SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 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
(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
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes X No
Number of shares of the Registrant's common stock outstanding on April 29, 2005:
117,283,778.
Explanatory Note Regarding Amendment No. 1
The Registrant hereby files this Report on Form 10-Q/A ("Form 10-Q/A") to
amend its Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, as
filed with the Securities and Exchange Commission ("SEC") on May 10, 2005
("Original Form 10-Q"). As discussed in Note 1 to the Consolidated Financial
Statements, on December 21, 2005, the Registrant and its audit committee
concluded that the Registrant would file this Form 10-Q/A to restate the
Registrant's consolidated balance sheet as of December 31, 2004 and March 31,
2005, and the Registrant's consolidated statements of income, comprehensive
income, cash flows and stockholders' equity for the interim periods ended March
31, 2004 and 2005, in each case as contained in the Original Form 10-Q.
As previously disclosed, in January 1997 the Registrant transferred control
of the refined sugar operations previously conducted by the Registrant's
wholly-owned subsidiary, The Amalgamated Sugar Company, to Snake River Sugar
Company, an Oregon agricultural cooperative formed by certain sugarbeet growers
in Amalgamated's areas of operations. Pursuant to the transaction, Amalgamated
contributed substantially all of its net assets to the Amalgamated Sugar Company
LLC, a limited liability company controlled by Snake River, on a tax-deferred
basis in exchange for a non-voting ownership interest in the LLC. The cost basis
of the net assets transferred by Amalgamated to the LLC was approximately $34
million. As part of such transaction, Snake River made certain loans to the
Registrant aggregating $250 million. Such loans from Snake River are
collateralized by the Registrant's interest in the LLC. Snake River's sources of
funds for its loans to the Registrant, as well as for the $14 million it
contributed to the LLC for its voting interest in the LLC, included cash capital
contributions by the grower members of Snake River and $180 million in debt
financing provided by the Registrant, of which $100 million was subsequently
repaid in 1997 when Snake River obtained an equal amount of third-party term
loan financing. After such repayments, $80 million principal amount of the
Registrant's loans to Snake River have remained outstanding since June 30, 1997
through March 31, 2005.
The Registrant and Snake River share in distributions from the LLC up to an
aggregate of $26.7 million per year (the "base" level), with a preferential 95%
share going to the Registrant. To the extent the LLC's distributions are below
this base level in any given year, the Registrant is entitled to an additional
95% preferential share of any future annual LLC distributions in excess of the
base level until such shortfall is recovered. Under certain conditions, the
Registrant is entitled to receive additional cash distributions from the LLC.
The Registrant may, at its option, require the LLC to redeem the Registrant's
interest in the LLC beginning in 2012, and the LLC has the right to redeem the
Registrant's interest in the LLC beginning in 2027. The redemption price is
generally $250 million plus the amount of certain undistributed income allocable
to the Registrant. In the event the Registrant requires the LLC to redeem the
Registrant's interest in the LLC, Snake River has the right to accelerate the
maturity of and call Registrant's $250 million loans from Snake River.
The Registrant reports the cash distributions received from the LLC as
dividend income. The amount of such future distributions is dependent upon,
among other things, the future performance of the LLC's operations. Because the
Registrant receives preferential distributions from the LLC and has the right to
require the LLC to redeem its interest in the LLC for a fixed and determinable
amount beginning at a fixed and determinable date, the Registrant accounts for
its investment in the LLC as a debt security at its estimated fair value.
In 1997 when the Company obtained its interest in the LLC, the Registrant
concluded that the earnings process with respect to the refined sugar operations
contributed by the Registrant to the LLC was not complete. Accordingly, the
Registrant did not recognize any gain in earnings. The Registrant did treat its
investment in the LLC as equivalent to a SFAS No. 115 debt security. Thus, the
excess of the fair value of the Registrant's investment in the LLC over the $34
million cost basis of such investment was recognized as a component of other
comprehensive income, net of applicable deferred income taxes. In estimating the
fair value of the Registrant's interest in the LLC, the Registrant considered,
among other things, the outstanding balance of the Registrant's loans to Snake
River and the outstanding balance of the Registrant's loans from Snake River,
with the result that the estimated fair value of the Registrant's LLC investment
was deemed to be $170 million ever since June 30, 1997. Under this accounting,
the Registrant would have reported a gain in earnings for financial reporting
purposes at the time its LLC interest was redeemed, with a corresponding
reduction in accumulated other income.
In connection with finalizing the preparation of the Company's consolidated
financial statements for the quarter ended September 30, 2005, the Registrant
re-evaluated its original conclusions regarding how it accounts for its
investment in the LLC. As a result, the Registrant has now concluded that a
proper application of accounting principles generally accepted in the United
States of America ("GAAP") would have been to recognize a gain in earnings in
1997 equal to the difference between $250 million (the fair value of the
Registrant's interest in the LLC) and the $34 million cost basis of the net
assets contributed to the LLC, net of applicable deferred income taxes. This
correction constitutes a prior period adjustment under GAAP. Accordingly, the
Registrant has retroactively restated its consolidated financial statements to
reflect this correction. The effect of this correction on the Registrant's March
31, 2005 consolidated balance sheet, as contained herein, as compared to such
consolidated balance sheet contained in the Original Form 10-Q, is to (i)
increase the carrying value of the Registrant's investment in the LLC (included
as part of noncurrent marketable securities) by $80 million, (ii) increase
noncurrent deferred income tax liabilities by $31.2 million and (iii) increase
total stockholders' equity by $48.8 million (with retained earnings increasing
by $131.7 million and accumulated other comprehensive income related to
marketable securities decreasing by $82.9 million). A similar balance sheet
adjustment would be applicable to Registrant's previously-reported consolidated
balance sheet at December 31, 2004 contained in the Original Form 10-Q, and each
consolidated balance sheet prior thereto until June 30, 1997. Under this revised
accounting, the Company would not be expected to report a gain in earnings for
financial reporting purposes at the time its LLC interest is redeemed, as the
redemption price of $250 million is expected to equal the carrying value of its
investment in the LLC at the time of redemption.
As previously disclosed, prior to December 2003 Kronos Worldwide, Inc. was
a wholly-owned subsidiary of NL Industries, Inc., a majority-owned subsidiary of
the Registrant. In December 2003, NL completed the distribution of approximately
48.8% of Kronos' common stock on a pro-rata basis to its shareholders, including
Valhi, and during 2004 NL paid each of its four $.20 per share regular quarterly
dividends in the form of shares of Kronos common stock. In its previously-issued
consolidated financial statements, the Registrant accounted for its pro-rata
share of any current income tax resulting from the distribution of shares of
Kronos common stock to NL's stockholders as a direct charge to equity. In
addition, the Registrant has never recognized deferred income taxes with respect
to the excess of the GAAP book basis of its investment in Kronos over the income
tax basis of such shares. The Registrant has now concluded, among other things,
that (i) a portion of the current income taxes resulting from the distribution
of shares of Kronos common stock to NL's shareholders should be included in the
Registrant's provision for income taxes included in the determination of net
income and (ii) the Registrant should have commenced to recognize deferred
income taxes with respect to the excess of the GAAP book basis of its investment
in Kronos over the income tax basis of such shares starting in December 2003,
concurrent with NL's December 2003 distribution of 48.8% of Kronos' common stock
(the first time in which the Registrant owned shares of Kronos directly),
including recognition of such deferred income taxes with respect to the excess
of the GAAP book basis of its investment in Kronos over the income tax basis of
such shares that existed as of the date of such December 2003 distribution.
Accordingly, during the Registrant's close process for its fiscal quarter
ended September 30, 2005, the Registrant concluded that:
o its provision for income taxes included in the determination of income
from continuing operations was misstated by an aggregate of $2.6
million ($.02 per diluted share, net of minority interest) in the
first quarter of 2004 and by $5.0 million ($5.2 million, or $.04 per
diluted share, net of minority interest) in the first quarter of 2005;
o its provision for deferred income taxes included in the determination
of total other comprehensive income related to foreign currency
translation and pension liabilities, net of minority interest, was
misstated by an aggregate of $371,000 in the first quarter of 2004 and
by $84,000 in the first quarter of 2005;
o its provision for income taxes accounted for as a direct reduction to
stockholders' equity, net of minority interest, was misstated by
$553,000 in the first quarter of 2005; and
o with respect to its statement of changes in stockholders' equity, and
in addition to the effect of the items noted above, total
stockholders' equity was misstated by $121.9 million as of December
31, 2004,
in each case as they related to the appropriate provision for income taxes and
related items which should have been recognized in accordance with accounting
principles generally accepted in the United States of America ("GAAP") as
provided by the guidance contained in Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, principally with respect to the
following items:
o Deferred income taxes with respect to the income tax effect of the
excess of the GAAP book basis over the income tax basis of the
Registrant's investment in Kronos Worldwide, Inc., a majority-owned
subsidiary of the Registrant;
o Current income taxes related to distributions of shares of Kronos
common stock made by NL Industries, Inc., the Registrant's
majority-owned subsidiary, to NL's stockholders; and
o Current and deferred income tax provisions related to other items.
This amendment was required to correct for the aggregate effect of these
misstatements. See Note 1 to the Consolidated Financial Statements for a summary
of financial statement amounts that are affected by this restatement. While the
effect of these misstatements have no effect on the Company's
previously-reported total cash flows from operating, investing and financing
activities, these misstatements do have a significant effect on the Company's
provision for income taxes, related income tax accounts (principally deferred
income taxes) and stockholders' equity.
The guidance set forth in Auditing Standards No. 2 of the Public Company
Accounting Oversight Board states that a restatement of previously-issued
financial statements to reflect the correction of a misstatement should be
regarded as at least a significant control deficiency and as a strong indicator
that a material weakness in internal control over financial reporting exists. As
a result of this amendment, the Registrant has concluded that a material
weakness existed at December 31, 2004 and March 31, 2005 that precludes the
Registrant from concluding that its internal control over financial reporting
was effective as of such dates. Therefore, the Registrant's previous conclusion
that it maintained effective internal control over financial reporting as of
March 31, 2005, as set forth in the Original Form 10-Q, has been restated. See
Item 4 - "Controls and Procedures."
For the convenience of the reader, this Form 10-Q/A sets forth the Original
Form 10-Q, as amended hereby, in its entirety. However, this Form 10-Q/A only
amends and restates Items 1, 2 and 4 of the Original Form 10-Q, in each case
solely as a result of and to reflect the corrections discussed above, and no
other information in the Original Form 10-Q is amended hereby. The foregoing
items have not been updated to reflect other events occurring after the filing
of the Original Form 10-Q, or to modify or update those disclosures affected by
other subsequent events. In addition, pursuant to the rules of the SEC, Exhibits
31.1, 31.2 and 32.1 have been updated to contain currently-dated certifications
of the Registrant's Chief Executive Officer and Chief Financial Officer.
VALHI, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets -
December 31, 2004 (Restated);
March 31, 2005 (Restated and Unaudited) 3
Consolidated Statements of Income -
Three months ended March 31, 2004 and 2005
(Restated and Unaudited) 5
Consolidated Statements of Comprehensive Income -
Three months ended March 31, 2004 and 2005
(Restated and Unaudited) 6
Consolidated Statements of Cash Flows -
Three months ended March 31, 2004 and 2005
(Restated and Unaudited) 7
Consolidated Statement of Stockholders' Equity -
Three months ended March 31, 2005
(Restated and Unaudited) 9
Notes to Consolidated Financial Statements (Unaudited) 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 26
Item 4. Controls and Procedures 46
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 48
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds; Share Repurchases 48
Item 6. Exhibits. 48
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, March 31,
2004 2005
(Restated) (Restated)
(Unaudited)
Current assets:
Cash and cash equivalents $ 267,829 $ 247,601
Restricted cash equivalents 9,609 6,343
Marketable securities 9,446 12,873
Accounts and other receivables 217,931 241,113
Refundable income taxes 3,330 1,343
Receivable from affiliates 5,531 6,190
Inventories 263,414 260,998
Prepaid expenses 12,342 12,930
Deferred income taxes 9,705 9,311
--------- ----------
Total current assets 799,137 798,702
--------- ----------
Other assets:
Marketable securities 256,770 261,982
Investment in affiliates 189,726 218,538
Receivable from affiliate 10,000 10,000
Loans and other receivables 119,452 124,940
Unrecognized net pension obligations 13,518 13,152
Goodwill 354,051 349,094
Other intangible assets 3,189 3,041
Deferred income taxes 239,521 235,909
Other 52,326 54,603
--------- ----------
Total other assets 1,238,553 1,271,259
--------- ----------
Property and equipment:
Land 38,493 40,771
Buildings 234,152 225,794
Equipment 894,023 838,944
Mining properties 20,277 18,318
Construction in progress 21,557 26,354
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1,208,502 1,150,181
Less accumulated depreciation 555,707 535,284
--------- ----------
Net property and equipment 652,795 614,897
--------- ----------
$2,690,485 $2,684,858
========== ==========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, March 31,
2004 2005
(Restated) (Restated)
(Unaudited)
Current liabilities:
Current maturities of long-term debt $ 14,412 $ 13,701
Accounts payable 109,158 95,896
Accrued liabilities 131,119 140,040
Payable to affiliates 11,607 12,800
Income taxes 21,196 20,785
Deferred income taxes 24,170 26,330
--------- ----------
Total current liabilities 311,662 309,552
--------- ----------
Noncurrent liabilities:
Long-term debt 769,525 743,252
Accrued pension costs 77,360 72,690
Accrued OPEB costs 34,988 34,045
Accrued environmental costs 55,450 52,968
Deferred income taxes 386,054 393,845
Other 41,061 39,459
--------- ----------
Total noncurrent liabilities 1,364,438 1,336,259
--------- ----------
Minority interest 139,710 151,633
--------- ----------
Stockholders' equity:
Common stock 1,242 1,242
Additional paid-in capital 110,978 111,530
Retained earnings 812,484 824,850
Accumulated other comprehensive income:
Marketable securities 5,449 5,281
Currency translation 36,380 36,369
Pension liabilities (53,916) (53,916)
Treasury stock (37,942) (37,942)
--------- ----------
Total stockholders' equity 874,675 887,414
--------- ----------
$2,690,485 $2,684,858
========== ==========
Commitments and contingencies (Notes 11 and 13)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, 2004 and 2005
(In thousands, except per share data)
(Unaudited)
2004 2005
Revenues and other income:
Net sales $307,677 $341,247
Other, net 9,701 26,637
-------- --------
317,378 367,884
-------- --------
Costs and expenses:
Cost of sales 243,686 251,982
Selling, general and administrative 52,717 54,431
Interest 15,605 17,879
-------- --------
312,008 324,292
-------- --------
5,370 43,592
Equity in earnings of:
Titanium Metals Corporation ("TIMET") 686 16,801
Other 136 112
-------- --------
Income before income taxes 6,192 60,505
Provision for income taxes 3,431 29,946
Minority interest in after-tax earnings 1,793 5,497
-------- --------
Income from continuing operations 968 25,062
Discontinued operations 5 (272)
-------- --------
Net income $ 973 $ 24,790
======== ========
Basic and diluted earnings per share:
Income from continuing operations $ .01 $ .21
Discontinued operations - -
-------- --------
Net income $ .01 $ .21
======== ========
Cash dividends per share $ .06 $ .10
======== ========
Shares used in the calculation of per share amounts:
Basic earnings per common share 120,190 120,223
Dilutive impact of outstanding stock options 299 349
-------- --------
Diluted earnings per share 120,489 120,572
======== ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended March 31, 2004 and 2005
(In thousands)
(Unaudited)
2004 2005
(Restated) (Restated)
Net income $ 973 $24,790
------ -------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment 1,268 (168)
Currency translation adjustment (1,961) (11)
Pension liabilities adjustment 309 -
------ -------
Total other comprehensive income (loss), net (384) (179)
------ -------
Comprehensive income $ 589 $24,611
====== =======
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2004 and 2005
(In thousands)
(Unaudited)
2004 2005
(Restated) (Restated)
Cash flows from operating activities:
Net income $ 973 $ 24,790
Depreciation and amortization 19,606 19,024
Goodwill impairment - 864
Securities transactions, net 25 (14,607)
Noncash:
Interest expense 654 821
Defined benefit pension expense 1,048 (1,956)
Other postretirement benefit expense (1,146) (965)
Deferred income taxes:
Continuing operations 537 20,872
Discontinued operations 4 (334)
Minority interest:
Continuing operations 1,793 5,497
Discontinued operations 2 (205)
Other, net 1,139 46
Equity in:
TIMET (686) (16,801)
Other (136) (112)
Net distributions from (contributions to):
Manufacturing joint venture 1,800 (850)
Other 52 109
Change in assets and liabilities:
Accounts and other receivables (34,703) (44,760)
Inventories 35,276 (14,278)
Accounts payable and accrued liabilities (43,283) 12,779
Accounts with affiliates (1,379) 190
Income taxes 22,339 7,513
Other, net 1,801 (8,144)
--------- ---------
Net cash provided (used) by operating activities 5,716 (10,507)
--------- ---------
Cash flows from investing activities:
Capital expenditures (6,358) (12,155)
Purchases of:
TIMET common stock - (11,450)
Kronos common stock (11,833) -
Marketable securities - (12,645)
Proceeds from disposal of:
Business unit - 18,094
Kronos common stock - 19,047
Marketable securities - 2,911
Loans to affiliate:
Loans - (11,000)
Collections - 10,068
Cash of disposed business unit - (4,006)
Change in restricted cash equivalents, net 1,687 2,659
Other, net 21 (108)
--------- ---------
Net cash provided (used) by investing activities (16,483) 1,415
--------- ---------
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three months ended March 31, 2004 and 2005
(In thousands)
(Unaudited)
2004 2005
(Restated) (Restated)
Cash flows from financing activities:
Indebtedness:
Borrowings $135,220 $ -
Principal payments (79,607) (82)
Deferred financing costs paid (35) (28)
Loans from affiliate:
Loans 11,348 -
Repayments (18,680) -
Valhi dividends paid (7,451) (12,424)
Distributions to minority interest (772) (1,477)
Issuance of NL common stock 7,664 2,413
Issuance of Valhi common stock and other, net 34 742
-------- ---------
Net cash provided (used) by financing activities 47,721 (10,856)
-------- ---------
Cash and cash equivalents - net change from:
Operating, investing and financing activities 36,954 (19,948)
Currency translation (1,265) (280)
Cash and equivalents at beginning of period 103,394 267,829
-------- ---------
Cash and equivalents at end of period $139,083 $247,601
======== =========
Supplemental disclosures - cash paid (received) for:
Interest, net of amounts capitalized $ 7,493 $ 6,224
Income taxes, net (16,414) 6,117
Noncash investing activity - note receivable
received upon disposal of business unit $ - $ 4,179
-------- ---------
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three months ended March 31, 2005
(In thousands)
(Unaudited)
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) (Restated) (Restated) (Restated) (Restated)
Balance at December 31, 2004:
Originally reported $1,242 $85,213 $864,821 $88,367 $45,561 $(57,779) $(37,942) $ 989,483
Adjustments:
Effect of TIMET's change
in accounting - - 7,092 - - - - 7,092
Prior period adjustments - 25,765 (59,429) (82,918) (9,181) 3,863 - (121,900)
------ ------- -------- -------- --------- -------- ------- --------
Balance, as restated 1,242 110,978 812,484 5,449 36,380 (53,916) (37,942) 874,675
Net income (restated) - - 24,790 - - - - 24,790
Dividends - - (12,424) - - - - (12,424)
Other comprehensive income
(loss), net (restated) - - - (168) (11) - - (179)
Other, net - 552 - - - - - 552
------ ------- -------- -------- --------- -------- ------- --------
Balance at March 31, 2005
(restated)
$1,242 $111,530 $824,850 $5,281 $36,369 $(53,916) $(37,942) $887,414
====== ======== ======== ====== ======= ======== ======== ========
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Organization and basis of presentation:
Restatements.
Effective January 1, 2005, TIMET 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, the Company's income from continuing operations in the
first quarter of 2004 is approximately $200,000, or nil per diluted share,
higher than previously reported, and the Company's consolidated stockholders'
equity as of December 31, 2004 is approximately $7.1 million higher than
previously reported.
On December 21, 2005, the Company and its audit committee concluded that
the Company would file this Quarterly Report on Form 10-Q/A for the quarter
ended March 31, 2005 to restate the Company's consolidated balance sheet as of
December 31, 2004 and March 31, 2005, and the Company's consolidated statements
of income, comprehensive income, cash flows and stockholders' equity for the
interim periods ended March 31, 2004 and 2005.
As previously disclosed, in January 1997 the Company transferred control of
the refined sugar operations previously conducted by the Company's wholly-owned
subsidiary, The Amalgamated Sugar Company, to Snake River Sugar Company, an
Oregon agricultural cooperative formed by certain sugarbeet growers in
Amalgamated's areas of operations. Pursuant to the transaction, Amalgamated
contributed substantially all of its net assets to the Amalgamated Sugar Company
LLC, a limited liability company controlled by Snake River, on a tax-deferred
basis in exchange for a non-voting ownership interest in the LLC. The cost basis
of the net assets transferred by Amalgamated to the LLC was approximately $34
million. As part of such transaction, Snake River made certain loans to Valhi
aggregating $250 million. Such loans from Snake River are collateralized by the
Company's interest in the LLC. Snake River's sources of funds for its loans to
Valhi, as well as for the $14 million it contributed to the LLC for its voting
interest in the LLC, included cash capital contributions by the grower members
of Snake River and $180 million in debt financing provided by Valhi, of which
$100 million was subsequently repaid in 1997 when Snake River obtained an equal
amount of third-party term loan financing. After such repayments, $80 million
principal amount of Valhi's loans to Snake River have remained outstanding since
June 30, 1997 through March 31, 2005.
The Company and Snake River share in distributions from the LLC up to an
aggregate of $26.7 million per year (the "base" level), with a preferential 95%
share going to the Company. To the extent the LLC's distributions are below this
base level in any given year, the Company is entitled to an additional 95%
preferential share of any future annual LLC distributions in excess of the base
level until such shortfall is recovered. Under certain conditions, the Company
is entitled to receive additional cash distributions from the LLC. The Company
may, at its option, require the LLC to redeem the Company's interest in the LLC
beginning in 2012, and the LLC has the right to redeem the Company's interest in
the LLC beginning in 2027. The redemption price is generally $250 million plus
the amount of certain undistributed income allocable to the Company. In the
event the Company requires the LLC to redeem the Company's interest in the LLC,
Snake River has the right to accelerate the maturity of and call Valhi's $250
million loans from Snake River.
The Company reports the cash distributions received from the LLC as
dividend income. The amount of such future distributions is dependent upon,
among other things, the future performance of the LLC's operations. Because the
Company receives preferential distributions from the LLC and has the right to
require the LLC to redeem its interest in the LLC for a fixed and determinable
amount beginning at a fixed and determinable date, the Company accounts for its
investment in the LLC as a debt security at its estimated fair value.
In 1997 when the Company obtained its interest in the LLC, the Company
concluded that the earnings process with respect to the refined sugar operations
contributed by the Company to the LLC was not complete. Accordingly, the Company
did not recognize any gain in earnings. The Company did treat its investment in
the LLC as equivalent to a SFAS No. 115 debt security. Thus, the excess of the
fair value of the Company's investment in the LLC over the $34 million cost
basis of such investment was recognized as a component of other comprehensive
income, net of applicable deferred income taxes. In estimating the fair value of
the Company's interest in the LLC, the Company considered, among other things,
the outstanding balance of the Company's loans to Snake River and the
outstanding balance of the Company's loans from Snake River, with the result
that the estimated fair value of the Company's LLC investment was deemed to be
$170 million ever since June 30, 1997. Under this accounting, the Company would
have reported a gain in earnings for financial reporting purposes at the time
its LLC interest was redeemed, with a corresponding reduction in accumulated
other income.
In connection with finalizing the preparation of the Company's consolidated
financial statements for the quarter ended September 30, 2005, the Company
re-evaluated its original conclusions regarding how it accounts for its
investment in the LLC. As a result, the Company has now concluded that a proper
application of accounting principles generally accepted in the United States of
America ("GAAP") would have been to recognize a gain in earnings in 1997 equal
to the difference between $250 million (the fair value of the Company's interest
in the LLC) and the $34 million cost basis of the net assets contributed to the
LLC, net of applicable deferred income taxes. This correction constitutes a
prior period adjustment under GAAP. Accordingly, the Company has retroactively
restated its consolidated balance sheet at March 31, 2005, as contained in this
Quarterly Report, to reflect this correction. The effect of this correction on
the Company's March 31, 2005 consolidated balance sheet is to (i) increase the
carrying value of the Company's investment in the LLC (included as part of
noncurrent marketable securities) by $80 million, (ii) increase noncurrent
deferred income tax liabilities by $31.2 million and (iii) increase total
stockholders' equity by $48.8 million (with retained earnings increasing by
$131.7 million and accumulated other comprehensive income related to marketable
securities decreasing by $82.9 million). A similar balance sheet adjustment
would be applicable to Valhi's previously-reported consolidated balance sheet at
December 31, 2004, and each consolidated balance sheet prior thereto until June
30, 1997. Under this revised accounting, the Company would not be expected to
report a gain in earnings for financial reporting purposes at the time its LLC
interest is redeemed, as the redemption price of $250 million is expected to
equal the carrying value of its investment in the LLC at the time of redemption.
As previously disclosed, prior to December 2003 Kronos Worldwide, Inc. was
a wholly-owned subsidiary of NL Industries, Inc., a majority-owned subsidiary of
the Company. In December 2003, NL completed the distribution of approximately
48.8% of Kronos' common stock on a pro-rata basis to its shareholders, including
Valhi, and during 2004 NL paid each of its four $.20 per share regular quarterly
dividends in the form of shares of Kronos common stock. In its previously-issued
consolidated financial statements, the Company accounted for its pro-rata share
of any current income tax resulting from the distribution of shares of Kronos
common stock to NL's stockholders as a direct charge to equity. In addition, the
Company has never recognized deferred income taxes with respect to the excess of
the GAAP book basis of its investment in Kronos over the income tax basis of
such shares. The Company has now concluded, among other things, that (i) a
portion of the current income taxes resulting from the distribution of shares of
Kronos common stock to NL's shareholders should be included in the Company's
provision for income taxes included in the determination of net income and (ii)
the Company should have commenced to recognize deferred income taxes with
respect to the excess of the GAAP book basis of its investment in Kronos over
the income tax basis of such shares starting in December 2003, concurrent with
NL's December 2003 distribution of 48.8% of Kronos' common stock (the first time
in which the Company owned shares of Kronos directly), including recognition of
such deferred income taxes with respect to the excess of the GAAP book basis of
its investment in Kronos over the income tax basis of such shares that existed
as of the date of such December 2003 distribution.
Accordingly, during the Registrant's close process for its fiscal quarter
ended September 30, 2005, the Registrant concluded that:
o its provision for income taxes included in the determination of income
from continuing operations was misstated by an aggregate of $2.6
million ($.02 per diluted share, net of minority interest) in the
first quarter of 2004 and by $5.0 million ($5.2 million, or $.04 per
diluted share, net of minority interest) in the first quarter of 2005;
o its provision for deferred income taxes included in the determination
of total other comprehensive income related to foreign currency
translation and pension liabilities, net of minority interest, was
misstated by an aggregate of $371,000 in the first quarter of 2004 and
by $84,000 in the first quarter of 2005;
o its provision for income taxes accounted for as a direct reduction to
stockholders' equity, net of minority interest, was misstated by
$553,000 in the first quarter of 2005; and
o with respect to its statement of changes in stockholders' equity, and
in addition to the effect of the items noted above, total
stockholders' equity was misstated by $121.9 million as of December
31, 2004,
in each case as they related to the appropriate provision for income taxes and
related items which should have been recognized in accordance with accounting
principles generally accepted in the United States of America ("GAAP") as
provided by the guidance contained in Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, principally with respect to the
following items:
o Deferred income taxes with respect to the income tax effect of the
excess of the GAAP book basis over the income tax basis of the
Registrant's investment in Kronos Worldwide, Inc., a majority-owned
subsidiary of the Registrant;
o Current income taxes related to distributions of shares of Kronos
common stock made by NL Industries, Inc., the Registrant's
majority-owned subsidiary, to NL's stockholders; and
o Current and deferred income tax provisions related to other items.
On December 22, 2005, the Company and its audit committee concluded that
the Company had failed to properly apply the guidance contained in SFAS No. 109
in so far as it related to these items.
This amendment was required to correct for the aggregate effect of these
misstatements. While the effect of these misstatements have no effect on the
Company's previously-reported total cash flows from operating, investing and
financing activities, these misstatements do have a significant effect on the
Company's provision for income taxes, related income tax accounts (principally
deferred income taxes) and stockholders' equity.
The following tables show (i) selected consolidated balance sheet data as
of December 31, 2004 and March 31, 2005, and selected consolidated statements of
income, comprehensive income, stockholders' equity and cash flow data for the
interim periods ended March 31, 2004 and 2005, in each case as reported before
the effect of the restatements discussed above, (ii) adjustments to such
consolidated financial statement data to reflect the aggregate effect of the
restatements discussed above as well as certain other immaterial items and (iii)
such consolidated financial statement data, as restated to reflect the aggregate
effect of the restatements. The previously reported amounts shown in the table
below (which are before the effect of the restatements discussed above) are as
reported in the Original Form 10-Q and include the impact of the restatement
discussed above related to TIMET's change in accounting for its inventories.
Valhi, Inc. and Subsidiaries
Selected Consolidated Balance Sheet Data
December 31, 2004
(In thousands)
(Unaudited)
December 31, 2004
--------------------------------------------------
Previously
reported Adjustments As restated
(In thousands)
Selected balance sheet items:
Noncurrent marketable securities $ 176,770 $ 80,000 $ 256,770
=========== ========= ==========
Total other noncurrent assets $ 1,158,553 $ 80,000 $1,238,553
=========== ========= ==========
Current receivable from affiliates $ 5,484 $ 47 $ 5,531
=========== ========= ==========
Total current assets $ 799,090 $ 47 $ 799,137
=========== ========= ==========
Noncurrent deferred income tax liabilities $ 165,577 $ 220,477 $ 386,054
=========== ========= ==========
Total noncurrent liabilities $ 1,143,961 $ 220,477 $1,364,438
=========== ========= ==========
Minority interest $ 158,240 $ (18,530) $139,710
=========== ========= ==========
Stockholders' equity:
Common stock $ 1,242 $ - $ 1,242
Additional paid-in capital 85,213 25,765 110,978
Retained earnings 871,913 (59,429) 812,484
Accumulated other comprehensive
income (loss)
Marketable securities 88,367 (82,918) 5,449
Currency translation 45,561 (9,181) 36,380
Pension liabilities (57,779) 3,863 (53,916)
Treasury stock (37,942) - (37,942)
----------- ----------- ----------
Total stockholders' equity $ 996,575 $ (121,900) $ 874,675
=========== ========= ==========
Valhi, Inc. and Subsidiaries
Selected Consolidated Balance Sheet Data
March 31, 2005
(In thousands)
(Unaudited)
March 31, 2005
Previously
reported Adjustments As restated
(In thousands)
Selected balance sheet items:
Noncurrent marketable securities $ 181,982 $ 80,000 $ 261,982
=========== ========= ==========
Total other noncurrent assets $ 1,191,259 $ 80,000 $1,271,259
=========== ========= ==========
Current receivable from affiliates $ 6,143 $ 47 $ 6,190
=========== ========= ==========
Total current assets $ 798,655 $ 47 $ 798,702
=========== ========= ==========
Noncurrent deferred income tax liabilities $ 169,142 $ 224,703 $ 393,845
=========== ========= ==========
Total noncurrent liabilities $ 1,111,556 $ 224,703 $1,336,259
=========== ========= ==========
Minority interest $ 169,788 $ (18,155) $151,633
=========== ========= ==========
Stockholders' equity:
Common stock $ 1,242 $ - $ 1,242
Additional paid-in capital 85,212 26,318 111,530
Retained earnings 889,517 (64,667) 824,850
Accumulated other comprehensive
income (loss)
Marketable securities 88,199 (82,918) 5,281
Currency translation 45,466 (9,097) 36,369
Pension liabilities (57,779) 3,863 (53,916)
Treasury stock (37,942) - (37,942)
----------- ----------- ---------
Total stockholders' equity $ 1,013,915 $ (126,501) $ 887,414
=========== ========= ==========
Valhi, Inc. and Subsidiaries
Selected Consolidated Income Statement Data
(In thousands)
(Unaudited)
Three months ended Three months ended
March 31, 2004 March 31, 2005
Previously Previously
reported Adjustments As restated reported Adjustments As restated
--------------------------------------------------------------------------------------------
(In thousands, except per share data)
Income from continuing operations
before income tax and minority
interest $ 6,192 $ - $ 6,192 $ 60,505 $ - $ 60,505
Provision for income taxes 778 2,653 3,431 24,973 4,973 29,946
Minority interest in after tax earnings 1,813 (20) 1,793 5,232 265 5,497
-------- -------- --------- -------- -------- --------
Income (loss) from
continuing operations 3,601 (2,633) 968 30,300 (5,238) 25,062
Discontinued operations 5 - 5 (272) - (272)
-------- -------- --------- -------- -------- --------
Net income (loss) $ 3,606 $ (2,633) $973 $ 30,028 $ (5,238) $ 24,790
========= ========= ========= ========= ========= ========
Earnings per share:
Basic net income per share $ .03 $ (.02) $ .01 $ .25 $ (.04) $ .21
========= ========= ========= ========= ========= ========
Diluted net income per share $ .03 $ (.02) $ .01 $ .25 $ (.04) $ .21
========= ========= ========= ========= ========= ========
Weighted average shares used:
Basic 120,190 120,190 120,223 120,223
Diluted 120,489 120,489 120,572 120,572
Valhi, Inc. and Subsidiaries
Selected Consolidated Statement of Comprehensive Income Data
(In thousands)
(Unaudited)
Three months ended March 31, 2004
Previously
reported Adjustments As restated
(In thousands)
Consolidated other comprehensive income:
Net income $ 3,606 $ (2,633) $ 973
======== ========= ========
Other comprehensive income, net of tax:
Marketable securities adjustment 1,268 - 1,268
Pension liabilities adjustment 309 - 309
Currency translation adjustment (2,332) 371 (1,961)
-------- --------- --------
Total other comprehensive income (755) 371 (384)
-------- --------- --------
Comprehensive income $ 2,851 $ (2,262) $ 589
======== ========= ========
Three months March 31, 2005
Previously
reported Adjustments As restated
(In thousands)
Consolidated other comprehensive income:
Net income (loss) $ 30,028 $ (5,238) $ 24,790
========= ========= =========
Other comprehensive income, net of tax:
Marketable securities adjustment (168) - (168)
Currency translation adjustment (95) 84 (11)
--------- --------- --------
Total other comprehensive income (263) 84 (179)
--------- --------- --------
Comprehensive income $ 29,765 $ (5,154) $ 24,611
========= ========= =========
Valhi, Inc. and Subsidiaries
Selected Consolidated Statement of Stockholders' Equity Data
(In thousands)
(Unaudited)
Total stockholders equity -
Three months ended March 31, 2005
Previously
reported Adjustments As restated
Balance at December 31, 2004 $ 996,575 $(121,900) $ 874,675
Net income 30,028 (5,238) 24,790
Other comprehensive income, net (263) 84 (179)
Income tax on distribution (553) 553 -
Other, net (11,872) - (11,872)
---------- ----------- ---------
Balance at March 31, 2005 $1,013,915 $ (126,501) $ 887,414
========= ========== =========
Valhi, Inc. and Subsidiaries
Selected Consolidated Statement of Cash Flow Data
(In thousands)
(Unaudited)
Three months ended March 31, 2004
Previously
reported Adjustments As restated
Items comprising cash flow from operating activities:
Net income $ 3,606 $ (2,633) $ 973
========= ========== =========
Deferred income taxes from continuing operations $(1,518) $ 2,055 $ 537
========= ========== =========
Minority interest from continuing
operations $1,813 $ (20) $ 1,793
========= ========== =========
Accounts with affiliates $ (1,977) $ 598 $ (1,379)
========= ========== =========
Total cash flow from operating
activities $ 5,719 $ - $ 5,719
========= ========== =========
Three months ended March 31, 2005
Previously
reported Adjustments As restated
Items comprising cash flow from operating activities:
Net income (loss) $ 30,028 $ (5,238) $ 24,790
========= ========== =========
Deferred income taxes from continuing operations $ 16,563 $ 4,309 $ 20,872
========= ========== =========
Minority interest from continuing
operations $5,232 $ 265 $ 5,497
========= ========== =========
Accounts with affiliates $ (474) $ 664 $ 190
========= ========== =========
Total cash flow from operating
activities $ (10,507) $ - $ (10,507)
========= ========== =========
Organization and basis of presentation.
The consolidated balance sheet of Valhi, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 2004 has been derived from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at March 31, 2005, and the consolidated statements of
income, comprehensive income, stockholders' equity and cash flows for the
interim periods ended March 31, 2004 and 2005, have been prepared by the
Company, without audit, in accordance with GAAP. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
state fairly the consolidated financial position, results of operations and cash
flows have been made.
The results of operations for the interim periods are not necessarily
indicative of the operating results for a full year or of future operations.
Certain information normally included in financial statements prepared in
accordance with GAAP has been condensed or omitted, and certain prior year
amounts have been reclassified to conform to the current year presentation. The
accompanying consolidated financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended December 31,
2004 (the "2004 Annual Report").
Contran Corporation holds, directly or through subsidiaries, approximately
91% of Valhi's outstanding common stock at March 31, 2005. 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.
As disclosed in the 2004 Annual Report, 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 16. 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 2004, 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). Net compensation
expense recognized by the Company in accordance with APBO No. 25 was
approximately $1.1 million and $120,000 in the first quarter of 2004 and 2005,
respectively.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in the 2004 and 2005 periods
presented 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
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, for all awards granted subsequent to January 1, 1995.
Three months
ended March 31,
2004 2005
(In millions, except
Per share amounts)
(Restated) (Restated)
Net income as reported $1.0 $24.8
Adjustments, net of applicable income
tax effects and minority interest:
Stock-based employee compensation expense
.6 .1
determined under APBO No. 25
Stock-based employee compensation expense (.2) (.1)
---- -----
determined under SFAS No. 123
Pro forma net income $1.4 $24.8
==== =====
Basic and diluted net income per share:
As reported $.01 $ .21
Pro forma .01 .21
Note 2 - Business segment information:
% owned by Valhi at
Business segment Entity March 31, 2005
Chemicals Kronos Worldwide, Inc. 93%
Component products CompX International Inc. 68%
Waste management Waste Control Specialists LLC 100%
Titanium metals TIMET 43%
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.
During the first quarter of 2005, NL sold approximately 467,000 shares of Kronos
common stock in market transactions for an aggregate of $19 million. See Note 8.
The Company's ownership of CompX is held directly by CompX Group, Inc, an
82.4%-owned subsidiary of NL. TIMET owns the remaining 17.6% of CompX Group.
CompX Group's sole asset consists of shares of CompX common stock representing
approximately 83% of the total number of CompX shares outstanding, and the
percentage ownership of CompX shown above represents NL's ownership interest in
CompX Group multiplied by CompX Group's ownership interest in CompX.
The Company's ownership of TIMET includes 40% owned directly by Tremont
LLC, a wholly-owned subsidiary of Valhi, and 3% owned directly by Valhi. In
addition, the Combined Master Retirement Trust, a collective investment trust
established by Valhi to permit the collective investment by certain master
trusts which fund certain employee benefits plans sponsored by Contran and
certain of its affiliates, owned an additional 12% of TIMET's outstanding common
stock at March 31, 2005. During the first quarter of 2005, Valhi purchased
additional shares of TIMET common stock in market transactions for approximately
$11.5 million.
TIMET owns an additional 2% of CompX, .5% of NL and less than .1% of
Kronos, and TIMET accounts for such CompX, NL and Kronos shares, as well as its
shares of CompX Group, as available-for-sale marketable securities carried at
fair value (with the fair value of TIMET's shares of CompX Group determined
based on the fair value of the underlying CompX shares held by CompX Group).
Because the Company does not consolidate TIMET, the shares of CompX Group,
CompX, NL and Kronos owned by TIMET are not considered as part of the Company's
consolidated investment in such companies.
Kronos (NYSE: KRO), NL (NYSE: NL), 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.
Three months ended
March 31,
2004 2005
(In millions)
Net sales:
Chemicals $263.3 $291.9
Component products 43.6 46.8
Waste management .8 2.5
Total net sales $307.7 $341.2
Operating income:
Chemicals $ 22.2 $ 43.6
Component products 2.5 4.1
Waste management (3.2) (2.8)
Total operating income 21.5 44.9
General corporate items:
Interest and dividend income 8.5 10.2
Securities transaction gains, net - 14.6
General expenses, net (9.0) (8.2)
Interest expense (15.6) (17.9)
5.4 43.6
Equity in:
TIMET .7 16.8
Other .1 .1
Income before income taxes $ 6.2 $ 60.5
Chemicals operating income, as presented above, differs from amounts
separately reported by Kronos due to amortization of purchase accounting basis
adjustments recorded by the Company. Similarly, the Company's equity in earnings
of TIMET differs from the Company's pro-rata share of TIMET's
separately-reported results. Component products operating income, as presented
below, may differ from amounts separately reported by CompX because the Company
defines operating income differently than CompX.
In March 2005, NL paid its $.25 per share regular quarterly dividend in the
form of shares of Kronos common stock in which approximately 266,000 shares, or
approximately .5% of Kronos' outstanding common stock, were distributed to NL
shareholders, including Valhi, in the form of a pro-rata dividend. NL's
distribution of such shares of Kronos common stock is taxable to NL, and NL is
required to recognize a taxable gain equal to the difference between the fair
market value of the shares of Kronos common stock distributed and NL's adjusted
tax basis in such stock at the date of distribution. Of the $3.9 million tax
liability recognized by NL with respect to the Kronos shares distributed,
$664,000 relates to the Kronos shares distributed to NL shareholders other than
Valhi and $3.3 million relates to the Kronos shares distributed to Valhi. The
taxable gain with respect to the shares of Kronos distributed to Valhi
(approximately 221,000 shares) is deferred at the Valhi level since Valhi and NL
are members of the same consolidated tax group for U.S. federal income tax
purposes, and such tax liability is not recognized in the Company's consolidated
financial statements. In accordance with GAAP, the $664,000 income tax related
to the Kronos shares distributed to NL shareholders other than Valhi has been
recognized as a component of the Company's provision for income taxes in the
first quarter of 2005. Completion of the distribution had no other impact on the
Company's consolidated financial position, results of operations or cash flows.
Note 3 - Marketable securities:
December 31, March 31,
2004 2005
(In thousands)
(Restated) (Restated)
Current assets - available for sale:
Restricted debt securities $ 9,446 $ 9,916
Other debt securities - 2,957
-------- --------
$ 9,446 $ 12,873
========= ========
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC $250,000 $250,000
Restricted debt securities 6,725 5,181
Other debt securities and common stocks 45 6,801
-------- --------
$256,770 $261,982
========= ========
The carrying value of the Company's investment in The Amalgamated Sugar
Company LLC at December 31, 2004, as presented herein, has been restated. See
Note 1 for a discussion of this restatement and a description of the LLC
interest.
Note 4 - Accounts and other receivables:
December 31, March 31,
2004 2005
(In thousands)
Accounts receivable $219,764 $242,058
Notes receivable 1,993 2,071
Allowance for doubtful accounts (3,826) (3,016)
-------- --------
$217,931 $241,113
======== ========
Note 5 - Inventories:
December 31, March 31,
2004 2005
(In thousands)
Raw materials:
Chemicals $ 45,961 $ 43,596
Component products 8,193 4,774
-------- --------
54,154 48,370
-------- --------
In process products:
Chemicals 16,612 17,256
Component products 10,827 9,776
-------- --------
27,439 27,032
-------- --------
Finished products:
Chemicals 131,161 138,943
Component products 9,696 6,215
-------- --------
140,857 145,158
-------- --------
Supplies (primarily chemicals) 40,964 40,438
-------- --------
$263,414 $260,998
======== ========
Note 6 - Accrued liabilities:
December 31, March 31,
2004 2005
(In thousands)
Current:
Employee benefits $ 53,295 $ 47,568
Environmental costs 21,316 22,761
Deferred income 5,276 3,751
Interest 243 11,142
Other 50,989 54,818
-------- --------
$131,119 $140,040
======== ========
Noncurrent:
Insurance claims and expenses $ 22,718 $ 23,838
Employee benefits 5,380 5,093
Deferred income 1,427 1,329
Asset retirement obligations 1,357 1,373
Other 10,179 7,826
-------- --------
$ 41,061 $ 39,459
======== ========
Note 7 - Other assets:
December 31, March 31,
2004 2005
(In thousands)
Investment in affiliates:
TIMET:
Common stock $ 55,425 $ 83,384
Preferred stock 183 183
55,608 83,567
-------- --------
TiO2 manufacturing joint venture 120,251 121,101
Other 13,867 13,870
-------- --------
$189,726 $218,538
======== ========
Loans and other receivables:
Snake River Sugar Company:
Principal $ 80,000 $ 80,000
Interest 38,294 39,592
Other 3,151 7,419
-------- --------
121,445 127,011
Less current portion 1,993 2,071
-------- --------
Noncurrent portion $119,452 $124,940
======== ========
Other noncurrent assets:
IBNR receivables $ 11,646 $ 12,617
Deferred financing costs 10,933 9,742
Waste disposal site operating permits 9,269 9,801
Refundable insurance deposit 2,483 2,483
Restricted cash equivalents 494 442
Other 17,501 19,518
-------- --------
$ 52,326 $ 54,603
======== ========
At March 31, 2005, the Company held 6.8 million shares of TIMET with a
quoted market price of $36.00 per share, or an aggregate market value of $245
million. At March 31, 2005, TIMET reported total assets of $764.2 million and
stockholders' equity of $445.3 million. TIMET's total assets at March 31, 2005
include current assets of $412.0 million, property and equipment of $231.9
million, marketable securities of $47.0 million and investment in joint ventures
of $25.2 million. TIMET's total liabilities at March 31, 2005 include current
liabilities of $195.1 million, accrued OPEB and pension costs aggregating $91.3
million and debt payable to TIMET Capital Trust I of $12.0 million. During the
first quarter of 2005, TIMET reported net sales of $155.2 million, operating
income of $19.4 million and income attributable to common stockholders of $38.1
million (2004 - net sales of $120.5 million, operating income of $3.3 million
and a loss attributable to common stockholders of $1.2 million). See Note 1.
See Note 1 for a discussion of the Company's loan to Snake River, and
various other relationships between the Company and Snake River.
Note 8 - Other income:
Three months ended
March 31,
2004 2005
(In thousands)
Securities earnings:
Dividends and interest $8,461 $10,175
Securities transactions, net (25) 14,607
-------- --------
8,436 24,782
Currency transactions, net 398 874
Other, net 867 981
-------- --------
$9,701 $26,637
======== ========
Securities transaction gains in 2005 relate primarily to NL's sale of
approximately 467,000 shares of Kronos common stock in market transactions for
aggregate proceeds of $19 million.
Note 9 - Long-term debt:
December 31, March 31,
2004 2005
(In thousands)
Valhi - Snake River Sugar Company $250,000 $250,000
-------- --------
Subsidiaries:
Kronos International Senior Secured Notes 519,225 493,015
Kronos European bank credit facility 13,622 12,946
Other 1,090 992
-------- --------
533,937 506,953
-------- --------
783,937 756,953
Less current maturities 14,412 13,701
-------- --------
$769,525 $743,252
======== ========
As previously reported in the 2004 Annual Report, Kronos International has
pledged 65% of the common stock or other ownership interests of certain of its
first-tier operating subsidiaries as collateral for its Senior Secured Notes.
Such operating subsidiaries are Kronos Titan GmbH, Kronos Denmark ApS, Kronos
Limited and Societe Industrielle Du Titane, S.A.
Note 10 - Accounts with affiliates:
December 31, March 31,
2004 2005
(In thousands)
(Restated) (Restated)
Current receivables from affiliates:
Contran:
Demand loan $ 4,929 $ 5,861
Income taxes 578 326
TIMET 24 -
Other - 3
------- -------
$ 5,531 $ 6,190
======= =======
Noncurrent receivable from affiliate -
loan to Contran family trust $10,000 $10,000
======= =======
Payables to affiliates:
Louisiana Pigment Company $ 8,844 $ 9,638
Contran - trade items 2,753 3,049
Other, net 10 113
------- -------
$11,607 $12,800
======= =======
Note 11 - Provision for income taxes:
Three months ended
March 31,
2004 2005
(Restated) (Restated)
(In millions)
Expected tax expense $ 2.2 $21.2
Incremental U.S. tax and rate differences on
equity in earnings 2.5 4.8
Non-U.S. tax rates .1 -
Income tax on distribution of shares of
Kronos common stock .6 .7
Excess of book basis over tax basis of shares of
Kronos common stock sold - 1.6
Change in deferred income tax valuation allowance (3.0) -
U.S. state income taxes, net - .3
Nondeductible expenses 1.0 1.2
Other, net - .1
------ -----
$ 3.4 $29.9
====== =====
Comprehensive provision for income taxes (benefit)
allocated to:
Income from continuing operations $ 3.4 $29.9
Discontinued operations - (.4)
Additional paid-in capital .6 .7
Other comprehensive income:
Marketable securities .1 .9
Currency translation (.5) (.2)
Pension liabilities .1 -
------ -----
$ 3.7 $30.9
====== =====
Certain of the Company's U.S. and non-U.S. tax returns are being examined
and tax authorities have or may propose tax deficiencies, including penalties
and interest. For example:
o NL's and NL's majority-owned subsidiary, NL Environmental Management
Services, Inc. ("EMS"), U.S. federal income tax returns for the years
1998 through 2000 have been audited by the U.S. tax authorities.
During the course of the audit, the IRS proposed a substantial tax
deficiency, including interest, related to a restructuring
transaction. To avoid protracted litigation, minimize the hazards of
such litigation and other considerations, NL and EMS applied to take
part in an IRS settlement initiative applicable to transactions
similar to the restructuring transaction. In April 2003, the IRS
notified NL and EMS that they had been accepted into such settlement
initiative. NL has reached an agreement with the IRS concerning the
settlement of this matter pursuant to which, among other things, NL
paid approximately $21 million, including interest, up front as a
partial payment of the settlement amount (which amount was paid in
April 2005 and is classified as a current liability at March 31,
2005), and NL will be required to recognize the remaining settlement
amount (approximately $15 million) ratably in its taxable income over
a 15-year time period beginning in 2004. NL and the IRS have signed
the settlement agreement, and the case is now closed.
o Kronos has received a preliminary tax assessment related to 1993 from
the Belgian tax authorities proposing tax deficiencies, including
related interest, of approximately euro 6 million ($8 million at March
31, 2005). Kronos has filed a protest to this assessment, and believes
that a significant portion of the assessment is without merit. The
Belgian tax authorities have filed a lien on the fixed assets of
Kronos' Belgian TiO2 operations in connection with this assessment. In
April 2003, Kronos received a notification from the Belgian tax
authorities of their intent to assess a tax deficiency related to 1999
that, including interest, is expected to be approximately euro 9
million ($12 million). Kronos believes the proposed assessment is
substantially without merit, and Kronos has filed a written response.
o The Norwegian tax authorities have notified Kronos of their intent to
assess tax deficiencies of approximately kroner 12 million ($2
million) relating to the years 1998 through 2000. Kronos has objected
to this proposed assessment.
o Kronos has received a preliminary tax assessment from the Canadian tax
authorities related to the years 1998 and 1999 proposing tax
deficiencies of Cdn. $11 million ($9 million). Kronos has filed a
protest and believes a significant portion of the assessment is
without merit.
No assurance can be given that these unresolved tax matters will be
resolved in the Company's favor in view of the inherent uncertainties involved
in settlement initiatives, court and tax proceedings. The Company believes that
it has provided adequate accruals for additional taxes and related interest
expense which may ultimately result from all such examinations and believes that
the ultimate disposition of such examinations should not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity.
Note 12 - Minority interest:
December 31, March 31,
2004 2005
(Restated) (Restated)
(In thousands)
Minority interest in net assets:
NL Industries $ 51,662 $ 57,424
Kronos Worldwide 29,569 35,304
CompX International 49,153 49,549
Subsidiary of NL 9,250 9,280
Subsidiary of Kronos 76 76
-------- --------
$139,710 $151,633
======== ========
Three months ended
March 31,
2004 2005
(Restated) (Restated)
(In thousands)
Minority interest in income -
continuing operations:
NL Industries $ 616 $3,228
Kronos Worldwide 681 1,534
CompX International 488 701
Subsidiary of NL - 30
Subsidiary of Kronos 8 4
------- ------
$1,793 $5,497
====== ======
Note 13 - Commitments and contingencies:
Lead pigment litigation - NL.
NL's former operations included the manufacture of lead pigments for use in
paint and lead-based paint. NL, other former manufacturers of lead pigments for
use in paint and lead-based paint, and the Lead Industries Association (which
discontinued business operations in 2002) have been named as defendants in
various legal proceedings seeking damages for personal injury, property damage
and governmental expenditures allegedly caused by the use of lead-based paints.
Certain of these actions have been filed by or on behalf of states, large U.S.
cities or their public housing authorities and school districts, and certain
others have been asserted as class actions. These lawsuits seek recovery under a
variety of theories, including public and private nuisance, negligent product
design, negligent failure to warn, strict liability, breach of warranty,
conspiracy/concert of action, aiding and abetting, enterprise liability, market
share liability, intentional tort, fraud and misrepresentation, violations of
state consumer protection statutes, supplier negligence and similar claims.
The plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and health concerns associated with the
use of lead-based paints, including damages for personal injury, contribution
and/or indemnification for medical expenses, medical monitoring expenses and
costs for educational programs. A number of cases are inactive or have been
dismissed or withdrawn. Most of the remaining cases are in various pre-trial
stages. Some are on appeal following dismissal or summary judgment rulings in
favor of the defendants. In addition, various other cases are pending (in which
NL is not a defendant) seeking recovery for injury allegedly caused by lead
pigment and lead-based paint. Although NL is not a defendant in these cases, the
outcome of these cases may have an impact on additional cases being filed
against NL in the future.
NL believes these actions are without merit, intends to continue to deny
all allegations of wrongdoing and liability and to defend against all actions
vigorously. NL has neither lost nor settled any of these cases. NL has not
accrued any amounts for pending lead pigment and lead-based paint litigation.
Liability that may result, if any, cannot reasonably be estimated. There can be
no assurance that NL will not incur liability in the future in respect of this
pending litigation in view of the inherent uncertainties involved in court and
jury rulings in pending and possible future cases. If any such future liability
were to be incurred, it could be material to the Company's consolidated
financial statements, results of operations and liquidity.
NL previously filed an action against certain of its former insurance
carriers for coverage with respect to defense costs related to certain specific
lead pigment litigation matters. This action was settled in 2000. NL is
continuing discussions with certain former insurance carriers for coverage with
respect to defense costs related to NL's remaining past and present lead pigment
litigation matters. Whether insurance coverage for defense costs will be found
to exist for lead pigment litigation depends on a variety of factors, and there
can be no assurance that NL will be successful in obtaining reimbursement for
past or future defense costs. NL has not considered any potential insurance
recoveries for lead pigment litigation in determining related accruals.
Environmental matters and litigation.
General. The Company's operations are governed by various environmental
laws and regulations. Certain of the Company's operations are and have been
engaged in the handling, manufacture or use of substances or compounds that may
be considered toxic or hazardous within the meaning of applicable environmental
laws and regulations. As with other companies engaged in similar businesses,
certain past and current operations and products of the Company have the
potential to cause environmental or other damage. The Company has implemented
and continues to implement various policies and programs in an effort to
minimize these risks. The Company's policy is to maintain compliance with
applicable environmental laws and regulations at all of its plants and to strive
to improve its environmental performance. From time to time, the Company may be
subject to environmental regulatory enforcement under U.S. and foreign statutes,
resolution of which typically involves the establishment of compliance programs.
It is possible that future developments, such as stricter requirements of
environmental laws and enforcement policies thereunder, could adversely affect
the Company's production, handling, use, storage, transportation, sale or
disposal of such substances. The Company believes all of its plants are in
substantial compliance with applicable environmental laws.
Certain properties and facilities used in the Company's former businesses,
including divested primary and secondary lead smelters and former mining
locations of NL, are the subject of civil litigation, administrative proceedings
or investigations arising under federal and state environmental laws.
Additionally, in connection with past disposal practices, the Company has been
named as a defendant, potential responsible party ("PRP") or both, pursuant to
the Comprehensive Environmental Response, Compensation and Liability Act, as
amended by the Superfund Amendments and Reauthorization Act ("CERCLA") and
similar state laws in various governmental and private actions associated with
waste disposal sites, mining locations, and facilities currently or previously
owned, operated or used by the Company or its subsidiaries, or their
predecessors, certain of which are on the U.S. EPA's Superfund National
Priorities List or similar state lists. These proceedings seek cleanup costs,
damages for personal injury or property damage and/or damages for injury to
natural resources. Certain of these proceedings involve claims for substantial
amounts. Although the Company may be jointly and severally liable for such
costs, in most cases it is only one of a number of PRPs who may also be jointly
and severally liable.
Environmental obligations are difficult to assess and estimate for numerous
reasons including the complexity and differing interpretations of governmental
regulations, the number of PRPs and the PRPs' ability or willingness to fund
such allocation of costs, their financial capabilities and the allocation of
costs among PRPs, the solvency of other PRPs, the multiplicity of possible
solutions, and the years of investigatory, remedial and monitoring activity
required. In addition, the imposition of more stringent standards or
requirements under environmental laws or regulations, new developments or
changes respecting site cleanup costs or allocation of such costs among PRPs,
solvency of other PRPs, the results of future testing and analysis undertaken
with respect to certain sites or a determination that the Company is potentially
responsible for the release of hazardous substances at other sites, could result
in expenditures in excess of amounts currently estimated by the Company to be
required for such matters. In addition, with respect to other PRPs and the fact
that the Company may be jointly and severally liable for the total remediation
cost at certain sites, the Company could ultimately be liable for amounts in
excess of its accruals due to, among other things, reallocation of costs among
PRPs or the insolvency of one or more PRPs. No assurance can be given that
actual costs will not exceed accrued amounts or the upper end of the range for
sites for which estimates have been made, and no assurance can be given that
costs will not be incurred with respect to sites as to which no estimate
presently can be made. Further, there can be no assurance that additional
environmental matters will not arise in the future. If any such future liability
were to be incurred, it could be material to 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 March 31, 2005, no receivables for recoveries have been recognized.
The exact time frame over which the Company makes payments with respect to
its accrued environmental costs is unknown and is dependent upon, among other
things, the timing of the actual remediation process that in part depends on
factors outside the control of the Company. At each balance sheet date, the
Company makes an estimate of the amount of its accrued environmental costs that
will be paid out over the subsequent 12 months, and the Company classifies such
amount as a current liability. The remainder of the accrued environmental costs
is classified as a noncurrent liability.
A summary of the activity in the Company's accrued environmental costs
during the first quarter of 2005 is presented in the table below.
Amount
(In thousands)
Balance at the beginning of the period $76,766
Additions charged to expense 2,197
Payments (3,234)
-------
Balance at the end of the period $75,729
=======
Amounts recognized in the balance sheet at the end of
the period:
Current liability $22,761
Noncurrent liability 52,968
-------
$75,729
=======
NL. 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 March 31, 2005, NL had
accrued $67 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 $91 million. NL's estimates of such liabilities have not been
discounted to present value.
At March 31, 2005, there are approximately 20 sites for which NL is unable
to estimate a range of costs. For these sites, generally the investigation is in
the early stages, and it is either unknown as to whether or not NL actually had
any association with the site, or if NL had association with the site, the
nature of its responsibility, if any, for the contamination at the site and the
extent of contamination. The timing on when information would become available
to NL to allow NL to estimate a range of loss is unknown and dependent on events
outside the control of NL, such as when the party alleging liability provides
information to NL.
At March 31, 2005, NL had $14 million in restricted cash, cash equivalents
and marketable debt securities held by special purpose trusts, the assets of
which can only be used to pay for certain of NL's future environmental
remediation and other environmental expenditures. (December 31, 2004 - $19
million). Use of such restricted balances does not affect the Company's
consolidated net cash flows.
Tremont. In July 2000 Tremont, entered into a voluntary settlement
agreement with the Arkansas Department of Environmental Quality and certain
other PRPs pursuant to which Tremont and the other PRPs will undertake certain
investigatory and interim remedial activities at a former mining site located in
Hot Springs County, Arkansas. Tremont currently believes that it has accrued
adequate amounts ($2.5 million at March 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 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. 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 2007. Currently, no reasonable estimate can be made of the cost of
any such final remediation measures, and accordingly Tremont has accrued no
amounts at March 31, 2005 for any such cost. The amount accrued at March 31,
2005 represents Tremont's estimate of the costs to be incurred through 2007 with
respect to the interim remediation measures.
TIMET. At March 31, 2005, TIMET had accrued approximately $4.6 million for
environmental cleanup matters, principally related to TIMET's facility in
Nevada. The upper end of the range of reasonably possible costs related to these
matters is approximately $7 million.
Other. The Company has also accrued approximately $6.4 million at March 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.
Reference is made to the 2004 Annual Report for a discussion of certain
other legal proceedings to which the Company is a party.
NL has been named as a defendant in various lawsuits in a variety of
jurisdictions, alleging personal injuries as a result of occupational exposure
primarily to products manufactured by formerly-owned operations of NL containing
asbestos, silica and/or mixed dust. Approximately 500 of these types of cases
involving a total of approximately 22,000 plaintiffs and their spouses remain
pending. Of these plaintiffs, approximately 4,700 are represented by four cases
pending in Mississippi state courts and approximately 5,000 are represented by
four cases that have been removed to federal court in Mississippi, where they
have been, or are in the process of being, transferred to the multi-district
litigation pending in the United States District Court for the Eastern District
of Pennsylvania. NL has not accrued any amounts for this litigation because
liability that might result to NL, if any, cannot be reasonably estimated. Based
on information available to NL, including facts concerning its historical
operations, the rate of new claims, the number of claims from which NL has been
dismissed and NL's prior experience in the defense of these matters, NL believes
that the range of reasonably possible outcomes of these matters will be
consistent with NL's historical costs with respect to these matters (which are
not material), and no reasonably possible outcome is expected to involve amounts
that are material to NL. NL has and will continue to vigorously seek dismissal
from each claim and/or a finding of no liability by NL in each case. In
addition, from time to time, NL has received notices regarding asbestos or
silica claims purporting to be brought against former subsidiaries of NL,
including notices provided to insurers with which NL has entered into
settlements extinguishing certain insurance policies. These insurers may seek
indemnification from NL.
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 NL 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, should not have a
material adverse effect on its consolidated financial position, results of
operations or liquidity.
Operating leases.
As noted in the 2004 Annual Report, 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, with approximately one-half of Kronos' current TiO2
production capacity, is located within Bayer's extensive manufacturing complex.
Rent for 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
the Leverkusen facility; 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.
Note 14 - Employee benefit plans:
Defined benefit plans. Certain subsidiaries maintain 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 components of
net periodic defined benefit pension cost are presented in the table below.
Three months ended
March 31,
2004 2005
(In thousands)
Service cost $ 1,669 $ 1,987
Interest cost 5,497 5,803
Expected return on plan assets (5,266) (5,744)
Amortization of prior service cost 141 154
Amortization of net transition obligations 143 140
Recognized actuarial losses 1,078 1,150
------- --------
$ 3,262 $ 3,490
======= =======
Postretirement benefits other than pensions. Certain subsidiaries provide
certain health care and life insurance benefits for eligible retired employees.
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. The components of net periodic OPEB cost are
presented in the table below.
Three months ended
March 31,
2004 2005
(In thousands)
Service cost $ 57 $ 55
Interest cost 660 483
Amortization of prior service credit (255) (232)
Recognized actuarial losses (gains) 45 (142)
------ -------
$ 507 $ 164
====== =======
Note 15 - Discontinued operations:
As discussed in the 2004 Annual Report, in December 2004 CompX's board of
directors committed to a formal plan to dispose of its Thomas Regout operations
in The Netherlands. Such operations, which previously were included in the
Company's component products operating segment (see Note 2), met all of the
criteria under GAAP to be classified as an asset held for sale at December 31,
2004, and accordingly the results of operations of Thomas Regout have been
classified as discontinued operations for all periods presented. The Company has
not reclassified its consolidated balance sheets or statements of cash flows. In
classifying the net assets of the Thomas Regout operations as an asset held for
sale, the Company concluded that the carrying amount of the net assets of such
operations exceeded the estimated fair value less costs to sell of such
operations, and accordingly in the fourth quarter of 2004 the Company recognized
a $6.5 million impairment charge to write-down its investment in the Thomas
Regout operations to its estimated net realizable value. Such charge represented
an impairment of goodwill.
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 Thomas Regout were approximately $860,000 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 the first quarter of 2005 includes a charge related
to such differential ($272,000, net of income tax benefit and minority
interest). During the first quarter of 2004, the Thomas Regout operations
reported net sales of $9.9 million, operating income of $400,000, interest
expense of $400,000 and a nominal amount of net income.
Note 16 - Accounting principles not yet implemented:
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 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 expected to be material, the effect of adopting SFAS No. 123R
is not expected to be significant in so far as it relates to existing stock
options. Should Valhi or its subsidiaries and affiliates, however, either grant
a significant number of options or modify, repurchase or cancel existing options
in the future, the effect on the Company's consolidated financial statements
could be material.
Impairment of investments. In June 2004, the Emerging Issues Task Force
("EITF") issued EITF No. 03-01, The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments. EITF No. 03-01, the effective date
of which is still pending based upon a deferral granted by the Financial
Accounting Standards Board, provides guidance for determining when an investment
covered by its scope is considered impaired, whether any impairment is other
than temporary and the date when an impairment loss is to be recognized. The
Company does not currently expect compliance with EITF No. 03-01 will have a
material affect on its consolidated financial statements, whenever it becomes
effective.
Note 17 - Stockholders' equity:
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 an additional 254,000
shares of its common stock under the repurchase program in market transactions
in April 2005 for an aggregate of $5.0 million.
-------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
-------------------------------------------------------------------------------
RESULTS OF OPERATIONS
General
The Company reported income from continuing operations of $25.1 million, or
$.21 per diluted share, in the first quarter of 2005 compared to income of $1.0
million, or $.01 per diluted share, in the first quarter of 2004.
The increase in the Company's diluted earnings per share from the first
quarter of 2004 compared to the first quarter of 2005 is due primarily to the
net effects of (i) higher chemicals operating income, (ii) higher component
products operating income, (iii) certain securities transaction gains, (iv)
certain income tax benefits recognized by TIMET and (v) current and deferred
provisions for income taxes related to the Company's investment in Kronos. The
Company currently believes its net income in 2005 will be lower than 2004 due
primarily to the effect of certain significant income tax benefits recognized
primarily in the second quarter of 2004.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts,
including, but not limited to, statements found in this Item 2 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations," are
forward-looking statements that represent management's beliefs and assumptions
based on currently available information. Forward-looking statements can be
identified by the use of words such as "believes," "intends," "may," "should,"
"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. The factors that could cause actual future results to differ
materially from those described herein are the risks and uncertainties discussed
in this Quarterly Report and those described from time to time in the Company's
other filings with the SEC include, but are not limited to, the following:
o Future supply and demand for the Company's products,
o The extent of the dependence of certain of the Company's businesses on
certain market sectors (such as the dependence of TIMET's titanium
metals business on the aerospace industry),
o The cyclicality of certain of the Company's businesses (such as
Kronos' TiO2 operations and TIMET's titanium metals operations),
o The impact of certain long-term contracts on certain of the Company's
businesses (such as the impact of TIMET's long-term contracts with
certain of its customers and such customers' performance thereunder
and the impact of TIMET's long-term contracts with certain of its
vendors on its ability to reduce or increase supply or achieve lower
costs),
o Customer inventory levels (such as the extent to which Kronos'
customers may, from time to time, accelerate purchases of TiO2 in
advance of anticipated price increases or defer purchases of TiO2 in
advance of anticipated price decreases, or the relationship between
inventory levels of TIMET's customers and such customers' current
inventory requirements and the impact of such relationship on their
purchases from TIMET),
o Changes in raw material and other operating costs (such as energy
costs),
o The possibility of labor disruptions,
o General global economic and political conditions (such as changes in
the level of gross domestic product in various regions of the world
and the impact of such changes on demand for, among other things,
TiO2),
o Competitive products and substitute products,
o Customer and competitor strategies,
o The impact of pricing and production decisions,
o Competitive technology positions,
o Fluctuations in currency exchange rates (such as changes in the
exchange rate between the U.S. dollar and each of the euro, the
Norwegian kroner and the Canadian dollar),
o Operating interruptions (including, but not limited to, labor
disputes, leaks, fires, explosions, unscheduled or unplanned downtime
and transportation interruptions),
o The ability of the Company to renew or refinance credit facilities,
o Uncertainties associated with new product development (such as TIMET's
ability to develop new end-uses for its titanium products),
o The ultimate outcome of income tax audits, tax settlement initiatives
or other tax matters,
o The ultimate ability to utilize income tax attributes, the benefit of
which has been recognized under the "more-likely-than-not" recognition
criteria (such as Kronos' ability to utilize its German net operating
loss carryforwards),
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o Government laws and regulations and possible changes therein (such as
changes in government regulations which might impose various
obligations on present and former manufacturers of lead pigment and
lead-based paint, including NL, with respect to asserted health
concerns associated with the use of such products),
o The ultimate resolution of pending litigation (such as NL's lead
pigment litigation and litigation surrounding environmental matters of
NL, Tremont and TIMET), and
o Possible future litigation.
Should one or more of these risks materialize (or the consequences of such a
development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected. The
Company disclaims any intention or obligation to update or revise any
forward-looking statement whether as a result of changes in information, future
events or otherwise.
Chemicals
Relative changes in Kronos' TiO2 sales and operating income during the 2004
and 2005 periods presented are primarily due to (i) relative changes in TiO2
average selling prices and (ii) relative changes in foreign currency exchange
rates. Selling prices (in billing currencies) for TiO2, Kronos' principal
product, were generally: decreasing during the first half of 2004 and increasing
in the last half of 2004 and the first quarter of 2005.
Three months ended
March 31, %
2004 2005 Change
(In $ millions)
Net sales $263.3 $291.9 +11%
Operating income 22.2 43.6 +96%
Ti02 operating statistics:
Sales volumes* 118 114 -3%
Production volumes* 117 122 +4%
Percentage change in Ti02 average selling
prices:
Using actual foreign currency exchange rates +13%
Impact of changes in foreign currency
exchange rates -5%
In billing currencies +8%
* Thousands of metric tons
Kronos' sales increased $28.6 million (11%) in the first quarter of 2005
compared to the first quarter of 2004 due to the net effects of higher average
TiO2 selling prices, lower TiO2 selling volumes and the favorable effect of
fluctuations in foreign currency exchange rates, which increased chemicals sales
by approximately $11 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 the first quarter
of 2005 were 8% higher as compared to the first quarter of 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 the first quarter of 2005 increased 13% compared to the first quarter
of 2004.
Kronos' sales are denominated in various currencies, including the U.S.
dollar, the euro, other major European currencies and the Canadian dollar. The
disclosure of the percentage change in Kronos' average TiO2 selling prices in
billing currencies (which excludes the effects of fluctuations in the value of
the U.S. dollar relative to other currencies) is considered a "non-GAAP"
financial measure under regulations of the SEC. The disclosure of the percentage
change in Kronos' average TiO2 selling prices using actual foreign currency
exchange rates prevailing during the respective periods is considered the most
directly comparable financial measure presented in accordance with GAAP ("GAAP
measure"). Kronos discloses percentage changes in its average TiO2 prices in
billing currencies because Kronos believes such disclosure provides useful
information to investors to allow them to analyze such changes without the
impact of changes in foreign currency exchange rates, thereby facilitating
period-to-period comparisons of the relative changes in average selling prices
in the actual various billing currencies. Generally, when the U.S. dollar either
strengthens or weakens against other currencies, the percentage change in
average selling prices in billing currencies will be higher or lower,
respectively, than such percentage changes would be using actual exchange rates
prevailing during the respective periods. The difference between the 13%
increase in Kronos' average TiO2 selling prices during the first quarter of 2005
as compared to the first quarter of 2004 using actual foreign currency exchange
rates prevailing during the respective periods (the GAAP measure), 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 in a tabular format (i) the
percentage change in Kronos' average TiO2 selling prices using actual foreign
currency exchange rates prevailing during the respective periods (the GAAP
measure), (ii) the percentage change in Kronos' average TiO2 selling prices in
billing currencies (the non-GAAP measure) and (iii) the percentage change due to
changes in foreign currency exchange rates (or the reconciling item between the
non-GAAP measure and the GAAP measure).
Kronos' TiO2 sales volumes in the first quarter of 2005 decreased 3%
compared to the first quarter of 2004, due primarily to lower volumes in export
markets. Demand for TiO2 has remained strong throughout 2004 and 2005, and while
Kronos believes that the strong demand is largely attributable to the end-use
demand of its customers, it is possible that some portion of the strong demand
resulted from customers increasing their inventory levels of TiO2 in advance of
implementation of announced or anticipated price increases. Kronos' operating
income comparisons were also favorably impacted by higher production levels,
which increased 4% in the first quarter of 2005 as compared to the same period
in 2004. Kronos' operating rates were near full capacity in both periods, and
Kronos' production volumes in the first quarter of 2005 were a new record for
Kronos for a first quarter.
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 $11 million in the first
quarter of 2005 as compared to the first quarter of 2004. 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 the first quarter of 2005 as compared to the same period in 2004.
Overall, currency exchange rate fluctuations resulted in a net $1 million
increase in Kronos' operating income in the first quarter of 2005 as compared to
the first quarter of 2004.
Reflecting the impact of partial implementation of prior price increase
announcements, Kronos' average TiO2 selling prices in billing currencies in the
first quarter of 2005 were 4% higher than the fourth quarter of 2004. Kronos
expects its TiO2 production volumes in 2005 will be slightly higher than its
2004 volumes, with sales volumes comparable to slightly lower in 2005 as
compared to 2004. Kronos' average TiO2 selling prices, which started to increase
during the second half of 2004 and continued to increase during the first
quarter of 2005, are expected to continue to increase during the remainder of
2005, and consequently Kronos currently expects its average TiO2 selling prices,
in billing currencies, will be higher in 2005 as compared to 2004. The
anticipated higher selling prices in 2005 reflect the expected continued
implementation of selling price announcements, including Kronos' latest price
increases announced in March 2005. The extent to which all of such price
increases, and any additional price increases which may be announced
subsequently in 2005, will be realized will depend on, among other things,
economic factors. Overall, Kronos expects it chemicals operating income in 2005
will be higher than 2004, due primarily to higher expected selling prices.
Kronos' expectations as to the future prospects of Kronos and the TiO2 industry
are based upon a number of factors beyond Kronos' control, including worldwide
growth of gross domestic product, competition in the marketplace, unexpected or
earlier-than-expected capacity additions and technological advances. If actual
developments differ from Kronos' expectations, Kronos' results of operations
could be unfavorably affected.
Kronos' efforts to debottleneck its production facilities to meet long-term
demand continues to prove successful. Such debottlenecking efforts included,
among other things, the addition of back-end finishing capacity to be able to
process a larger quantity of the base TiO2 produced and equipment upgrades and
enhancements 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 2005 is approximately
500,000 metric tons, with some slight additional capacity available in 2006
through its continued debottlenecking efforts.
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 $4.0 million in the first quarter of
2004 and $4.4 million in the first quarter of 2005.
Component products
Three months ended
March 31, %
2004 2005 Change
(In millions)
Net sales $43.6 $46.8 +7%
Operating income 2.5 4.1 +64%
Component products sales were higher in the first quarter of 2005 as
compared to the first quarter of 2004 due primarily to higher selling prices
across all product lines. During the first quarter of 2005, sales of slide and
ergonomic products increased 16% and 10%, respectively, while sales of security
products decreased 1%. The percentage changes in both precision slide and
ergonomic products include the impact resulting from changes in foreign currency
exchange rates. Sales of security products are generally denominated in U.S.
dollars.
Component products operating income comparisons in 2005 were favorably
impacted by the effect of certain cost reduction initiatives previously
undertaken. Component products operating income comparisons were also favorably
impacted by the net effects of increases in the cost of steel (the primary raw
material for CompX's products) and a favorable change in product mix of security
products.
CompX has substantial operations and assets located outside the United
States in Canada and Taiwan. A portion of CompX's sales generated from its
non-U.S. operations are denominated in currencies other than the U.S. dollar,
principally the Canadian dollar and the New Taiwan dollar. In addition, a
portion of CompX's sales generated from its non-U.S. operations (principally in
Canada) are denominated in the U.S. dollar. Most raw materials, labor and other
production costs for such non-U.S. operations are denominated primarily in local
currencies. Consequently, the translated U.S. dollar values of CompX's foreign
sales and operating results are subject to currency exchange rate fluctuations
which may favorably or unfavorably impact reported earnings and may affect
comparability of period-to-period operating results. During the first quarter of
2005, currency exchange rate fluctuations did not significantly affect
comparisons with 2004.
While demand has stabilized across most of CompX's product segments,
certain customers are seeking lower cost Asian sources as alternatives to
CompX's products. CompX believes the impact of this will be mitigated through
its ongoing initiatives to expand both new products and new market
opportunities. Asian-sourced competitive pricing pressures are expected to
continue to be a challenge as Asian manufacturers, particularly those located in
China, gain market share. CompX has responded to the competitive pricing
pressure in part by reducing production cost through product reengineering,
improvement in manufacturing processes or moving production to lower-cost
facilities including CompX's 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 pricing pressures from Asian competitors.
Additionally, CompX's cost for steel continues to be unstable due to the
continued high demand and shortages in various parts of the world. While CompX
has thus far been able to pass a majority of its higher raw material costs on to
its customers through price increases and surcharges, there is no assurance that
it would be able to continue to pass along any additional higher costs to its
customers. The price increases and surcharges may accelerate the efforts of some
of CompX's customers to find less expensive products from foreign manufacturers.
CompX will continue to focus on cost improvement initiatives, utilizing lean
manufacturing techniques and prudent balance sheet management in order to
minimize the impact of lower sales, particularly to the office furniture
industry, and to develop value-added customer relationships with an additional
focus on sales of CompX's higher-margin ergonomic computer support systems to
improve operating results. These 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
Three months ended
March 31,
2004 2005
(In millions)
Net sales $ .8 $ 2.5
Operating loss (3.2) (2.8)
Waste management sales increased, and its operating loss declined, in the
first quarter of 2005 as compared to the first quarter of 2004 due to higher
utilization of waste management services, offset in part by higher operating
costs. Waste Control Specialists also continues to explore opportunities to
obtain certain types of new business (including treatment and storage of certain
types of waste) that, if obtained, could help to further increase its sales, and
decrease its operating loss, in the remainder of 2005.
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 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 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 will begin 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 would 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 expects the TDSHS will issue a final decision on the license
application by the end of 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.
Equity in earnings of TIMET
Three months ended
March 31,
2004 2005
(In millions)
TIMET historical:
Net sales $120.5 $155.2
====== ======
Operating income $ 3.3 $ 19.4
Other general corporate, net .7 .7
Interest expense (4.3) (.7)
------ ------
(.3) 19.4
Income tax benefit(expense) (.5) 22.9
Minority interest (.4) (.9)
Dividends on preferred stock - (3.3)
------ ------
Net income (loss) $ (1.2) $ 38.1
====== ======
Equity in earnings of TIMET $ .7 $ 16.8
====== ======
TIMET reported higher sales and operating income in the first quarter of
2005 as compared to the first quarter of 2004, due in part to a 1% increase in
sales volumes of melted products (ingot and slab), a 6% increase in sales
volumes of mill products and 27% and 19% increases in average selling prices for
melted and mill products, respectively.
TIMET's operating results in the first quarter of 2004 include $1.9 million
of income related to a change in TIMET's vacation policy. TIMET's operating
results comparisons were favorably impacted by improved plant operating rates,
which increased from 73% in the first quarter of 2004 to 80% in the first
quarter of 2005, and TIMET's continued cost management efforts. In addition,
TIMET's operating results comparisons were negatively impacted by higher costs
for raw materials (scrap and alloys) and energy and a $1.2 million noncash
impairment charge related to certain abandoned manufacturing equipment of TIMET.
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 asset in such jurisdictions now meet the "more-likely-than-not"
recognition criteria. Accordingly, TIMET's income tax benefit in the first
quarter of 2005 includes a $29.9 million benefit ($7.9 million, or $.07 per
diluted share, net of minority interest to Valhi) related to reversal of the
valuation allowances attributable to such deferred income tax assets. TIMET
expects the remaining U.S. and U.K. valuation allowances (other than with
respect to TIMET's U.S. capital loss carryforward) aggregating approximately
$15.4 million will be reversed ratably during the final three quarters of 2005
in accordance with the GAAP requirements of accounting for income taxes at
interim dates.
Over the past several quarters, TIMET has seen the availability of raw
materials tighten, and, consequently, the prices for such raw material increase.
TIMET currently expects that a shortage in raw materials is likely to continue
throughout 2005 and into 2006, which could limit TIMET's ability to produce
enough titanium products to fully meet customer demand. In addition, TIMET has
certain customer long-term agreements that limit TIMET's ability to pass on all
of its increased raw material costs to all of its customers. In May 2005, TIMET
announced its 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 3,600 metric tons of
sponge annually, an increase of approximately 40% over the current capacity
levels. In the nearer term, the continued tightening TIMET is currently seeing
in the availability of titanium sponge and scrap is leading TIMET to evaluate
the possible need to allocate the available supply of its products among
customers on a fair and reasonable basis until these raw material shortages
abate.
TIMET currently expects its 2005 sales will range from $700 million to $730
million, which is higher than TIMET's previous expectations due primarily to
higher expected average selling prices. TIMET's cost of sales is affected by a
number of factors including customer and product mix, material yields, plant
operating rates, raw material costs, labor and energy costs. Raw material costs,
which include sponge, scrap and alloys, represent the largest portion of TIMET's
manufacturing cost structure, and, as previously discussed, significant
continued raw material cost increases are expected to continue during 2005.
Scrap and certain alloy prices have more than doubled from year ago prices, and
increased energy costs also continue to have negative impact on gross margin.
TIMET currently expects its production volumes will continue to increase in
2005, with overall capacity utilization expected to approximate 80% in 2005 (as
compared to 75% in 2004). However, practical capacity utilization measures can
vary significantly based on product mix.
TIMET anticipates that Boeing will purchase a significantly higher amount
of metal during 2005 as compared to 2004 and, therefore, expects the amount of
take-or-pay income recognized during 2005 to decrease to about $17 million.
Overall, TIMET presently expects its operating income for 2005 will be between
$70 million to $85 million. Dividends on TIMET's Series A Preferred Stock should
approximate $13.2 million in 2005, with TIMET currently expecting net income
attributable to common stockholders to range from $80 million to $95 million.
TIMET's net income estimates include a net $12.6 million non-operating gain
currently expected to be recognized in the second quarter of 2005 related to the
sale of certain real property adjacent to TIMET's Nevada facility, which
transaction closed in the fourth quarter of 2004. TIMET's net income estimates
also include the benefit of reversing the remaining U.S. and U.K. valuation
allowances (other than with respect to TIMET's U.S. capital loss carryforward)
aggregating $15.4 million during the remainder of 2005, as discussed above.
The Company accounts for its interest in TIMET by the equity method. The
Company's equity in earnings of TIMET differs from the amounts that would be
expected by applying the Company's ownership percentage to TIMET's
separately-reported earnings because of the effect of amortization of purchase
accounting adjustments made by the Company in conjunction with the Company's
acquisitions of its interests in TIMET. Amortization of such basis differences
generally increases earnings (or reduces losses) attributable to TIMET as
reported by the Company, and aggregated $1.2 million and $1.3 million in the
first quarter of 2004 and 2005, respectively.
General corporate and other items
General corporate interest and dividend income. General corporate interest
and dividend income in the first quarter of 2005 was higher as compared to the
first quarter of 2004 due primarily to a higher level of funds available for
investment. A significant portion of the Company's general corporate interest
and dividend income relates to distributions received from The Amalgamated Sugar
Company LLC and interest income on the Company's $80 million loan to Snake River
Sugar Company. See Notes 3 and 7 to the Consolidated Financial Statements.
Aggregate general corporate interest and dividend income in the remainder of
2005 is currently expected to be comparable to slightly higher as compared to
the same periods in 2004, with distributions from The Amalgamated Sugar Company
LLC in 2005 expected to be comparable to the aggregate amount received in 2004.
Securities transactions. Net securities transactions gains in the first
quarter of 2005 relate principally to a $14.6 million 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 transactions. See Notes 2
and 8 to the Consolidated Financial Statements.
In April 2005, Kronos sold its passive interest in a Norwegian smelting
operation, which had a nominal carrying value for financial reporting purposes,
for approximately $5 million. Kronos expects to recognize a gain of
approximately $5 million related to such sale in the second quarter of 2005.
General corporate expenses. Net general corporate expenses in the first
quarter of 2005 were $800,000 lower than the first quarter of 2004 due primarily
to lower environmental remediation and legal expenses of NL. Net general
corporate expenses in calendar 2005 are currently expected to be higher as
compared to calendar 2004, primarily due to higher expected litigation and
related expenses of NL for the remainder of 2005. However, obligations for
environmental remediation obligations are difficult to assess and estimate, and
no assurance can be given that actual costs will not exceed accrued amounts or
that costs will not be incurred in the future with respect to sites for which no
estimate of liability can presently be made. See Note 13 to the Consolidated
Financial Statements.
Interest expense. The Company has a significant amount of indebtedness
denominated in the euro, including Kronos International's ("KII")
euro-denominated Senior Secured Notes (euro 375 million outstanding at March 31,
2005). Accordingly, the reported amount of interest expense will vary depending
on relative changes in foreign currency exchange rates. Interest expense in the
first quarter of 2005 was higher than the same period of 2004 due primarily to
the interest expense associated with the additional euro 90 million 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 both periods by
approximately $500,000.
Assuming interest rates and foreign currency exchange rates do not increase
significantly from current levels, interest expense in the remainder of 2005 is
currently expected to be higher than the same periods of 2004 due primarily to
the effect of the issuance of an additional euro 90 million principal amount of
KII Senior Secured Notes in November 2004.
Provision for income taxes. The principal reasons for the difference
between the Company's effective income tax rates and the U.S. federal statutory
income tax rates are explained in Note 11 to the Consolidated Financial
Statements. As discussed in Note 1 to the Consolidated Financial Statements, the
Company's consolidated financial statements have been restated, including
significant changes in the Company's previously-reported provision for income
taxes.
As previously disclosed, 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 $1.9 million in
the first quarter of 2004 and $4.1 million in the first quarter of 2005. In
addition, the Company's provision for income taxes in the first quarter of 2004
and the first quarter of 2005 includes an aggregate $598,000 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.
At March 31, 2005, Kronos has the equivalent of $633 million and $205
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 the 2004 Annual Report, during 2004 Kronos concluded the benefit of
such net carryforwards met the more-likely-than-not recognition criteria of
GAAP, and accordingly in 2004 Kronos reversed the deferred income tax asset
valuation allowance related to such German carryforwards and other net
deductible temporary differences related to Germany. Because the benefit of such
net operating loss carryforwards and other deductible temporary differences in
Germany has now been recognized, the Company's effective income tax rate in 2005
is higher than its effective income tax rate in 2004, although its current and
future cash income tax rate was not affected by the reversal of the valuation
allowance. Prior to the complete utilization of such carryforwards, it is
possible that the Company might conclude in the future that the benefit of such
carryforwards would no longer meet the more-likely-than-not recognition
criteria, at which point the Company would be required to recognize a valuation
allowance against the then-remaining tax benefit associated with the
carryforwards.
Minority interest. See Note 12 to the Consolidated Financial Statements.
Minority interest in NL's subsidiary relates to NL's majority-owned
environmental management subsidiary, NL Environmental Management Services, Inc.
("EMS"). EMS was established in 1998, at which time EMS contractually assumed
certain of NL's environmental liabilities. EMS' earnings are based, in part,
upon its ability to favorably resolve these liabilities on an aggregate basis.
The shareholders of EMS, other than NL, actively manage the environmental
liabilities and share in 39% of EMS' cumulative earnings. NL continues to
consolidate EMS and provides accruals for the reasonably estimable costs for the
settlement of EMS' environmental liabilities.
Discontinued operations. See Note 15 to the Consolidated Financial
Statements.
Accounting principles not yet implemented. See Note 16 to the Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Summary
The Company's primary source of liquidity on an ongoing short-term and
long-term 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, (iv) pay dividends or (v) repurchase shares of its common stock.
At March 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) Kronos International's euro-denominated Senior Secured Notes
(equivalent of $485 million principal amount outstanding) due in 2009 and (iii)
Kronos International's European credit facility (the equivalent of $12.9 million
outstanding) due in June 2005. Kronos International expects to seek a renewal of
its European credit facility during the second quarter of 2005. Accordingly, the
Company does not currently expect that a significant amount of its cash flows
from operating activities generated during 2005 will be required to be used to
repay indebtedness during 2005.
Based upon the Company's expectations for the industries in which its
subsidiaries and affiliates operate, and the anticipated demands on the
Company's cash resources as discussed herein, the Company expects to have
sufficient liquidity to meet its obligations including operations, capital
expenditures, debt service 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, 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 flow from operations from period
to period, as the income statement impact of such items may occur in a different
period from when the underlying cash transaction occurs. For example, raw
materials may be purchased in one period, but the payment for such raw materials
may occur in a subsequent period. Similarly, inventory may be sold in one
period, but the cash collection of the receivable may occur in a subsequent
period. Relative changes in accounts receivable are affected by, among other
things, the timing of sales and the collection of the resulting receivable.
Relative changes in inventories, accounts payable and accrued liabilities are
affected by, among other things, the timing of raw material purchases and the
payment for such purchases and the relative difference between production
volumes and sales volumes. Relative changes in accrued environmental costs are
affected by, among other things, the period in which recognition of the
environmental accrual is recognized and the period in which the remediation
expenditure is actually made.
Cash flows from operating activities decreased from a generation of cash of
$5.7 million in the first quarter of 2004 to a use of cash of $10.5 million in
the first quarter of 2005. This $16.2 million net decrease is due primarily to
the net effects of (i) higher net income of $23.8 million, (ii) higher net
securities transaction gains of $14.6 million, (iii) a higher provision for
deferred income taxes of $20.0 million, (iv) higher minority interest of $3.5
million, (v) higher equity in earnings of TIMET of $16.1 million, (vi) lower net
cash distributions from the TiO2 manufacturing joint venture of $2.7 million,
(vii) higher net cash paid for income taxes of $22.5 million, due in large part
to a $20.1 million tax refund received by Kronos in 2004.
Valhi does not have complete access to the cash flows of certain 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).
Three months ended
March 31,
2004 2005
(In millions)
Cash provided (used) by operating activities:
Kronos $ 19.1 $ (5.0)
CompX 3.4 1.9
Waste Control Specialists (2.2) (2.5)
NL Parent .6 (4.5)
Tremont (.4) (.7)
Valhi Parent 9.7 13.4
Other (.1) -
Eliminations (24.4) (13.1)
------ ------
$ 5.7 $(10.5)
====== ======
Investing and financing activities. Approximately 43% of the Company's
consolidated capital expenditures in the first quarter of 2005 relate to Kronos,
42% relate to CompX and substantially all of the remainder relate to Waste
Control Specialists. During the first quarter of 2005, (i) Valhi purchased
shares of TIMET common stock in market transactions for $11.5 million, (ii) NL
sold shares of Kronos common stock in market transactions for $19 million, (iii)
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), (iv)
Valhi loaned a net $900,000 to Contran and (v) the Company made net purchases of
marketable securities of $9.7 million. See Notes 2 and 15 to the Consolidated
Financial Statements.
Valhi, which increased is regular quarterly dividend from $.06 per share to
$.10 per share in the first quarter of 2005, paid aggregate cash dividends of
$12.4 million in the first quarter of 2005. Distributions to minority interest
in the first quarter of 2005 are primarily comprised of Kronos cash dividends
paid to shareholders other than Valhi 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, CompX and Valhi common stock
issued upon exercise of stock options.
At March 31, 2005, unused credit available under existing credit facilities
approximated $287.6 million, which was comprised of: CompX - $47.5 million under
its revolving credit facility; Kronos - $89 million under its European credit
facility, $11 million under its Canadian credit facility, $40 million under its
U.S. credit facility and $3 million under other non-U.S. facilities; and Valhi -
$97.1 million under its revolving bank credit facility.
Provisions contained in certain of the Company's credit agreements could
result in the acceleration of the applicable indebtedness prior to its stated
maturity for reasons other than defaults from failing to comply with typical
financial covenants. For example, certain credit agreements allow the lender to
accelerate the maturity of the indebtedness upon a change of control (as
defined) of the borrower. The terms of Valhi's revolving bank credit facility
could require Valhi to either reduce outstanding borrowings or pledge additional
collateral in the event the fair value of the existing pledged collateral falls
below specified levels. In addition, certain credit agreements could result in
the acceleration of all or a portion of the indebtedness following a sale of
assets outside the ordinary course of business. Other than operating leases,
neither Valhi nor any of its subsidiaries or affiliates are parties to any
off-balance sheet financing arrangements.
Chemicals - Kronos
At March 31, 2005, Kronos had cash, cash equivalents and marketable debt
securities of $42.1 million, including restricted balances of $3.7 million, and
Kronos had approximately $143 million available for borrowing under its U.S.,
Canadian and European credit facilities. Based upon Kronos' expectations for the
TiO2 industry and anticipated demands on Kronos' cash resources as discussed
herein, Kronos expects to have sufficient liquidity to meet its future
obligations including operations, capital expenditures, debt service and current
dividend policy. To the extent that actual developments differ from Kronos'
expectations, Kronos' liquidity could be adversely affected.
At March 31, 2005, Kronos' outstanding debt was comprised of (i) $493.0
million related to KII's Senior Secured Notes, (ii) $12.9 million related to
Kronos International's European revolving bank credit facility and (iii)
approximately $292,000 of other indebtedness.
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions significantly impact Kronos' earnings and operating cash
flows. Cash flows from operations is considered the primary source of liquidity
for Kronos. Changes in TiO2 pricing, production volumes and customer demand,
among other things, could significantly affect the liquidity of Kronos.
See Note 11 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 13 to the
Consolidated Financial Statements with respect to certain legal proceedings with
respect to Kronos.
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. To manage
such exchange rate risk, at March 31, 2005, Kronos held a contract, which
matured in April 2005, to exchange an aggregate of U.S. $5 million for an
equivalent amount of Canadian dollars at an exchange rate of Cdn. $1.24 per U.S.
dollar. At March 31, 2005, the actual exchange rate was Cdn. $1.21 per U.S.
dollar. The estimated fair value of such foreign currency forward contracts at
March 31, 2005 is insignificant.
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.
As disclosed in the 2004 Annual Report, Kronos International may redeem up
to 35% of the Senior Secured Notes on or before June 30, 2005 with the net
proceeds of a qualified public offering of equity securities of either Kronos
International or Kronos Worldwide. Kronos International currently has no plans
to so redeem the Senior Secured Notes, although until the June 30, 2005 date
passes, it retains the right to so redeem the Senior Secured Notes.
Based upon Kronos' expectations for the TiO2 industry and anticipated
demand for its cash resources as discussed herein, Kronos expects to have
sufficient short-term and long-term liquidity to meet its obligations including
operations, capital expenditures, debt service and dividends. To the extent that
actual developments differ from Kronos' expectations, Kronos' liquidity could be
adversely affected.
Kronos periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and availability of resources in view of, among other
things, its dividend policy, its debt service and capital expenditure
requirements and estimated future operating cash flows. As a result of this
process, Kronos has in the past and may in the future seek to reduce, refinance,
repurchase or restructure indebtedness, raise additional capital, repurchase
shares of its common stock, modify its dividend policy, restructure ownership
interests, sell interests in subsidiaries or other assets, or take a combination
of such steps or other steps to manage its liquidity and capital resources. In
the normal course of its business, Kronos may review opportunities for the
acquisition, divestiture, joint venture or other business combinations in the
chemicals or other industries, as well as the acquisition of interests in, and
loans to, related entities. In the event of any such transaction, Kronos may
consider using available cash, issuing equity securities or increasing
indebtedness to the extent permitted by the agreements governing Kronos'
existing debt.
Kronos has substantial operations located outside the United States for
which the functional currency is not the U.S. dollar. As a result, the reported
amounts of Kronos' assets and liabilities related to its non-U.S. operations,
and therefore Kronos' consolidated net assets, will fluctuate based upon changes
in currency exchange rates.
NL Industries
At March 31, 2005, NL (exclusive of CompX) had cash, cash equivalents and
marketable debt securities of $114.5 million, including restricted balances of
$17.5 million. Of such restricted balances, $14.0 million was held by special
purpose trusts, the assets of which can only be used to pay for certain of NL's
future environmental remediation and other environmental expenditures. See Note
13 to the Consolidated Financial Statements.
See Note 11 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 13 to the Consolidated Financial Statements and Part II,
Item 1, "Legal Proceedings" with respect to certain legal proceedings and
environmental matters with respect to NL.
In addition to those legal proceedings described in Note 13 to the
Consolidated Financial Statements, various legislation and administrative
regulations have, from time to time, been proposed that seek to (i) impose
various obligations on present and former manufacturers of lead pigment and
lead-based paint with respect to health concerns associated with the use of such
products and (ii) effectively overturn court decisions in which NL and other
pigment manufacturers have been successful. Examples of such proposed
legislation include bills which would permit civil liability for damages on the
basis of market share, rather than requiring plaintiffs to prove that the
defendant's product caused the alleged damage, and bills which would revive
actions barred by the statute of limitations. While no legislation or
regulations have been enacted to date that are expected to have a material
adverse effect on NL's consolidated financial position, results of operations or
liquidity, imposition of market share liability or other legislation could have
such an effect.
NL previously filed an action against certain of its former insurance
carriers for coverage with respect to defense costs related to certain lead
pigment litigation matters. This action was settled in 2000. NL is continuing
discussions with certain former insurance carriers for coverage with respect to
defense costs related to NL's remaining past and present lead pigment litigation
matters. Whether insurance coverage for defense costs will be found to exist for
lead pigment litigation depends on a variety of factors, and there can be no
assurance that NL will be successful in obtaining reimbursement for past or
future defense costs. NL has not considered any potential insurance recoveries
for lead pigment litigation in determining related accruals. Any such insurance
recoveries would be recognized when their receipt is deemed probable.
NL periodically evaluates its liquidity requirements, alternative uses of
capital, capital needs and availability of resources in view of, among other
things, its dividend policy, its debt service and capital expenditure
requirements and estimated future operating cash flows. As a result of this
process, NL has in the past and may in the future seek to reduce, refinance,
repurchase or restructure indebtedness, raise additional capital, repurchase
shares of its common stock, modify its dividend policy, restructure ownership
interests, sell interests in subsidiaries or other assets, or take a combination
of such steps or other steps to manage its liquidity and capital resources. In
the normal course of its business, NL may review opportunities for the
acquisition, divestiture, joint venture or other business combinations in the
chemicals or other industries, as well as the acquisition of interests in, and
loans to, related entities. In the event of any such transaction, NL may
consider using its available cash, issuing its equity securities or increasing
its indebtedness to the extent permitted by the agreements governing NL's
existing debt.
Component products - CompX International
CompX 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 15 to the Consolidated Financial Statements. CompX believes that its
cash on hand, together with cash generated from operations and borrowing
availability under its bank credit facility, will be sufficient to meet CompX's
liquidity needs for working capital, capital expenditures, debt service and
dividends. To the extent that CompX's actual operating results or developments
differ from CompX's expectations, CompX's liquidity could be adversely affected.
CompX, which had suspended its regular quarterly dividend of $.125 per share in
the second quarter of 2003, reinstated its regular quarterly dividend at the
$.125 per share rate in the fourth quarter of 2004.
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 or similar
exchange rate risk associated with future sales. 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 March 31, 2005, CompX held a series of contracts
maturing through May 2005 to exchange an aggregate of U.S. $2.5 million for an
equivalent amount of Canadian dollars at an exchange rates of Cdn. $1.20 to Cdn.
$1.23 per U.S. dollar. At March 31, 2005, the actual exchange rate was Cdn.
$1.21 per U.S. dollar. The estimated fair value of such foreign currency forward
contracts at March 31, 2005 is insignificant.
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 March 31, 2005, Waste Control Specialists' indebtedness consisted
principally of $14.8 million of borrowings owed to a wholly-owned subsidiary of
Valhi (December 31, 2004 intercompany indebtedness - $4.6 million). During the
first quarter of 2005, a subsidiary of Valhi loaned an additional net of $10.2
million to Waste Control Specialists, which were used by Waste Control
Specialists primarily to fund its operating loss and its capital expenditures.
Such indebtedness is eliminated in the Company's Consolidated Financial
Statements. Waste Control Specialists will likely borrow additional amounts
during the remainder of 2005 from such Valhi subsidiary under the terms of a $15
million revolving credit facility that matures in March 2006.
TIMET
At March 31, 2005, TIMET had $110 million of borrowing availability under
its various U.S. and European credit agreements.
See Note 13 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 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 on 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. Including an estimated $25 million
related to this sponge expansion, TIMET current expects its aggregate capital
expenditures during 2005 will be approximately $68 million.
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 13 to the Consolidated Financial Statements for certain legal
proceedings and environmental matters with respect to Tremont.
General corporate - Valhi
Because Valhi's operations are conducted primarily through its subsidiaries
and affiliates, Valhi's long-term ability to meet its parent company level
corporate obligations is dependent in large measure on the receipt of dividends
or other distributions from its subsidiaries and affiliates. In February 2004,
Kronos announced it would pay its first regular quarterly cash dividend of $.25
per share. At that rate, and based on the 27.8 million shares of Kronos held by
Valhi at March 31, 2005, Valhi would receive aggregate annual dividends from
Kronos of $27.8 million. NL, which paid its 2004 regular quarterly dividends of
$.20 per share in the form of shares of Kronos common stock. NL increased its
regular quarterly dividend in the first quarter of 2005 to $.25 per share, which
also was in the form of shares of Kronos common stock. The Company does not
currently expect to receive any distributions from Waste Control Specialists
during 2005. CompX dividends, which resumed in the fourth quarter of 2004, are
paid to NL.
Various credit agreements to which certain subsidiaries or affiliates are
parties contain customary limitations on the payment of dividends, typically a
percentage of net income or cash flow; however, such restrictions in the past
have not significantly impacted Valhi's ability to service its parent company
level obligations. Valhi generally does not guarantee any indebtedness or other
obligations of its subsidiaries or affiliates. To the extent that one or more of
Valhi's subsidiaries were to become unable to maintain its current level of
dividends, either due to restrictions contained in the applicable subsidiary's
credit agreements or otherwise, Valhi parent company's liquidity could become
adversely impacted. In such an event, Valhi might consider reducing or
eliminating its dividends or selling interests in subsidiaries or other assets.
Waste Control Specialists is required to provide certain financial
assurance to a Texas government agency with respect to certain decommissioning
obligations related to its facility in West Texas. Such financial assurance 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 $2 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 an
additional 254,000 shares of its common stock under the repurchase program in
April 2005 for an aggregate of $5.0 million.
At March 31, 2005, Valhi had $73.6 million of parent level cash and cash
equivalents and had no amounts outstanding under its revolving bank credit
agreement. In addition, Valhi had $97.1 million of borrowing availability under
its revolving bank credit facility, and Valhi had $5.9 million in short-term
demand loans to Contran.
The terms of The Amalgamated Sugar Company LLC Company Agreement provide
for annual "base level" of cash dividend distributions (sometimes referred to as
distributable cash) by the LLC of $26.7 million, from which the Company is
entitled to a 95% preferential share. Distributions from the LLC are dependent,
in part, upon the operations of the LLC. The Company records dividend
distributions from the LLC as income upon receipt, which occurs in the same
month in which they are declared by the LLC. To the extent the LLC's
distributable cash is below this base level in any given year, the Company is
entitled to an additional 95% preferential share of any future annual LLC
distributable cash in excess of the base level until such shortfall is
recovered. Based on the LLC's current projections for 2005, Valhi currently
expects that distributions received from the LLC in 2005 will approximate its
debt service requirements under its $250 million loans from Snake River Sugar
Company.
Certain covenants contained in Snake River's third-party senior debt allow
Snake River 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 current scheduled maturity in 2007, and such loan is
subordinated to Snake River's third-party senior debt. At March 31, 2005, the
accrued and unpaid interest on the $80 million loan to Snake River aggregated
$39.6 million and is classified as a noncurrent asset. The Company currently
believes it will ultimately realize both the $80 million principal amount and
the accrued and unpaid interest, whether through cash generated from the future
operations of Snake River and the LLC or otherwise (including any liquidation of
Snake River or the LLC). Following the currently scheduled complete repayment of
Snake River's third-party senior debt in April 2007, Valhi believes it will
receive significant debt service payments on its loan to Snake River as the cash
flows that Snake River previously would have been using to fund debt service on
its third-party senior debt ($10.0 million of scheduled payments in 2005), plus
other cash resources at Snake River would then become available, and would be
required, to be used to fund debt service payments on its loan from Valhi. Prior
to the repayment of the third-party senior debt, Snake River might also make
debt service payments to Valhi, if permitted by the terms of the senior debt, or
if Snake River would refinance with a third party all or a portion of the amount
it owes to Valhi under such $80 million loan.
The Company may, at its option, require the LLC to redeem the Company's
interest in the LLC beginning in 2010, and the LLC has the right to redeem the
Company's interest in the LLC beginning in 2027. The redemption price is
generally $250 million plus the amount of certain undistributed income allocable
to the Company. In the event the Company requires the LLC to redeem the
Company's interest in the LLC, Snake River has the right to accelerate the
maturity of and call Valhi's $250 million loans from Snake River. Redemption of
the Company's interest in the LLC would result in the Company reporting income
related to the disposition of its LLC interest for income tax purposes, although
the Company would not be expected to report a gain in earnings for financial
reporting purposes at the time its LLC interest is redeemed (as discussed in
Note 1 to the Consolidated Financial Statements). However, because of Snake
River's ability to call its $250 million loans to Valhi upon redemption of the
Company's interest in the LLC, the net cash proceeds (after repayment of the
debt) generated by redemption of the Company's interest in the LLC could be less
than the income taxes that would become payable as a result of the disposition.
The Company routinely compares its liquidity requirements and alternative
uses of capital against the estimated future cash flows to be received from its
subsidiaries, and the estimated sales value of those units. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify its dividend policies, consider
the sale of interests in subsidiaries, affiliates, business units, marketable
securities or other assets, or take a combination of such steps or other steps,
to increase liquidity, reduce indebtedness and fund future activities. Such
activities have in the past and may in the future involve related companies.
The Company and related entities routinely evaluate acquisitions of
interests in, or combinations with, companies, including related companies,
perceived by management to be undervalued in the marketplace. These companies
may or may not be engaged in businesses related to the Company's current
businesses. The Company intends to consider such acquisition activities in the
future and, in connection with this activity, may consider issuing additional
equity securities and increasing the indebtedness of the Company, its
subsidiaries and related companies. From time to time, the Company and related
entities also evaluate the restructuring of ownership interests among their
respective subsidiaries and related companies.
Non-GAAP financial measures
In an effort to provide investors with additional information regarding the
Company's results of operations as determined by GAAP, the Company has disclosed
certain non-GAAP information which the Company believes provides useful
information to investors:
o The Company discloses percentage changes in Kronos' average TiO2
selling prices in billing currencies, which excludes the effects of
foreign currency translation. The Company believes disclosure of such
percentage changes allows investors to analyze such changes without
the impact of changes in foreign currency exchange rates, thereby
facilitating period-to-period comparisons of the relative changes in
average selling prices in the actual various billing currencies.
Generally, when the U.S. dollar either strengthens or weakens against
other currencies, the percentage change in average selling prices in
billing currencies will be higher or lower, respectively, than such
percentage changes would be using actual exchange rates prevailing
during the respective periods.
ITEM 4. CONTROLS AND PROCEDURES
Restatement. As disclosed in Note 1 to the Consolidated Financial
Statements, the Company and its audit committee concluded to restate the
Company's consolidated financial statements as of December 31, 2004 and March
31, 2005, and for the interim periods ended March 31, 2004 and 2005.
The guidance set forth in Auditing Standard No. 2 of the Public Company
Accounting Oversight Board states that a restatement of previously-issued
financial statements to reflect the correction of a misstatement should be
regarded as at least a significant control deficiency and as a strong indicator
that a material weakness in internal control over financial reporting exists. As
a result of this restatement, the Company has concluded that a material weakness
existed at December 31, 2004 and March 31, 2005.
Management's Consideration of the Restatement.In coming to the conclusion
that the Company's disclosure controls and procedures were not effective as of
March 31, 2005, management also considered the restatement discussed in Note 1
to the Consolidated Financial Statements related to the Company's accounting for
its investment in The Amalgamated Sugar Company LLC and the guidance contained
in the SEC's Staff Accounting Bulletin ("SAB") No. 99, Materiality, paragraphs
36 and 37 of Accounting Principles Board Opinion ("APBO") No. 20 and paragraph
29 of APBO No. 28. The Company also considered, by analogy, the guidance
contained in the SEC's SAB Topic 5-F, Accounting Changes Not Retroactively
Applied Due to Immateriality. Because (i) the restatement adjustments did not
have a material impact to the financial statements of prior interim or annual
periods presented, taken as a whole, (ii) the impact of the restatement
adjustments did not have a material impact on the Company's consolidated
stockholders' equity as of any prior interim or annual period presented and
(iii) the Company decided to restate its previously-issued consolidated
financial statements in part because the impact of the adjustment which the
Company concluded should have been reported as part of 1997's net income, if
recorded in net income in the period in which the adjustment became known, would
have been material to such interim period's reported net income, management of
the Company concluded that this control deficiency, individually or in the
aggregate when considered with other control deficiencies, does not constitute a
material weakness in internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures. The Company maintains a
system of disclosure controls and procedures. The term "disclosure controls and
procedures," as defined by regulations of the SEC, means controls and other
procedures that are designed to ensure that information required to be disclosed
in the reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits to the SEC under the Act is
accumulated and communicated to the Company's management, including its
principal executive officer and its principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions to be
made regarding required disclosure. Each of Steven L. Watson, the Company's
President and Chief Executive Officer, and Bobby D. O'Brien, the Company's Vice
President and Chief Financial Officer, have evaluated the Company's disclosure
controls and procedures as of March 31, 2005. Based upon their evaluation, and
as a result of the material weakness discussed below, these executive officers
have concluded that the Company's disclosure controls and procedures are not
effective as of the date of such evaluation.
A material weakness is a control deficiency, or a combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. As of March 31, 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 restatement of the Company's 2002, 2003 and 2004
consolidated financial statements and 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 constitutes a material weakness.
Remediation.In order to remediate this material weakness, the Company
intends to increase its financial reporting staff, with particular emphasis on
obtaining additional personnel with a background in the financial reporting
requirements for the determination of the provision for income taxes in
accordance with SFAS No. 109 and related GAAP. Such additional staff could be
employees of the Company and/or independent contractors hired by the Company
with qualifications in the required area. As of December 23, 2005, two such
persons have been hired. Management believes that the addition of such staff
will help ensure that GAAP has been appropriately applied with respect to the
calculation and classification within the consolidated financial statements of
income tax provisions and related current and deferred income tax accounts.
Changes in Internal Control Over Financial Reporting. There has been no
change to the Company's internal control over financial reporting during the
quarter ended March 31, 2005 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Note 13 to the Consolidated Financial Statements and
to the 2004 Annual Report for descriptions of certain legal proceedings.
Smith, et al. v. Lead Industries Association, et al. (Circuit Court for
Baltimore City, Maryland, Case No. 24-C-99-004490). 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.
Lewis, et al. v. Lead Industries Association, et al. (Circuit Court of Cook
County, Illinois, County Department, Chancery Division, Case No. 00CH09800). In
March 2005, the plaintiffs appealed the trial court's dismissal of the case.
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.). With respect to the
seven plaintiffs remaining in Jefferson County, five of these plaintiffs
voluntarily dismissed their claims without prejudice in March 2005.
Houston Independent School District v. Lead Industries Association, et al.
(District Court of Harris County, Texas, No. 2000-33725). In March 2005, the
plaintiff voluntarily dismissed the case without prejudice.
City of Chicago v. American Cyanamid, et al. (Circuit Court of Cook County,
Illinois, No. 02CH16212). In February 2005, the plaintiff filed a petition with
the Illinois Supreme Court seeking review of the appellate court's decision
affirming the dismissal of the case.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds; Share
Repurchases.
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. There were no shares repurchased by Valhi during the quarter
covered by this Quarterly Report. See also Note 17 to the Consolidated Financial
Statements.
Item 6. Exhibits.
31.1 - Certification
31.2 - Certification
32.1 - Certification.
The Company has retained a signed original of any of the above exhibits
that contains signatures, and the Company will provide such exhibit to the
Commission or its staff upon request. 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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALHI, INC.
(Registrant)
Date December 23, 2005 By /s/ Bobby D. O'Brien
----------------------------------
Bobby D. O'Brien
Vice President and Chief Financial
Officer
(Principal Financial Officer)
Date December 23, 2005 By /s/ Gregory M. Swalwell
----------------------------------
Gregory M. Swalwell
Vice President and Controller
(Principal Accounting Officer)