7
Asset retirement obligations recognized (1.3)
Deferred income taxes (.3)
-----
Net impact $ .6
=====
The change in the asset retirement obligations from January 1, 2003 ($1.3
million) to December 31, 2003 ($1.7 million) is due primarily to accretion
expense, which is reported as a component of cost of good sold. The change in
the asset retirement obligations from December 31, 2003 to December 31, 2004
($1.4 million) is due primarily to the net effects of accretion expense as well
as a $492,000 payment charged to the asset retirement obligation related to the
settlement of a portion of the retirement obligations related to the Company's
waste management operations. The change in the asset retirement obligations from
December 31, 2004 ($1.4 million) to December 31, 2005 ($1.4 million) was nil as
the effects of accretion expense were offset by the effects of changes in
foreign currency exchange rates.
The types of estimated costs used in determining the Company's asset
retirement obligations under SFAS No. 143 are the same types of costs the
Company used to estimate its closure and post closure obligations prior to
adoption of SFAS No. 143. Estimates of the ultimate cost to be incurred to
settle the Company's closure and post closure obligations require a number of
assumptions, are inherently difficult to develop and the ultimate outcome may
differ from current estimates. As additional information becomes available, cost
estimates will be adjusted as necessary. It is possible that technological,
regulatory or enforcement developments, the results of studies or other factors
could necessitate the recording of additional liabilities.
Costs associated with exit or disposal activities. The Company adopted SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities, on
January 1, 2003 for exit or disposal activities initiated on or after that date.
Under SFAS No. 146, costs associated with exit activities, as defined, that are
covered by the scope of SFAS No. 146 will be recognized and measured initially
at fair value, generally in the period in which the liability is incurred. Costs
covered by the scope of SFAS No. 146 include termination benefits provided to
employees, costs to consolidate facilities or relocate employees, and costs to
terminate contracts (other than a capital lease). Under prior GAAP, a liability
for such an exit cost is recognized at the date an exit plan is adopted, which
may or may not be the date at which the liability has been incurred. The effect
of adopting SFAS No. 146 as of January 1, 2003 was not material as the Company
was not involved in any exit or disposal activities covered by the scope of the
new standard as of such date.
Variable interest entities. The Company complied with the consolidation
requirements of FASB Interpretation ("FIN") No. 46R, Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51, as amended, as of March 31,
2004. The Company does not have any involvement with any variable interest
entity (as that term is defined in FIN No. 46R) covered by the scope of FIN No.
46R that would require the Company to consolidate such entity under FIN No. 46R
which had not already been consolidated under prior applicable GAAP, and
therefore the impact to the Company of adopting the consolidation requirements
of FIN No. 46R was not material.
Note 20 - Accounting principles not yet adopted:
Inventory costs. The Company will adopt SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4, for inventory costs incurred on or after
January 1, 2006. SFAS No. 151 requires that the allocation of fixed production
overhead costs to inventory shall be based on normal capacity. Normal capacity
is not defined as a fixed amount; rather, normal capacity refers to a range of
production levels expected to be achieved over a number of periods under normal
circumstances, taking into account the loss of capacity resulting from planned
maintenance shutdowns. The amount of fixed overhead allocated to each unit of
production is not increased as a consequence of idle plant or production levels
below the low end of normal capacity, but instead a portion of fixed overhead
costs is charged to expense as incurred. Alternatively, in periods of production
above the high end of normal capacity, the amount of fixed overhead costs
allocated to each unit of production is decreased so that inventories are not
measured above cost. SFAS No. 151 also clarifies existing GAAP to require that
abnormal freight and wasted materials (spoilage) are to be expensed as incurred.
The Company believes its production cost accounting already complies with the
requirements of SFAS No. 151, and the Company does not expect adoption of SFAS
No. 151 will have a material effect on its consolidated financial statements.
Stock options. As permitted by regulations of the SEC, the Company will
adopt SFAS No. 123R, Share-Based Payment, as of January 1, 2006. SFAS No. 123R,
among other things, eliminates the alternative in existing GAAP to use the
intrinsic value method of accounting for stock-based employee compensation under
APBO No. 25. Upon adoption of SFAS No. 123R, the Company will generally be
required to recognize the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award,
with the cost recognized over the period during which an employee is required to
provide services in exchange for the award (generally, the vesting period of the
award). No compensation cost will be recognized in the aggregate for equity
instruments for which the employee does not render the requisite service
(generally, if the instrument is forfeited before it has vested). The grant-date
fair value will be estimated using option-pricing models (e.g. Black-Sholes or a
lattice model). Under the transition alternatives permitted under SFAS No. 123R,
the Company will apply the new standard to all new awards granted on or after
January 1, 2006, and to all awards existing as of December 31, 2005 which are
subsequently modified, repurchased or cancelled. Additionally, as of January 1,
2006, the Company will be required to recognize compensation cost previously
measured under SFAS No. 123 for the portion of any non-vested award existing as
of December 31, 2005 over the remaining vesting period. Because the number of
non-vested awards as of December 31, 2005 with respect to options granted by
Valhi and its subsidiaries and affiliates is not material, the effect of
adopting SFAS No. 123R is not expected to be significant in so far as it relates
to the recognition of compensation cost in the Company's consolidated statements
of income for existing stock options. Should Valhi or its subsidiaries and
affiliates, however, either grant a significant number of options or modify,
repurchase or cancel existing options in the future, the Company could in the
future recognize material amounts of compensation cost related to such options
in its consolidated financial statements.
Also upon adoption of SFAS No. 123R, the cash income tax benefit resulting
from the exercise of stock options in excess of the cumulative income tax
benefit related to such options previously recognized for GAAP financial
reporting purposes in the Company's consolidated statements of income, if any,
will be reflected as a cash inflow from financing activities in the Company's
consolidated statements of cash flows, and the Company's cash flows from
operating activities will reflect the effect of cash paid for income taxes
exclusive of such cash income tax benefit.
SFAS No. 123R also requires certain expanded disclosures regarding the
Company's stock options, and such expanded disclosure have been provided in Note
14.
Note 21 - Financial instruments:
December 31,
--------------------------------------------------
2004 2005
------------------------- -----------------------
Carrying Fair Carrying Fair
amount value Amount value
------- ------- ------- -----
(Restated)
(In millions)
Cash, cash equivalents and restricted cash
equivalents $277.9 $ 277.9 $281.4 $ 281.4
Marketable securities:
Current $ 9.4 $ 9.4 $ 11.8 $ 11.8
Noncurrent 256.8 256.8 258.7 258.7
Loan to Snake River Sugar Company $ 80.0 $ 96.3 $ - $ -
Long-term debt (excluding capitalized leases):
Publicly-traded fixed rate debt -
KII Senior Secured Notes $519.2 $ 549.1 $449.3 $ 463.6
Snake River Sugar Company loans 250.0 250.0 250.0 250.0
Other fixed-rate debt .6 .6 2.0 2.0
Variable rate debt 13.6 13.6 11.5 11.5
Minority interest in:
NL common stock $ 51.7 $ 178.8 $ 51.2 $ 115.7
Kronos common stock 29.6 125.3 28.2 97.7
CompX common stock 49.2 79.4 45.6 74.1
Valhi common stockholders' equity $874.7 $1,934.2 $795.6 $2,160.1
The fair value of the Company's publicly-traded marketable securities and
debt, minority interest in NL Industries, Kronos and CompX and Valhi's common
stockholders' equity are all based upon quoted market prices at each balance
sheet date. The estimated fair value of the Company's investment in The
Amalgamated Sugar Company LLC is $250 million (the redemption price of the
Company's investment in the LLC). The fair value of the Company's fixed-rate
loan to Snake River Sugar Company is based upon relative changes in market
interest rates since the interest rates were fixed. The fair value of Valhi's
fixed-rate nonrecourse loans from Snake River Sugar Company is based upon the
$250 million redemption price of Valhi's investment in the Amalgamated Sugar
Company LLC, which investment collateralizes such nonrecourse loans. Fair values
of variable interest rate debt and other fixed-rate debt are deemed to
approximate book value. See Notes 5 and 10.
Certain of the Kronos' sales generated by its non-U.S. operations are
denominated in U.S. dollars. Kronos periodically uses currency forward contracts
to manage a very nominal portion of foreign exchange rate risk associated with
receivables denominated in a currency other than the holder's functional
currency or similar exchange rate risk associated with future sales. Kronos has
not entered into these contracts for trading or speculative purposes in the
past, nor does Kronos currently anticipate entering into such contracts for
trading or speculative purposes in the future. Derivatives used to hedge
forecasted transactions and specific cash flows associated with foreign currency
denominated financial assets and liabilities which meet the criteria for hedge
accounting are designated as cash flow hedges. Consequently, the effective
portion of gains and losses is deferred as a component of accumulated other
comprehensive income and is recognized in earnings at the time the hedged item
affects earnings. Contracts that do not meet the criteria for hedge accounting
are marked-to-market at each balance sheet date with any resulting gain or loss
recognized in income currently as part of net currency transactions. During 2004
and 2005, Kronos has not used hedge accounting for any of its contracts. To
manage such exchange rate risk, at December 31, 2005, Kronos held a series of
contracts, which mature at various dates through March 31, 2006, to exchange an
aggregate of U.S. $7.5 million for an equivalent amount of Canadian dollars at
exchange rate of Cdn. $1.19 per U.S. dollar. At December 31, 2005, the actual
exchange rate was Cdn. $1.16 per U.S. dollar. The estimated fair value of such
foreign currency forward contracts at December 31, 2005 was not material. Kronos
held no such currency forward contracts at December 31, 2004.
Certain of the CompX's sales generated by its non-U.S. operations are
denominated in U.S. dollars. CompX periodically uses currency forward contracts
to manage a portion of foreign exchange rate risk associated with receivables
denominated in a currency other than the holder's functional currency. CompX has
not entered into these contracts for trading or speculative purposes in the
past, nor does CompX currently anticipate entering into such contracts for
trading or speculative purposes in the future. Derivatives used to hedge
forecasted transactions and specific cash flows associated with foreign currency
denominated financial assets and liabilities which meet the criteria for hedge
accounting are designated as cash flow hedges. Consequently, the effective
portion of gains and losses is deferred as a component of accumulated other
comprehensive income and is recognized in earnings at the time the hedged item
affects earnings. Contracts that do not meet the criteria for hedge accounting
are marked-to-market at each balance sheet date with any resulting gain or loss
recognized in income currently as part of net currency transactions. To manage
such exchange rate risk, at December 31, 2005, CompX held a series of contracts
to exchange an aggregate of U.S. $6.5 million for an equivalent value of
Canadian dollars at an exchange rate of Cdn. $1.19 per U.S. dollar. Such
contracts mature through March 2006. The exchange rate was $1.17 per U.S. dollar
at December 31, 2005. At December 31, 2004 CompX held contracts maturing through
March 2005 to exchange an aggregate of U.S. $7.2 million for an equivalent value
of Canadian dollars at an exchange rates of Cdn. $1.19 to Cdn. $1.23 per U.S.
dollar. At December 31, 2004, the actual exchange rate was Cdn. $1.21 per U.S.
dollar. The estimated fair value of such contracts is not material at December
31, 2004 and 2005.
The Company may periodically uses interest rate swaps and other types of
contracts to manage interest rate risk with respect to financial assets or
liabilities. The Company has not entered into these contracts for trading or
speculative purposes in the past, nor does the Company currently anticipate
entering into such contracts for trading or speculative purposes in the future.
The Company was not a party to any such contract during 2003, 2004 or 2005.
Note 22 - Discontinued operations:
In December 2004, CompX's board of directors committed to a formal plan to
dispose of its Thomas Regout operations in Europe. Such operations, which
previously were included in the Company's component products operating segment
(see Note 3), met all of the criteria under GAAP to be classified as an asset
held for sale at December 31, 2004, and accordingly the results of operations of
Thomas Regout have been classified as discontinued operations for all periods
presented. The Company has not reclassified its December 31, 2004 consolidated
balance sheet or its 2003, 2004 and 2005 consolidated statements of cash flows
to separately present the financial positions or cash flows of the assets
disposed. In classifying the net assets of the Thomas Regout operations as an
asset held for sale, the Company concluded that the carrying amount of the net
assets of such operations exceeded the estimated fair value less costs to sell
of such operations, and accordingly in the fourth quarter of 2004 the Company
recognized a $6.5 million impairment charge to write-down its investment in the
Thomas Regout operations to its estimated net realizable value. Such charge
represented an impairment of goodwill. See Note 9.
In January 2005, CompX completed the sale of such operations for proceeds
(net of expenses) of approximately $22.3 million. The net proceeds consisted of
approximately $18.1 million in cash at the date of sale and a $4.2 million
principal amount note receivable from the purchaser bearing interest at a fixed
rate of 7% and payable over four years. The note receivable is collateralized by
a secondary lien on the assets sold and is subordinated to certain third-party
indebtedness of the purchaser. Accordingly, the Company no longer includes the
results of operations of Thomas Regout subsequent to December 31, 2004 in its
consolidated financial statements. The net proceeds from the January 2005 sale
of European Thomas Regout operations were approximately $860,000 (before income
tax benefit) less than the net realizable value estimated at the time of the
goodwill impairment charge (primarily due to higher expenses associated with the
disposal of the Thomas Regout operations), and discontinued operations in 2005
includes a first quarter charge related to such differential ($272,000, net of
income tax benefit and minority interest).
Condensed income statement data for Thomas Regout for 2003 and 2004 is
presented below. The $6.5 million goodwill impairment charge is included in
Thomas Regout's operating loss for 2004. Interest expense included in
discontinued operations represents interest on certain intercompany indebtedness
with CompX, which indebtedness arose at the time of CompX's acquisition of such
operations prior to 2003 and corresponded to certain third-party indebtedness
CompX incurred at the time such operations were acquired. Discontinued
operations in 2004 includes a $4.2 million income tax benefit associated with
the U.S. capital loss realized in the first quarter of 2005 upon completion of
the sale of the Thomas Regout operations. Recognition of the benefit of such
capital loss by the Company is appropriate under GAAP in the fourth quarter of
2004 at the time such operations were classified as held for sale.
Years ended December 31,
------------------------
2003 2004
------ ------
(In millions)
Net sales $35.3 $41.7
===== =====
Operating loss $(5.5) $(3.5)
Interest expense (1.4) (1.5)
Income tax benefit 2.6 4.6
Minority interest in losses 1.4 4.1
----- -----
Net income (loss) $(2.9) $ 3.7
===== =====
Condensed balance sheet data for Thomas Regout at December 31, 2004,
included in the Company's consolidated balance sheets, is presented below.
(Amount)
--------
(In millions)
Current assets $18.0
Noncurrent assets 11.0
-----
$29.0
=====
Current liabilities $ 5.0
Net assets 24.0
-----
$29.0
=====
Included in the net assets of Thomas Regout are certain intercompany loans
payable by Thomas Regout to CompX which are eliminated in the Company's
consolidated balance sheet.
Note 23 - Quarterly results of operations (unaudited):
Quarter ended
---------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
---------- --------- ---------- --------
(Restated) (Restated) (Restated) (Restated)
(In millions, except per share data)
Year ended December 31, 2004
Net sales $307.7 $343.3 $336.8 $332.3
Operating income 21.5 37.7 30.2 20.1
Income (loss) from continuing
operations $ 1.0 $246.2 $ 10.5 $(31.4)
Discontinued operations - .2 .2 3.3
------ ------ ------ ------
Net income (loss) $ 1.0 $246.4 $ 10.7 $(28.1)
====== ====== ====== ======
Per basic share:
Continuing operations $ .01 $ 2.05 $ .09 $ (.26)
Discontinued operations - - - .03
------ ------ ------ ------
$ .01 $ 2.05 $ .09 $ (.23)
====== ====== ====== ======
Year ended December 31, 2005
Net sales $341.2 $359.5 $342.2 $349.9
Operating income 44.9 56.4 37.6 33.2
Income from continuing operations $ 25.1 $ 28.3 $ 13.4 $ 14.7
Discontinued operations (.3) - - -
------ ------ ------ ------
Net income $ 24.8 $ 28.3 $ 13.4 $ 14.7
====== ====== ====== ======
Per basic share:
Continuing operations $ .21 $ .24 $ .11 $ .13
Discontinued operations - - - -
------ ------ ------ ------
$ .21 $ .24 $ .11 $ .13
====== ====== ====== ======
The sum of the quarterly per share amounts may not equal the annual per
share amounts due to relative changes in the weighted average number of shares
used in the per share computations.
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheets
December 31, 2004 and 2005
(In thousands)
2004 2005
--------- -----------
(Restated)
Current assets:
Cash and cash equivalents $ 94,337 $ 119,763
Restricted cash equivalents 270 325
Accounts and notes receivable 226 6,241
Receivables from subsidiaries and affiliates:
Demand loan to Contran Corporation 4,929 -
Other 2,165 2,281
Deferred income taxes 201 633
Other 267 233
---------- ----------
Total current assets 102,395 129,476
---------- ----------
Other assets:
Marketable securities 250,023 250,000
Restricted cash equivalents 494 382
Investment in and advances to subsidiaries and
affiliate 942,633 955,851
Other receivable from subsidiary 696 -
Loan receivable - Snake River Sugar Company 118,294 -
Other assets 206 210
Property and equipment, net 1,893 1,705
---------- ----------
Total other assets 1,314,239 1,208,148
---------- ----------
$1,416,634 $1,337,624
========== ==========
Current liabilities:
Payables to subsidiaries and affiliates:
Income taxes, net $ 1,050 $ 2,351
Other 20 16
Accounts payable and accrued liabilities 822 3,321
Income taxes 381 66
---------- ----------
Total current liabilities 2,273 5,754
---------- ----------
Noncurrent liabilities:
Long-term debt - Snake River Sugar Company 250,000 250,000
Deferred income taxes 288,372 284,782
Other 1,314 1,495
---------- ----------
Total noncurrent liabilities 539,686 536,277
---------- ----------
Stockholders' equity 874,675 795,593
---------- ----------
$1,416,634 $1,337,624
========== ==========
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed Statements of Operations
Years ended December 31, 2003, 2004 and 2005
(In thousands)
2003 2004 2005
----- ------ ------
(Restated) (Restated)
Revenues and other income:
Interest and dividend income $30,432 $ 32,438 $ 52,351
Write-off of accrued interest on loan to
Snake River Sugar Company - - (21,638)
Securities transaction gains, net 3 - (3)
Other, net 3,419 3,306 2,289
-------- -------- -------
33,854 35,744 32,999
-------- -------- -------
Costs and expenses:
General and administrative 8,385 9,302 8,424
Interest 24,613 25,202 24,116
-------- -------- -------
32,998 34,504 32,540
-------- -------- -------
856 1,240 459
Equity in earnings of subsidiaries and
affiliate 12,630 305,597 88,222
-------- -------- -------
Income before income taxes 13,486 306,837 88,681
Provision for income taxes 98,893 80,578 6,958
-------- -------- -------
Income (loss) from continuing operations (85,407) 226,259 81,723
Discontinued operations (2,874) 3,732 (272)
Cumulative effect of change in accounting
principle 586 - -
-------- -------- -------
Net income (loss) $(87,695) $229,991 $ 81,451
======== ======== ========
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed Statements of Cash Flows
Years ended December 31, 2003, 2004 and 2005
(In thousands)
2003 2004 2005
------ ------ ------
(Restated) (Restated)
Cash flows from operating activities:
Net income (loss) $ (87,695) $ 229,991 $ 81,451
Securities transactions gains, net (3) - 3
Proceeds from disposal of marketable
securities (trading) 50 - -
Write-off of accrued interest receivable - - 21,638
Deferred income taxes 106,019 75,503 10,722
Equity in earnings of subsidiaries
and affiliate:
Continuing operations (12,630) (305,597) (88,222)
Discontinued operations 2,874 (3,732) 272
Cumulative effect of change in
accounting principle (586) - -
Dividends from subsidiaries and
affiliates 25,405 37,209 58,639
Other, net (37) 683 (276)
Net change in assets and liabilities (2,838) (9,264) 17,199
-------- -------- --------
Net cash provided by operating
activities 30,559 24,793 101,426
-------- -------- --------
Cash flows from investing activities:
Purchase of:
Kronos common stock (6,428) (17,057) (7,039)
TIMET common stock (840) - (17,972)
TIMET debt securities (238) - -
Loans to subsidiaries and affiliates:
Loans (9,689) (32,328) (35,416)
Collections 1,000 178,227 18,137
Investment in other subsidiary - - (2,937)
Collection of loan to Snake River
Sugar Company - - 80,000
Change in restricted cash equivalents, net 94 44 57
Other, net (919) (558) (42)
-------- -------- --------
Net cash provided (used) by
investing activities (17,020) 128,328 34,788
-------- -------- --------
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed Statements of Cash Flows (Continued)
Years ended December 31, 2003, 2004 and 2005
(In thousands)
2003 2004 2005
---- ---- ----
(Restated) (Restated)
Cash flows from financing activities:
Indebtedness:
Borrowings $ 10,000 $ 53,000 $ 5,000
Principal payments (5,000) (58,000) (5,000)
Loans from affiliates:
Loans 34,583 30,529 -
Repayments (23,262) (54,154) -
Dividends (29,796) (29,804) (48,805)
Treasury stock acquired - - (62,060)
Other, net 264 (424) 77
-------- --------- ---------
Net cash used by financing activities (13,211) (58,853) (110,788)
-------- --------- ---------
Cash and cash equivalents:
Net increase 328 94,268 25,426
Valmont Insurance Company - (5,374) -
Balance at beginning of year 5,115 5,443 94,337
-------- --------- ---------
Balance at end of year $ 5,443 $ 94,337 $ 119,763
======== ======== =========
Supplemental disclosures - cash paid
(received) for:
Interest $ 24,613 $ 25,116 $ 23,342
Income taxes, net (4,231) (2,134) (8,023)
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Notes to Condensed Financial Information
Note 1 - Basis of presentation:
The accompanying financial statements of Valhi, Inc. reflect Valhi's
investment in (i) the common stocks (or equivalent thereof) of NL Industries,
Inc., Kronos Worldwide, Inc., Tremont LLC, Valcor, Inc., Waste Control
Specialists LLC and Titanium Metals Corporation ("TIMET") on the equity method
and (ii) the preferred stock securities of TIMET as an available-for-sale
marketable security carried at fair value. The Consolidated Financial Statements
of Valhi, Inc. and Subsidiaries, including the notes thereto, are incorporated
herein by reference.
Note 2 - Marketable securities:
December 31,
-----------------------
2004 2005
------ --------
(In thousands)
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC $250,000 $250,000
Other securities 23 -
-------- --------
$250,023 $250,000
======== ========
Note 3 - Investment in and advances to subsidiaries and affiliate:
December 31,
------------------------
2004 2005
------- ------
(Restated)
(In thousands)
Investment in:
NL Industries (NYSE: NL) $209,681 $292,226
Kronos Worldwide, Inc. (NYSE: KRO) 398,628 483,293
Tremont LLC 319,690 126,025
Valcor and subsidiaries (15,803) (8,864)
Waste Control Specialists LLC 23,766 34,345
TIMET (NYSE: TIE) common stock 1,905 24,059
TIMET preferred stock 183 183
-------- --------
938,050 951,267
Noncurrent loans to Waste Control Specialists LLC 4,583 4,584
-------- --------
$942,633 $955,851
======== ========
Noncurrent receivable from subsidiary at December 31, 2004 and 2005
consists of accrued interest due from Waste Control Specialists on the Company's
loans to Waste Control Specialists. During 2004 and 2005, Valhi contributed an
aggregate of $47.5 million and $23.9 million, respectively of loans and related
accrued interest to Waste Control Specialists' equity.
Prior to December 2003, Kronos was a wholly-owned subsidiary of NL. In
December 2003, NL completed the distribution of approximately 48.8% of Kronos'
common stock to NL shareholders (including Valhi and Tremont LLC) in the form of
a pro-rata dividend. Shareholders of NL received one share of Kronos common
stock for every two shares of NL held. Valhi's equity in earnings of Kronos for
2003 relates to Kronos' earnings subsequent to the December 2003 distribution.
During 2004 and the first quarter of 2005, NL paid an aggregate of five
quarterly dividends in the form of shares of Kronos common stock, in which an
aggregate of approximately 1.2 million shares of Kronos' common stock (2.5%) was
distributed to Valhi and Tremont in the form of pro-rata dividends.
During the fourth quarter of 2004, NL transferred approximately 5.5 million
shares of Kronos common stock to Valhi in satisfaction of an NL separate income
tax liability and the tax liability generated from the use of such Kronos shares
to settle such tax liability. The transfer of such 5.5 million shares of Kronos
common stock, accounted for under GAAP as a transfer of net assets among
entities under common control at carryover basis, had no effect on the Company's
consolidated financial statements.
At the beginning of 2003, Valhi and NL owned 80% and 20%, respectively, of
Tremont Group, Inc. Tremont Group was a holding company that owned 80% of
Tremont Corporation. In February 2003, Valhi completed a series of merger
transactions pursuant to which, among other things, both Tremont Group, and
Tremont became wholly-owned subsidiaries of Valhi and Tremont Group and Tremont
subsequently merged to form Tremont LLC. Tremont LLC is a holding company whose
principal assets at December 31, 2005 are a 35% interest in TIMET and interests
in other joint ventures. In January 2005, Tremont distributed to Valhi its 21%
ownership interest in NL and its 11% ownership interest in Kronos.
Prior to September 2004, Valcor's principal asset was a 66% interest in
CompX International, Inc., and Valhi owned an additional 3% of CompX directly.
Valhi's direct investment in CompX was considered part of its investment in
Valcor. On September 24, 2004, NL completed the acquisitions of the CompX shares
previously held by Valhi and Valcor at a purchase price of $16.25 per share, or
an aggregate of approximately $168.6 million. The purchase price was paid by
NL's transfer to Valhi and Valcor of an aggregate $168.6 million of NL's $200
million long-term note receivable from Kronos. Subsequently in 2004, Valcor
distributed to Valhi its notes receivable from Kronos that Valcor received in
this transaction, and Kronos prepaid the entire note balance.
In December 2004, Valmont Insurance Company, a subsidiary of Valhi, merged
into Tall Pines Insurance Company, a subsidiary of Tremont, with Tall Pines
surviving the merger. Valmont was previously included as part of the
registrant's consolidated financial information. At December 27, 2004, the net
assets of Valmont were transferred to Tall Pines for financial reporting
purposes at Valhi's carryover basis, and such net assets are included as part of
Valhi's investment in Tremont at December 31, 2004 and 2005. Valmont's cash and
cash equivalents was approximately $5.4 million at December 27, 2004, and such
cash is shown as a reconciling item on the accompanying condensed statements of
cash flows.
See the notes to the Company's Consolidated Financial Statements for a
discussion of these and other transactions affecting the Company's investment in
its subsidiaries and affiliates.
Years ended December 31,
-----------------------------------------
2003 2004 2005
------ ------ ---------
(Restated) (Restated)
(In thousands)
Equity in earnings of subsidiaries and
affiliate from continuing operations
NL Industries $ 12,369 $124,035 $ 23,051
Kronos Worldwide 804 99,948 33,828
Tremont LLC 8,954 88,035 40,576
Valcor 3,503 5,399 -
Waste Control Specialists LLC (12,923) (12,379) (13,358)
TIMET (77) 559 4,125
-------- -------- --------
$ 12,630 $305,597 $ 88,222
======== ======== ========
Cash dividends from subsidiaries
NL Industries $ 24,108 $ - $ 30,264
Kronos Worldwide - 17,586 27,887
Tremont LLC - 19,623 488
Valcor 1,297 - -
Waste Control Specialists LLC - - -
-------- -------- --------
$ 25,405 $ 37,209 $ 58,639
======== ======== ========
Equity in earnings of discontinued operations relates to CompX's operations
in The Netherlands.
Note 4 - Loan receivable - Snake River Sugar Company:
December 31,
---------------------
2004 2005
---- ----
(In thousands)
Snake River Sugar Company:
Principal $ 80,000 $ -
Interest 38,294 -
-------- --------
$118,294 $ -
======== ========
Note 5 - Long-term debt:
Valhi's $250 million in loans from Snake River bear interest at a weighted
average fixed interest rate of 9.4%, are collateralized by the Company's
interest in The Amalgamated Sugar Company LLC and are due in January 2027. At
December 31, 2005, $37.5 million of such loans are recourse to Valhi and the
remaining $212.5 million is nonrecourse to Valhi. Under certain conditions,
Snake River has the ability to accelerate the maturity of these loans. See Note
4 to the Consolidated Financial Statements.
At December 31, 2005, Valhi has a $100 million revolving bank credit
facility which matures in October 2006, generally bears interest at LIBOR plus
1.5% (for LIBOR-based borrowings) or prime (for prime-based borrowings), and is
collateralized by 15 million shares of Kronos common stock held by Valhi. The
agreement limits dividends and additional indebtedness of Valhi and contains
other provisions customary in lending transactions of this type. In the event of
a change of control of Valhi, as defined, the lenders would have the right to
accelerate the maturity of the facility. The maximum amount which may be
borrowed under the facility is limited to one-third of the aggregate market
value of the shares of Kronos common stock pledged as collateral. Based on
Kronos' December 31, 2005 quoted market price of $29.01 per share, the shares of
Kronos common stock pledged under the facility provide more than sufficient
collateral coverage to allow for borrowings up to the full amount of the
facility. At December 31, 2005, Valhi would only have become limited to
borrowing less than the full $100 million amount of the facility, or would be
required to pledge additional collateral if the full amount of the facility had
been borrowed, if the quoted market price of the shares of Kronos pledged was
less than $20 per share. At December 31, 2005, no amounts were outstanding,
letters of credit aggregating $1.5 million had been issued, and $98.5 million
was available for borrowing under this facility.
Note 6 - Income taxes:
The Amalgamated Sugar Company LLC is treated as a partnership for federal
income tax purposes. Valhi Parent Company's provision for income taxes (benefit)
includes a tax provision (benefit) attributable to Valhi's equity in earnings
(losses) of Waste Control Specialists, as recognition of such income tax
(benefit) is not appropriate at the Waste Control Specialist level.
Years ended December 31,
---------------------------------------
2003 2004 2005
------ ------ --------
(Restated) (Restated)
(In thousands)
Components of provision for income taxes
(benefit):
Currently payable (refundable) $ (7,126) $ 5,075 $(3,764)
Deferred income tax expense 106,019 75,503 10,722
-------- -------- -------
$ 98,893 $ 80,578 $ 6,958
======== ======== =======
Cash paid (received) for income taxes, net:
Received from subsidiaries, net $(5,768) $(2,174) $(9,030)
Paid to Contran 1,490 - 503
Paid to tax authorities, net 47 40 504
-------- -------- -------
$(4,231) $(2,134) $(8,023)
======== ======== =======
Deferred tax
Asset (liability)
------------------------
December 31,
------------------------
2004 2005
---- ----
(Restated)
(In thousands)
Components of the net deferred tax asset (liability) -
tax effect of temporary differences related to:
Marketable securities - primarily The Amalgamated
Sugar Company LLC $(104,151) $(102,945)
Investment in Kronos Worldwide (192,996) (184,454)
Reduction of deferred income tax assets of
subsidiaries that are members of the Contran Tax
Group - separate company U.S. net operating loss
carryforwards and other tax attributes that do not
exist at the Valhi level (7,984) (8,283)
Tax attributes of Valhi:
Federal loss carryforwards 16,627 12,458
Federal capital loss carryforward - 2,058
State net operating and capital loss carryforwards 2,941 3,751
AMT credit carryforwards 381 381
Accrued liabilities and other deductible differences 4,601 2,836
Other taxable differences (7,590) (9,951)
--------- --------
$(288,171) $(284,149)
========= =========
Current deferred tax asset $ 201 $ 633
Noncurrent deferred tax liability (288,372) (284,782)
--------- --------
$(288,171) $(284,149)
========= =========
VALHI, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
Balance at charged to Balance
beginning costs and Net Currency at end
Description of year expenses deductions translation Other* of year
---------------------------------- --------- ---------- ----------- --------- -------- --------
Year ended December 31, 2003:
Allowance for doubtful accounts $ 6,356 $(1,768) $ (425) $ 486 $ - $ 4,649
======= ======= ======= ======= ====== =======
Reserve for slow moving or
obsolete inventories $ 9,314 $ 2,076 $(1,699) $ 182 $ - $ 9,873
======= ======= ======= ======= ====== =======
Accrual for planned major
maintenance activities $ 3,986 $ 5,337 $(3,896) $ 900 $ - $ 6,327
======= ======= ======= ======= ====== =======
Year ended December 31, 2004:
Allowance for doubtful accounts $ 4,649 $ (30) $(1,013) $ 220 $ - $ 3,826
======= ======= ======= ======= ====== =======
Reserve for slow moving or
obsolete inventories $ 9,873 $ 1,675 $(2,136) $ 793 $ - $10,205
======= ======= ======= ======= ====== =======
Accrual for planned major
maintenance activities $ 6,327 $ 6,602 $(8,001) $ 425 $ - $ 5,353
======= ======= ======= ======= ====== =======
Year ended December 31, 2005:
Allowance for doubtful accounts $ 3,826 $ 658 $ (915) $ (201) $ (553) $ 2,815
======= ======= ======= ======= ====== =======
Reserve for slow moving or
obsolete inventories $10,205 $ 547 $ (681) $ (852) $ 254 $ 9,473
======= ======= ======= ======= ====== =======
Accrual for planned major
maintenance activities $ 5,353 $ 9,385 $(9,333) $ (448) $ - $ 4,957
======= ======= ======= ======= ====== =======
Note - Certain information has been omitted from this Schedule because it is
disclosed in the notes to the Consolidated Financial Statements.
* - Business units acquired and/or disposed.