Valhi, Inc. Form 10-K December 31, 2006
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 -
For the fiscal year ended December
31, 2006
Commission
file number 1-5467
VALHI,
INC.
(Exact
name of Registrant as specified in its charter)
Delaware
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|
87-0110150
|
(State
or other jurisdiction of
Incorporation
or organization)
|
|
(IRS
Employer
Identification
No.)
|
5430
LBJ Freeway, Suite 1700, Dallas, Texas
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|
75240-2697
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(Address
of principal executive offices)
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|
(Zip
Code)
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Registrant’s
telephone number, including area code:
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(972)
233-1700
|
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
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|
Name
of each exchange on
which
registered
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|
|
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Common
stock ($.01 par value per share)
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|
New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
None.
Indicate
by check mark:
If
the Registrant is a well-known seasoned issuer, as defined in Rule 405 of
the
Securities Act. Yes
No X
If
the Registrant is not required to file reports pursuant to Section 13 or
Section
15(d) of the Act. Yes
No X
Whether
the Registrant (1) has filed all reports required to be filed by Section
13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or
for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes
X
No
If
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not
contained herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K.
Yes X
No
Whether
the Registrant is a large accelerated filer, an accelerated filer or a
non-accelerated filer (as defined in Rule 12b-2 of the Act). Large accelerated
filer
Accelerated filer X
non-accelerated filer .
Whether
the Registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
No X .
The
aggregate market value of the 7.8 million shares of voting common stock held
by
nonaffiliates of Valhi, Inc. as of June 30, 2006 (the last business day of
the
Registrant's most recently-completed second fiscal quarter) approximated
$192
million.
As
of February 28, 2007, 114,112,378 shares of the Registrant's common stock
were
outstanding.
Documents
incorporated by reference
The
information required by Part III is incorporated by reference from the
Registrant's definitive proxy statement to be filed with the Commission pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
[INSIDE
FRONT COVER]
A
chart
showing, as of December 31, 2006, (i) our 83% ownership of NL Industries,
Inc.,
59% ownership of Kronos Worldwide, Inc., 100% ownership of Waste Control
Specialists LLC, 100% ownership of Tremont LLC and 4% ownership of Titanium
Metals Corporation (“TIMET”), (ii) NL's 36% ownership of Kronos Worldwide and
70% ownership of CompX International Inc., (iii) Tremont's 31% ownership
of
TIMET and (x) TIMET’s 18% ownership of CompX.
PART
I
ITEM 1.
BUSINESS
Valhi,
Inc. (NYSE: VHI) is primarily a holding company. We operate through our
wholly-owned and majority-owned subsidiaries, including NL Industries, Inc.,
Kronos Worldwide, Inc., CompX International, Inc., Tremont LLC and Waste
Control
Specialists LLC (“WCS”). We are also the largest shareholder of Titanium Metals
Corporation (“TIMET”), although we own less than a majority interest and
therefore we account for our investment in TIMET by the equity method. On
February 28, 2007 our board of directors declared a special dividend of all
of
the TIMET common stock we own. The special dividend is payable on March 26,
2007
to stockholders of record as of March 12, 2007. After the dividend is completed
the only ownership interest we will have in TIMET will be a nominal amount
through our NL subsidiary. See Note 23 to our Consolidated Financial Statements.
Kronos (NYSE: KRO), NL (NYSE: NL), CompX (NYSE: CIX) and TIMET (NYSE: TIE)
each
file periodic reports with the U.S. Securities and Exchange Commission (“SEC”).
Our
principal executive offices are located at Three Lincoln Center, 5430 LBJ
Freeway, Suite 1700, Dallas, Texas 75240. Our telephone number is (972)
233-1700. We maintain a worldwide website at www.valhi.net.
Brief
History
LLC
Corporation, our legal predecessor, was incorporated in Delaware in 1932.
We are
the successor company of the 1987 merger of LLC Corporation and another entity
controlled by Contran Corporation. We
are
majority owned by Contran, which directly or indirectly owns approximately
92%
of our outstanding common stock at December 31, 2006. 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 (for which Mr.
Simmons is the sole trustee) or is held directly by Mr. Simmons or other
persons
or related companies to Mr. Simmons. Consequently, Mr. Simmons may be deemed
to
control Contran and us.
Key
events in our history include:
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·
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1979
- Contran acquires control of LLC;
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·
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1981
- Contran acquires control of our other predecessor
company;
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·
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1982 - Contran
acquires control of Keystone Consolidated Industries, Inc., a predecessor
to CompX;
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·
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1984 - Keystone
spins-off an entity that includes what is to become CompX; this
entity
subsequently merges with LLC;
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|
·
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1986
- Contran acquires control of NL, which at the time owns 100% of
Kronos
and a 50% interest in TIMET;
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|
·
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1987
- LLC and another Contran controlled company merge to form Valhi,
our
current corporate structure;
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·
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1988
- NL spins-off an entity that includes its investment in
TIMET;
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·
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1995
- WCS begins start-up operations;
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·
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1996
- TIMET completes an initial public
offering;
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·
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2003
- NL completes the spin-off of Kronos through the pro-rata distribution
of
Kronos shares to its shareholders including
us;
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·
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2004
through 2005 NL continues to distribute Kronos shares to its shareholders,
including us, through its quarterly dividend;
and
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·
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2007
- We announced our plan to distribute all of our TIMET common stock
to our
shareholders
through a stock dividend.
|
Unless
otherwise indicated, references in this report to “we”, “us” or “our” refer to
Valhi, Inc. and its subsidiaries, taken as a whole.
Forward-Looking
Statements
This
Annual Report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Statements in this Annual
Report on Form 10-K that are not historical in nature are forward-looking
in
nature about our future that are not statements of historical fact. Statements
are found in this report including, but not limited to, statements found
in Item
1 -
"Business," Item 1A - “Risk Factors,” Item 3 - "Legal Proceedings," Item 7 -
"Management’s Discussion and Analysis of Financial Condition and Results of
Operations"
and Item
7A - "Quantitative and Qualitative Disclosures About Market Risk," are
forward-looking statements that represent our beliefs and assumptions based
on
currently available information. In
some
cases you can identify these forward-looking statements 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
we
believe the expectations reflected in such forward-looking statements are
reasonable, we do not know if these expectations will be correct. Forward-looking
statements by their nature involve substantial risks and uncertainties that
could significantly impact expected results. Actual future results could
differ
materially from those predicted. While it is not possible to identify all
factors, we continue to face many risks and uncertainties. Among
the
factors that could cause actual future results to differ materially from
those
described herein are the risks and uncertainties discussed in this Annual
Report
and those described from time to time in our other filings with the SEC
including, but not limited to, the following:
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·
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Future
supply and demand for our products,
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·
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The
extent of the dependence of certain of our businesses on certain
market
sectors (such as the dependence of TIMET’s titanium metals business on the
commercial aerospace industry),
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·
|
The
cyclicality of certain of our businesses (such as Kronos’ TiO2
operations and TIMET's titanium metals
operations),
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·
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The
impact of certain long-term contracts on certain of our businesses
(such
as the impact of TIMET's long-term contracts with certain of its
customers
and such customers' performance there under 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),
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·
|
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),
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·
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Changes
in our raw material and other operating costs (such as energy
costs),
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·
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The
possibility of labor disruptions,
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·
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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),
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·
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Competitive
products and substitute products,
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·
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Possible
disruption of our business or increases in the cost of doing business
resulting from terrorist activities or global
conflicts,
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Customer
and competitor strategies,
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The
impact of pricing and production
decisions,
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Competitive
technology positions,
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The
introduction of trade barriers,
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·
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The
extent to which our subsidiaries were to become unable to pay dividends
to
us,
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·
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Restructuring
transactions involving us and our
affiliates,
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·
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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),
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·
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Operating
interruptions (including, but not limited to, labor disputes, leaks,
natural disasters, fires, explosions, unscheduled or unplanned
downtime
and transportation interruptions),
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·
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The
timing and amounts of insurance
recoveries,
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·
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Our
ability to renew or refinance credit
facilities,
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·
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Uncertainties
associated with new product development (such as TIMET's ability
to
develop new end-uses for its titanium
products),
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·
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The
ultimate outcome of income tax audits, tax settlement initiatives
or other
tax matters,
|
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·
|
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),
|
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·
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Environmental
matters (such
as those requiring compliance with emission and discharge standards
for
existing and new facilities, or new developments regarding environmental
remediation at sites related to our former operations),
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·
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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),
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·
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The
ultimate resolution of pending litigation (such
as NL's lead pigment litigation and litigation surrounding environmental
matters of NL and Tremont), and
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·
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Possible
future litigation.
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Should
one or more of these risks materialize (or the consequences of such development
worsen), or should the underlying assumptions prove incorrect, actual results
could differ materially from those currently forecasted or expected. We disclaim
any intention or obligation to update or revise any forward-looking statement
whether as a result of changes in information, future events or
otherwise.
Segments
and Equity Investments
We
have
three consolidated operating segments and one significant equity investment
at
December 31, 2006:
Chemicals
Kronos
Worldwide, Inc.
|
Our
chemicals segment is operated through our majority ownership of
Kronos.
Kronos is a leading global producer and marketer of value-added
titanium
dioxide pigments (“TiO2”).
TiO2,
which imparts whiteness, brightness and opacity, is used for a
variety of
manufacturing applications including: plastics, paints, paper and
other
industrial products. Kronos has production facilities in Europe
and North
America. TiO2
sales were over 90% of Kronos’ total sales in 2006.
|
|
|
Component
Products
CompX
International Inc.
|
We
operate in the component products industry through our majority
ownership
of CompX. CompX is a leading manufacturer of security products,
precision
ball bearing slides and ergonomic computer support systems used
in office
furniture and other computer-related applications. CompX has recently
entered the performance marine components industry through the
acquisition
of two performance manufacturers. CompX has production facilities
in North
America and Asia.
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Waste
Management
Waste
Control Specialists LLC
|
WCS
is our wholly-owned subsidiary which owns and operates a West Texas
facility for the processing, treatment, storage and disposal of
hazardous,
toxic and certain types of low-level radioactive waste. WCS is
in the
process of seeking
to obtain regulatory authorization to expand its low-level and
mixed
low-level radioactive waste handling capabilities.
|
|
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Titanium
Metals
Titanium
Metals Corporation
|
We
account for our 35% non-controlling interest in TIMET by the equity
method. TIMET is a leading global producer of titanium sponge,
melted
products and mill products. Titanium is used for a variety of commercial,
aerospace, military, medical and other emerging markets. TIMET
is also the
only titanium producer with major production facilities in both
of the
world’s principal titanium markets: the U.S. and
Europe.
|
For
additional information about our segments and equity investments see “Part II -
Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and Notes 2 and 7 to our Consolidated Financial Statements. See
also Note 23 to our Consolidated Financial Statements.
CHEMICALS
SEGMENT - KRONOS WORLDWIDE, INC.
Business
Overview - Through
our majority owned subsidiary, Kronos, we are a leading global producer and
marketer of value-added TiO2,
which
is a white inorganic pigment used to impart whiteness, brightness and opacity
for products such as coatings, plastics, paper, fibers, food, ceramics and
cosmetics. Kronos and its predecessors have produced and marketed
TiO2
in North
America and Europe for over 80 years. TiO2
is
considered a "quality of life" product with demand and growth affected by
gross
domestic product and overall economic conditions in various regions of the
world. We produce TiO2
in four
facilities in Europe and two facilities in North America, including one facility
in the U.S. that is owned by a 50/50 joint venture. We also mine ilmenite
in
Norway.
TiO2’s
value
is in its whitening properties and hiding power (opacity), which is the ability
to cover or mask other materials effectively and efficiently. TiO2
is the
largest commercially used whitening pigment by volume because it provides
more
hiding power than any other commercially produced white pigment due to its
high
refractive index rating. In addition, TiO2
has
excellent resistance to interaction with other chemicals, good thermal stability
and resistance to ultraviolet degradation. We ship TiO2 to our customers
in
either a powder or slurry form.
Approximately
half our 2006 TiO2
sales
volumes were to Europe. We believe we are the second-largest producer of
TiO2
in
Europe, with an estimated 20% of European TiO2
sales
volumes. We estimated we had 15% of North American TiO2
sales
volumes.
Per
capita consumption of TiO2
is
greatest in the United States and Western Europe and far exceeds consumption
in
other areas of the world. We expect these markets to continue to be the largest
consumers of TiO2 for the near future. It is probable significant markets
for
TiO2 could emerge in Eastern Europe, the Far East or China, as the economies
in
these regions continue to develop.
Manufacturing,
Operations and Products - We
produce TiO2
using
two different methods: the chloride process and the sulfate process. The
chloride process, which begins with raw natural rutile ore or purchased slag
as
the base, utilizes newer technology, is less labor intensive, requires less
energy and results in less waste. The chloride process produces rutile
TiO2
which is
preferred for the majority of customer applications because it has a bluer
undertone and higher durability than sulfate process rutile TiO2.
Chloride process rutile TiO2
is
preferred for use in coatings and plastics, the two largest end-use markets.
As
a result approximately three-fourths of the TiO2
we
produce and the majority of our volume growth is chloride based rutile. For
the
overall TiO2
industry, chloride based TiO2
sales
have increased relative to sulfate process pigments over the last several
years.
In 2006, industry wide chloride process production facilities represented
approximately 65% of production capacity. The sulfate process, which begins
with
ilmenite ore or purchased slag as a base, produces both rutile and anatase
TiO2.
Anatase
TiO2
is a
much smaller percentage of annual global TiO2
production and is preferred for use in selected paper, ceramics, rubber tires,
man-made fibers, food and cosmetics applications.
After
the
intermediate TiO2
pigment
is produced by either the chloride or sulfate process, it is “finished” into
products with specific performance characteristics for particular end-use
applications through proprietary processes involving various chemical surface
treatments and intensive micronizing or milling. We distribute finished
TiO2
by rail,
truck or ocean carrier as either dry powder or slurry. We produce over 40
different TiO2
grades,
sold under our Kronos
trademark,
which
provide a variety of performance properties to meet our customers' specific
requirements. Our major customers include domestic and international paint,
plastics and paper manufacturers. Directly and through our distributors and
agents, we sell and provide technical services for our products to over 4,000
customers in over 100 countries, with the majority of our sales are in Europe
and North America.
We
believe there are no effective substitutes for TiO2.
Extenders, such as kaolin clays, calcium carbonate and polymeric opacifiers,
are
used in a number of end-use markets as white pigments, however the opacity
in
these products is not able to duplicate the performance characteristics of
TiO2.
Therefore, we believe these products are unlikely to replace TiO2.
Over
the
last 10 years we have focused on expanding our annual production capacity
by
obtaining additional operating efficiencies at our existing plants through
modest capital expenditures. In 2006, we produced a new record of 516,000
metric
tons of TiO2
compared
to 492,000 metric tons 2005 and 484,000 metric tons in 2004. Our TiO2
production amount in 2006 was a new record for us for the fifth consecutive
year. Our production records include our 50% share of TiO2
produced
at our joint-venture owned Louisiana facility. We believe our attainable
production capacity for 2007 is approximately 525,000 metric tons with some
slight additional capacity available in 2008, through our continued
debottlenecking efforts.
TiO2
sales
were about 90% of our total Chemicals sales in 2006. The remaining 10% of
our
total chemical sales is comprised of other products which are complementary
to
our TiO2
business. These products are as follows:
|
· |
Ilmenite ore, which is in addition to the ore
we supply
to our European sulfate-process plants and which additional amount
we sell
to third-parties, some of whom are our
competitors; |
|
·
|
Iron-based
chemicals, which are byproducts of the TiO2
production
process. These byproducts are sold through our Ecochem division,
and are used primarily as treatment and conditioning agents for
industrial
effluents and municipal wastewater;
and
|
|
·
|
Titanium
chemical products (titanium oxychloride and titanyl sulfate), which
are
also generated in the production of TiO2.
|
Our
Chemicals Segment operate the following TiO2
facilities,
two slurry facilities and an ilmenite mine at December 31, 2006.
Location
|
|
Description
|
Leverkusen,
Germany (1)
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|
Chloride
and sulfate process TiO2
production
|
Nordenham,
Germany
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Sulfate
process TiO2
production
|
Langerbrugge,
Belgium
|
|
Chloride
process TiO2
production
|
Fredrikstad,
Norway (2)
|
|
Sulfate
process TiO2
production
|
Varennes,
Quebec
|
|
Chloride
and sulfate process TiO2
production,
slurry
facility
|
Lake
Charles, Louisiana (3)
|
|
Chloride
process TiO2
production
|
Lake
Charles, Louisiana
|
|
Slurry
facility
|
Hauge
I Dalane, Norway
|
|
Ilmenite
mine
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|
(1)
|
The
Leverkusen facility is located within an extensive manufacturing
complex
owned by Bayer AG. We own the Leverkusen facility, which represents
about
one-third of our current TiO2
production capacity, but we lease the land under the facility from
Bayer
AG under a long term agreement which expires in 2050. Lease payments
are
periodically
negotiated with Bayer for periods of at least two years at a time.
Bayer
provides some raw materials, including chlorine, auxiliary and
operating
materials, utilities and services necessary to operate the Leverkusen
facility under separate supplies and services agreements.
|
|
(2)
|
The
Fredrikstad plant is located on public land and is leased until
2013, with
an option to extend the lease for an additional 50
years.
|
|
(3)
|
We
operate this facility in a 50/50 joint venture with Huntsman Holdings
LLC.
|
We
produce our iron-based chemicals products in Germany, Norway and Belgium,
and we
produce our titanium chemicals products in Belgium and Canada. Our
Chemicals Segment also leases various corporate and administrative offices
in
the U.S. and various sales offices in the U.S. and Europe.
Raw
Materials
- The
primary raw materials used in chloride process TiO2
are
titanium-containing feedstock (natural rutile ore or purchased slag), chlorine
and coke. Chlorine and coke are available from a number of suppliers.
Titanium-containing feedstock suitable for use in the chloride process is
available from a limited, but increasing, number of suppliers around the
world,
principally in Australia, South Africa, Canada, India and the United States.
We
purchased chloride process grade slag in 2006 from Rio Tinto Iron and Titanium,
under a long-term supply contract that expires at the end of 2010. We purchase
natural rutile ore primarily from Iluka Resources, Limited under a long-term
supply contract that expires at the end of 2009. We expect to successfully
obtain long-term extensions to those and other existing supply contracts
prior
to their expiration. We expect the raw materials purchased under these contracts
to meet our chloride process feedstock requirements over the next several
years.
The
primary raw materials used in sulfate process TiO2
are
titanium-containing feedstock (primarily ilmenite from our Norwegian mine
or
purchased slag) and sulfuric acid. We are one of the few vertically integrated
producers of sulfate process TiO2.
We own
and operate a rock ilmenite mine in Norway which supplied all the ilmenite
used
in our European sulfate process TiO2
in 2006.
We expect ilmenite production from our mine to meet our European sulfate
process
feedstock requirements for the foreseeable future. For our Canadian sulfate
process TiO2,
we
purchase sulfate grade slag, primarily from Q.I.T. Fer et Titane Inc. (also
a
subsidiary of Rio Tinto Iron and Titanium), under a long-term supply contract
that expires at the end of 2009 and Tinfos Titan and Iron KS of Norway under
a
supply contract that expires in 2010. We expect these contracts will meet
our
Canadian sulfate process feedstock requirements over the next several years.
Sulfuric acid is available from a number of suppliers.
Many
of
our raw material contracts contain fixed quantities we are required to purchase,
although these contracts allow for an upward or downward adjustment in the
quantity purchased. We are not required to purchase feedstock in excess of
amounts we would reasonably consume in a year. Raw material pricing under
these
agreements is generally negotiated annually.
The
following table summarizes our raw materials procured or mined in
2006.
Production
Process/Raw Material
|
|
Quantities
of Raw Materials
Procured
or Mined
|
|
|
(In
thousands of metric tons)
|
|
|
|
Chloride
process plants -
|
|
|
purchased
slag or natural rutile ore
|
|
472
|
|
|
|
Sulfate
process plants:
|
|
|
Raw
ilmenite ore mined and used
internally
|
|
319
|
Purchased
slag
|
|
25
|
Joint
Venture
- We
hold a
50% interest in a manufacturing joint venture with a subsidiary of Huntsman
Corporation (NYSE: HUN). The joint venture owns and operates a chloride process
TiO2
facility
in Lake Charles, Louisiana. We share production from the facility equally
with
Huntsman pursuant to separate offtake agreements.
A
supervisory committee composed of four members, two of whom we appoint and
two
of whom are appointed by Huntsman, directs the business and affairs of the
joint
venture, including production and output decisions. Two general managers,
one we
appoint and one appointed by Huntsman, manage the joint venture operations
acting under the direction of the supervisory committee.
We
are
required to purchase half of the TiO2
produced
by the joint venture. Because we do not control the joint venture, it is
not
consolidated in our Consolidated Financial Statements; instead we use the
equity
method to account for our interest. The joint venture operates on a break-even
basis, and therefore we do not have any equity in earnings from the joint
venture. With the exception of raw material costs and packaging costs for
the
pigment grades produced, we share all costs and capital expenditures of the
joint venture equally with Huntsman. Our share of the net costs is reported
as
cost of sales as the related TiO2
is sold.
See Note 7 to our Consolidated Financial Statements for additional financial
information.
Patents
and Trademarks
- We
hold
patents for products and production processes which we believe are important
to
our continuing business activities. We seek patent protection for technical
developments, principally in the United States, Canada and Europe, and from
time
to time we enter into licensing arrangements with third parties. Our existing
patents generally
have terms of 20 years from the date of filing, and have remaining terms
ranging
from one to 19 years. We
actively protect our intellectual property rights, including our patent rights,
and from time to time we are engaged in disputes relating to the protection
and
use of intellectual property relating to our products. We also rely on
unpatented proprietary know-how, continuing technological innovation and
other
trade secrets to develop and maintain our competitive position. Our proprietary
chloride production process is an important part of our technology, and our
business could be harmed if we fail to maintain confidentiality of trade
secrets
used in this technology.
Our
major
trademarks, including KronosTM,
are
protected by registration in the United States and elsewhere for products
we
manufacture and sell.
Sales
- We
sell
to a diverse customer base, with no single customer makes up more than 10%
of
our Chemicals Segment’s sales in 2006. Our
ten
largest Chemicals Segment customers accounted for approximately 28% of the
Chemicals Segment’s 2006 sales. Due
in
part to the increase in paint production in the spring to meet spring and
summer
painting season demand, our sales are slightly seasonal with TiO2
sales
generally higher in the first half of the year.
Competition
- The
TiO2
industry
is highly competitive, with five major producers including us. Our four largest
competitors are: E.I. du Pont de Nemours & Co. ("DuPont"), Millennium
Inorganic Chemicals, Inc. (a subsidiary of Lyondell Chemical Company), Tronox
Incorporated and Huntsman. These
four largest competitors, plus the next largest producer Ishihara Sangyo
Kaisha,
Ltd., have estimated individual shares of TiO2
production capacity ranging from 4% (for Ishihara) to 24% (for DuPont), and
an
estimated aggregate share of worldwide TiO2
production volume in excess of 60%. DuPont has about half of total North
American TiO2
production capacity and is our principal North American competitor. Lyondell
has
announced that it intends to sell Millennium Inorganic Chemicals to National
Titanium Dioxide Company Ltd. in the first half of 2007.
We
compete primarily on the basis of price, product quality and technical service,
and the availability of high performance pigment grades. Although certain
TiO2
grades
are considered specialty pigments, the majority of our TiO2
grades
and substantially all our production are considered commodity pigments with
price generally being the most significant competitive factor. We believe
we are
the leading seller of TiO2
in
several countries, including Germany, with an estimated 12% of worldwide
TiO2
sales
volumes in 2006. Overall,
we are the world's fifth-largest producer of TiO2.
Worldwide
capacity additions in the TiO2
market
resulting from construction of greenfield plants require significant capital
expenditures and substantial lead time (typically three to five years in
our
experience). We are not aware of any TiO2
plants
currently under construction. DuPont has announced its intention to build
a
TiO2
facility
in China, but it is not clear when construction will begin and it is not
likely
that any product would be available until 2010, at the earliest. We expect
that
industry capacity will increase as we and our competitors continue to
debottleneck our existing facilities. We expect the average annual increase
in
industry capacity from announced debottlenecking projects will be less than
the
average annual demand growth for TiO2 during
the next three to five years. However,
we cannot assure you that future increases in the TiO2
industry
production capacity and future average annual demand growth rates for
TiO2
will
conform to our expectations. If actual developments differ from our
expectations, ours and the TiO2
industry's performances could be unfavorably affected.
Research
and Development
- Our
research and development activities are focused primarily on improving both
the
chloride and sulfate production processes, improving product quality and
strengthening our competitive position by developing new pigment applications.
We conduct our research and development activities primarily at our Leverkusen,
Germany facility. We spent approximately $8 million in 2004, $9 million in
2005
and $11 million in 2006 on these activities.
We
are
continually improving the quality of our finished grades, and we have been
successful at developing new grades for existing and new applications to
meet
the needs of our customers and increase product life cycle. Since 2002, we
have
added 11 new grades for plastics, coatings, fiber or paper laminate
applications.
Regulatory
and Environmental Matters
- Our
operations are governed by various environmental laws and regulations.
Certain
of our operations are, or have been, engaged in the handling, manufacture
or use
of substances or compounds that may be considered toxic or hazardous within
the
meaning of applicable environmental laws and regulations. As with other
companies engaged in similar businesses, certain of our past and current
operations and products have the potential to cause environmental or other
damage. We have implemented and continue to implement various policies and
programs in an effort to minimize these risks. Our policy is to maintain
compliance with applicable environmental laws and regulations at all of our
facilities and to strive to improve our environmental performance. It is
possible that future developments, such as stricter requirements of
environmental laws and enforcement policies, could adversely affect our
production, handling, use, storage, transportation, sale or disposal of such
substances as well as our consolidated financial position, results of operations
or liquidity.
Our
U.S.
manufacturing operations are governed by federal environmental and worker
health
and safety laws and regulations, principally the Resource Conservation and
Recovery Act ("RCRA"), the Occupational Safety and Health Act, the Clean
Air
Act, the Clean Water Act, the Safe Drinking Water Act, the Toxic Substances
Control Act ("TSCA"), and the Comprehensive Environmental Response, Compensation
and Liability Act, as amended by the Superfund Amendments and Reauthorization
Act ("CERCLA"), as well as the state counterparts of these statutes. We believe
our joint venture Louisiana TiO2
facility
and a Louisiana TiO2
slurry
facility we own are in substantial compliance with applicable requirements
of
these laws or compliance orders issued thereunder. These are our only U.S.
facilities.
While
the
laws regulating operations of industrial facilities in Europe vary from country
to country, a common regulatory framework is provided by the European Union
("EU"). Germany and Belgium are members of the EU and follow its initiatives.
Norway, although not a member of the EU, generally patterns its environmental
regulations after the EU. We believe we have obtained all required permits
and
we are in substantial compliance with applicable environmental requirements
for
our European and Canadian facilities.
At
our
sulfate plant facilities in Germany, we recycle weak sulfuric acid either
through contracts with third parties or at our own facilities. At our Norwegian
plant, we ship spent acid to a third party location where it is treated and
disposed. At our German sulfate process facilities we have contracted with
a
third party to treat certain sulfate-process effluents. Either party may
terminate the contract after giving three or four years advance notice,
depending on the contract.
From
time
to time, our facilities may be subject to environmental regulatory enforce-ment
under U.S. and foreign statutes. Typically we establish- compliance programs
to
resolve such matters. Occasionally, we may pay penalties, but to date such
penalties have not had a material adverse effect on our consolidated financial
position, results of operations or liquidity. We believe all of our facilities
are in substantial compliance with applicable environmental laws.
Capital
expenditures related to ongoing environmental compliance, protection and
improvement programs in 2006 were approximately $4.4 million, and are currently
expected to approximate $5 million in 2007.
Employees
- As
of
December 31, 2006, our Chemicals Segment employed approximately 2,450
people as follows:
|
|
|
|
|
Europe
|
|
|
1,960
|
|
Canada
|
|
|
435
|
|
United
States(1)
|
|
|
55
|
|
Total
|
|
|
2,450
|
|
(1)Excludes
employees of our Louisiana joint venture.
Our
hourly employees in production facilities worldwide are represented by a
variety
of labor unions under labor agreements with various expiration dates. Our
European union employees are covered by master collective bargaining agreements
in the chemicals industry that are renewed annually. Our Canadian union
employees are covered by a collective bargaining agreement that expires in
June
2007. We have begun negotiations for a new collective bargaining agreement
in
Canada, and we currently believe we will obtain a new agreement before the
current agreement expires. We believe our labor relations are good.
COMPONENT
PRODUCTS SEGMENT - COMPX INTERNATIONAL INC.
Business
Overview - Through
our majority-owned subsidiary, CompX, we are a leading global manufacturer
of
security
products, precision ball bearing slides, and ergonomic computer support systems
used in the office furniture, transportation, postal, tool storage, appliance
and a variety of other industries. We
recently entered the performance marine components industry through the
acquisition of two performance manufacturers in August 2005 and April 2006.
See
Note 3 to the Consolidated Financial Statements. Our products are principally
designed for use in medium- to high-end product applications, where design,
quality and durability are critical to our customers. We
believe that we are among the world's largest producers of security products,
precision ball bearing slides and ergonomic computer support systems.
In
January 2005, we completed the disposition of our Netherlands based Thomas
Regout
operations. Thomas
Regout’s
results of operations are classified as discontinued operations in our
Consolidated Financial Statements.
Manufacturing,
Operations and Products - We
manufacture locking mechanisms and other security products for sale to the
postal, transportation, furniture, banking, vending, and other industries.
We
believe that we are a North American market leader in the manufacture and
sale
of cabinet locks and other locking mechanisms. Our security products are
used in
a variety of applications including ignition systems, mailboxes, vending
and
gaming machines, parking meters, electrical circuit panels, storage
compartments, office furniture and medical cabinet security. These products
include:
· |
disc
tumbler locks which provide moderate security and generally represent
the
lowest cost lock to produce;
|
· |
pin
tumbler locking mechanisms which are more costly to produce and are
used
in applications requiring higher levels of security, including our
KeySet
high
security system, which allows the user to change the keying on a
single
lock 64 times without removing the lock from its enclosure; and
|
· |
our
innovative eLock electronic locks provide stand alone security and
audit
trail capability for drug storage and other valuables through the
use of a
proximity card, magnetic stripe, or keypad
credentials.
|
A
substantial portion of our security products sales consist of products with
specialized adaptations to individual manufacturer’s specifications, some of
which are listed above. We, however, also have a standardized product line
suitable for many customers which is offered through a North American
distribution network through our STOCK
LOCKS
distribution program to lock distributors and to large OEMs.
We
manufacture a complete line of furniture components (precision ball bearing
slides and ergonomic computer support systems) for use in applications such
as
computer related equipment, tool storage cabinets, imaging equipment, file
cabinets, desk drawers, automated teller machines, appliances and other
applications. These products include:
· |
our
patented Integrated
Slide Lock
which allows a file cabinet manufacturer to reduce the possibility
of
multiple drawers being opened at the same
time;
|
· |
our
patented adjustable Ball
Lock
which reduces the risk of heavily-filled drawers, such as auto mechanic
tool boxes, from opening while in
movement;
|
· |
our
Self-Closing
Slide,
which is designed to assist in closing a drawer and is used in
applications such as bottom mount
freezers;
|
· |
articulating
computer keyboard support arms (designed to attach to desks in the
workplace and home office environments to alleviate possible strains
and
stress and maximize usable workspace), along with our patented
LeverLock
keyboard arm, which is designed to make the adjustment of an ergonomic
keyboard arm easier;
|
· |
CPU
storage devices which minimize adverse effects of dust and moisture;
and
|
· |
complimentary
accessories, such as ergonomic wrist rest aids, mouse pad supports
and
flat screen computer monitor support
arms.
|
We
also
manufacture and distribute marine instruments, hardware, and accessories
for
performance boats. Our specialty marine component products are high performance
components designed to operate in the highly corrosive marine environment.
These
products include:
· |
original
equipment and aftermarket stainless steel exhaust headers, exhaust
pipes,
mufflers, other exhaust components and billet accessories; and
|
· |
high
performance gauges and related components such as GPS speedometers,
throttles, controls, tachometers, and
panels.
|
Our
Component Products segment operated the following manufacturing facilities
at
December 31, 2006.
Furniture
Components
|
|
Security
Products
|
|
Specialty
Marine Components
|
|
|
|
|
|
Kitchener,
Ontario
|
|
Mauldin,
SC
|
|
Neenah,
WI
|
Byron
Center, MI
|
|
River
Grove, IL
|
|
Grayslake,
IL
|
Taipei,
Taiwan(1)
|
|
Lake
Bluff, IL(1)
|
|
|
(1)
Includes leased facilities.
We
also
lease a distribution facility located in California.
Raw
Materials - Our
primary raw materials are:
· |
zinc
(used in the manufacture of locking
mechanisms);
|
· |
coiled
steel (used in the manufacture of precision ball bearing slides and
ergonomic computer support systems);
|
· |
stainless
steel (used in the manufacture of exhaust headers and pipes and other
marine components); and
|
· |
plastic
resins (also used for injection molded plastics in the manufacture
of
ergonomic computer support systems).
|
These
raw
materials are purchased from several suppliers and are readily available
from
numerous sources.
We
occasionally enter into raw material arrangements to mitigate the short-term
impact of future increases in raw material costs. While these arrangements
do
not necessarily commit us to a minimum volume of purchases, they generally
provide for stated unit prices based upon achievement of specified purchase
volumes. We utilize purchase arrangements to stabilize our raw material prices
provided we meet the specified minimum monthly purchase quantities. Raw
materials
purchased outside of these arrangements are sometimes subject to unanticipated
and sudden price increases. Due to the competitive nature of the markets
served
by our products, it is often difficult to recover all increases in raw material
costs through increased product selling prices or raw material surcharges.
Consequently, overall operating margins can be affected by such raw material
cost pressures. Steel and zinc prices are cyclical, reflecting overall economic
trends and specific developments in consuming industries and are currently
at
historically high levels.
Patents
and Trademarks - Our
Component Products Segment holds a number of patents relating to its component
products, certain of which we believe are important to our continuing business
activity. Patents generally have a term of 20 years, and our patents have
remaining terms ranging from less than one year to 16 years at December 31,
2006. Our major trademarks and brand names include:
Furniture
Components
|
|
Security
Products
|
|
Marine
Components
|
CompX
Precision Slides®
|
|
CompX
Security Products®
|
|
Custom
Marine®
|
CompX
Waterloo®
|
|
KeSet®
|
|
Livorsi
Marine®
|
CompX
ErgonomX®
|
|
Fort
Lock®
|
|
CMI
Industrial Mufflers™
|
CompX
DurISLide®
|
|
Timberline
Lock®
|
|
Custom
Marine Stainless
|
CompX Dynaslide®
|
|
Chicago
Lock®
|
|
Exhaust™
|
Waterloo
Furniture
|
|
ACE
II®
|
|
The
#1 Choice in
|
Components
Limited®
|
|
TuBar®
|
|
Performance
Boating®
|
|
|
STOCK
LOCKS®
|
|
Mega
Rim™
|
|
|
National
Cabinet Lock®
|
|
Race
Rim™
|
|
|
Timberline®
|
|
CompX
Marine™
|
|
|
|
|
|
Sales
- Our
Component Products segment sells directly to large OEM customers through
our
factory-based sales and marketing professionals and engineers working in
concert
with field salespeople and independent manufacturers' representatives. We
select
manufacturers' representatives based on special skills in certain markets
or
relationships with current or potential customers.
A
significant portion of our sales are also made through distributors. We have
a
significant market share of cabinet lock sales as a result of the locksmith
distribution channel. We support our distributor sales with a line of
standardized products used by the largest segments of the marketplace. These
products are packaged and merchandised for easy availability and handling
by
distributors and end users. Due to our success with the STOCK
LOCKS
inventory program within the security products business unit, similar programs
have been implemented for distributor sales of ergonomic
computer support systems within the furniture components business
unit.
In
2006,
our ten largest customers accounted for approximately 38% of our Component
Products Segment’s sales (11% from security products’ customers and 27% from
furniture components customers). Overall, our customer base is diverse and
the
loss of a single customer would not have a material adverse effect on our
operations.
Competition
- The
markets in which our Component Products Segment compete are highly competitive.
We compete primarily on the basis of product design, including ergonomic
and
aesthetic factors, product quality and durability, price, on-time delivery,
service and technical support. We focus our efforts on the middle and high-end
segments of the market, where product design, quality, durability and service
are placed at a premium.
Our
performance marine components business unit’s products compete with small
domestic manufacturers and is minimally affected by foreign competitors.
Our
security products and furniture components products compete against a number
of
domestic and foreign manufacturers. Suppliers, particularly the foreign
furniture components suppliers, have put intense price pressure on our products.
In some cases, we have lost sales to these lower cost foreign manufacturers.
We
have responded by shifting the manufacture of some products to our lower
cost
facilities, working to reduce costs and gain operational efficiencies through
workforce reductions and process improvements in all of our facilities and
by
working with our customers to be their value-added supplier of choice by
offering customer support services which foreign suppliers are generally
unable
to provide.
Regulatory
and Environmental Matters - Our
facilities are subject to federal, state, local and foreign laws and regulations
relating to the use, storage, handling, generation, transportation, treatment,
emission, discharge, disposal, remediation of, and exposure to, hazardous
and
non-hazardous substances, materials and wastes. We
are
also subject to federal, state, local and foreign laws and regulations relating
to worker health and safety. We
believe we are in substantial compliance with all such laws and regulations.
To
date, the costs of maintaining compliance with such laws and regulations
have
not significantly impacted our Component Products Segment’s results. We
currently do not anticipate any significant costs or expenses relating to
such
matters; however, it is possible future laws and regulations may require
us to
incur significant additional expenditures.
Employees
- As
of
December 31, 2006, our Component Products Segment employed approximately
1,140 people as follows:
United
States
|
710
|
Canada(1)
|
280
|
Taiwan
|
150
|
Total
|
1,140
|
(1)
Approximately
73% of our Canadian employees are represented by a labor union covered by
a
collective bargaining agreement that expires in January 2009 which provides
for
annual wage increases from 1% to 2.5% over the term of the contract.
We
believe our labor relations are good.
WASTE
MANAGEMENT - WASTE CONTROL SPECIALISTS LLC
Business
Overview - Our
Waste
Management Segment was formed in 1995 and in early 1997 we completed
construction of the initial phase of our waste disposal facility in West
Texas.
The facility is designed for the processing, treatment, storage and disposal
of
certain hazardous and toxic wastes. We received the first wastes for disposal
in
1997. Subsequently, we have expanded our permitting authorizations to include
the processing, treatment and storage of low-level and mixed low-level
radioactive wastes and the disposal of certain types of exempt low-level
radioactive wastes.
We
currently operate our waste disposal facility on a relatively limited basis
while we navigate the regulatory licensing requirements to receive permits
for
the disposal of byproduct 11.e(2) waste material and for a broad range of
low-level and mixed low-level radioactive wastes.
Facility,
Operations and Services - Our
Waste
Management Segment has permits by the Texas Commission on Environmental Quality
("TCEQ") and the U.S. Environmental Protection Agency ("EPA") to accept
hazardous and toxic wastes governed by RCRA and TSCA. In November 2004,
our RCRA permit was renewed for a new ten-year period. Likewise, in November
2004 our five-year TSCA authorization was renewed for a new five-year period.
Our RCRA permit and TSCA authorization are subject to additional renewals
by the
agencies assuming we remain in compliance with the provisions of the permits.
In
November 1997, the Texas Department of State Health Services (“TDSHS”) issued a
license to Waste Control Specialists for the treatment and storage, but not
disposal, of low-level and mixed low-level radioactive wastes. The current
provisions of this license generally enable us to accept such wastes for
treatment and storage from U.S. commercial and federal generators, including
the
Department of Energy ("DOE") and other governmental agencies. We accepted
the
first shipments of such wastes in 1998. We have also been issued a permit
by the
TCEQ to establish a research, development and demonstration facility third
parties could use to develop and demonstrate new technologies in the waste
management industry, including possibly those involving low-level and mixed
low-level radioactive wastes. We have obtained additional authority to dispose
of certain categories of low-level radioactive material including
naturally-occurring radioactive material ("NORM") and exempt-level materials
(radioactive materials that do not exceed certain specified radioactive
concentrations and which are exempt from licensing). We continue to pursue
additional regulatory authorizations to expand our storage, treatment and
disposal capabilities for low-level and mixed low-level radioactive wastes.
Our
waste
disposal facility also serves as a staging and processing location for material
that requires other forms of treatment prior to final disposal as mandated
by
the U.S. EPA or other regulatory bodies. Our 20,000 square foot treatment
facility provides for waste treatment/stabilization, warehouse storage,
treatment facilities for hazardous, toxic and mixed low-level radioactive
wastes, drum to bulk, and bulk to drum materials handling and repackaging
capabilities. Treatment operations involve processing wastes through one
or more
chemical or other treatment methods, depending upon the particular waste
being
disposed and regulatory and customer requirements. Chemical treatment uses
chemical oxidation and reduction, chemical precipitation of heavy metals,
hydrolysis and neutralization of acid and alkaline wastes, and results in
the
transformation of waste into inert materials through one or more of these
chemical processes. Certain treatment processes involves technology which
we may
acquire, license or subcontract from third parties.
Once
treated and stabilized, waste is either (i) placed in our landfill, (ii)
stored
onsite in drums or other specialized containers or (iii) shipped to third-party
facilities for final disposition. Only waste which meets certain specified
regulatory requirements can be disposed of in our fully-lined landfill, which
includes a leachate collection system.
We
operate one Waste Control facility located on a 1,338-acre site in West Texas,
which we own. The site is permitted for 5.4 million cubic yards of airspace
landfill capacity for the disposal of RCRA and TSCA wastes. We also own
approximately 13,500 acres of additional land surrounding the permitted site,
a
small portion of which is located in New Mexico, which is available for future
expansion. We believe our facility has superior geological characteristics
which
make it an environmentally-desirable location for this type of waste disposal.
The facility is located in a relatively remote and arid section of West Texas.
The possibility of leakage into any underground water table is considered
highly
remote because the ground is composed of triassic red bed clay. However,
we do
not believe there are any underground aquifers or other usable sources of
water
below the site based in part on extensive drilling by the oil and gas industry
and our own test wells.
Sales
- Our Waste
Control Segment’s target customers are industrial companies, including chemical,
aerospace and electronics businesses and governmental agencies, including
the
DOE, which generate hazardous, mixed low-level radioactive and other wastes.
We
employ our own salespeople to market our services to potential customers.
Competition
- The
hazardous waste industry (other than low-level and mixed low-level radioactive
waste) currently has excess industry capacity caused by a number of factors,
including a relative decline in the number of environmental remediation projects
generating hazardous wastes and efforts on the part of waste generators to
reduce the volume of waste and/or manage waste onsite at their facilities.
These
factors have led to reduced demand and increased price pressure for
non-radioactive hazardous waste management services. While we believe our
broad
range of permits for the treatment and storage of low-level and mixed-level
radioactive waste streams provides us certain competitive advantages, a key
element of our long-term strategy is to provide "one-stop shopping" for
hazardous, low-level and mixed low-level radioactive wastes. To offer this
service we will have to obtain the additional regulatory authorizations for
which we have applied.
Competition
within the hazardous waste industry is diverse and based primarily on facility
location/proximity to customers, pricing and customer service. We expect
price
competition to be intense for RCRA- and TSCA-related wastes. With respect
to our
currently-permitted activities, our principal competitors are Energy Solutions,
LLC, American Ecology Corporation and Perma-Fix Environmental Services, Inc.
These competitors are well established and have significantly greater resources
than we do, which could be important factors to our potential customers.
We
believe we may have certain competitive advantages, including our
environmentally-desirable location, broad level of local community support,
a
rail transportation network leading to our facility and our capability for
future site expansion.
Regulatory
and Environmental Matters
- While
the
waste management industry has benefited from increased governmental regulation,
it has also become subject to extensive and evolving regulation by federal,
state and local authorities. The regulatory process requires businesses to
obtain and retain numerous operating permits covering various aspects of
their
operations, any of which could be subject to revocation, modification or
denial.
Regulations also allow public participation in the permitting process.
Individuals as well as companies may oppose the granting of permits. In
addition, governmental policies and the exercise of broad discretion by
regulators are subject to change. It is possible our ability to obtain and
retain permits on a timely basis could be impaired in the future. The loss
of an
individual permit or the failure to obtain a permit could have a significant
impact on our Waste Management Segment’s future operating plans, financial
condition, results of operations or liquidity, especially because we only
own
and operate one disposal site. For example, adverse decisions by governmental
authorities on our permit applications could cause us to abandon projects,
prematurely close our facility or restrict operations. We expect our RCRA
permit
and our license from the TDSHS, as amended, to expire in 2015 and our TSCA
authorization to expire in 2010. Such permits, licenses and authorizations
can
be renewed subject to compliance with the requirements of the application
process and approval by the TCEQ, TDSHS or EPA, as applicable.
Prior
to
June 2003, Texas state law 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 June 2003, a new Texas state law was enacted that allows the
TCEQ
to issue a low-level radioactive waste disposal license to a private entity,
such as us. Our Waste Control Segment is the only entity to apply for such
a
license with the TCEQ. The application was declared administratively complete
by
the TCEQ in February 2005. The TCEQ began its technical review of the
application in May 2005. We are uncertain as to the length of time it will
take
for the agency to complete its review and act upon our license application.
We
currently believe the state will make its final decision on our application
for
11.e(2) waste materials in late 2008, but we do not expect to receive a final
decision on our application for the disposal of low-level and mixed low-level
radioactive waste until early 2009. We do not know if we will be successful
in
obtaining these licenses.
From
time
to time federal, state and local authorities have proposed or adopted other
types of laws and regulations for the waste management industry, including
laws
and regulations restricting or banning the interstate or intrastate shipment
of
certain waste, changing the regulatory agency issuing a license, imposing
higher
taxes on out-of-state waste shipments compared to in-state shipments,
reclassifying certain categories of hazardous waste as non-hazardous and
regulating disposal facilities as public utilities. Certain states have issued
regulations which attempt to prevent waste generated within that particular
state from being sent to disposal sites outside that state. The U.S. Congress
has also considered legislation which would enable or facilitate such bans,
restrictions, taxes and regulations. Due to the complex nature of industry
regulation, implementation of existing or future laws and regulations by
different levels of government could be inconsistent and difficult to foresee.
While we attempt to monitor and anticipate regulatory, political and legal
developments which affect the industry, we cannot assure you we will be able
to
do so. Nor can we predict the extent to which legislation or regulations
that
may be enacted, or any failure of legislation or regulations to be enacted,
may
affect our operations in the future.
The
demand for certain hazardous waste services we intend to provide is dependent
in
large part upon the existence and enforcement of federal, state and local
environmental laws and regulations governing the discharge of hazardous waste
into the environment. We and the industry as a whole could be adversely affected
to the extent such laws or regulations are amended or repealed or their
enforcement is lessened.
Because
of the high degree of public awareness of environmental issues, companies
in the
waste management business may be, in the normal course of their business,
subject to judicial and administrative proceedings. Governmental agencies
may
seek to impose fines or revoke, deny renewal of, or modify any applicable
operating permits or licenses. In addition, private parties and special interest
groups could bring actions against us alleging, among other things, a violation
of operating permits or opposition to new license authorizations.
Employees
- At
December 31, 2006, we had approximately 108 employees. We
believe our labor relations are good.
TITANIUM
METALS - TITANIUM METALS CORPORATION
Business
Overview - We
account for our 35% non-controlling interest in TIMET by the equity method.
On
February 28, 2007 our board of directors declared a special dividend of all
of
the TIMET common stock we own. After the special dividend is completed the
only
ownership interest we will have in TIMET will be a nominal amount through
our NL
subsidiary. See Note 23 to our Consolidated Financial Statements. TIMET is
a
leading global producer of titanium sponge, melted products (ingot and slab)
and
mill products. Substantially all of TIMET’s sales and operating income is
derived from operations based in the U.S., the U.K., France and Italy.
Titanium
was first manufactured for commercial use in the 1950s. Titanium’s unique
combination of corrosion resistance, elevated-temperature performance and
high
strength-to-weight ratio makes it particularly desirable for use in commercial
and military aerospace applications where these qualities are essential design
requirements for certain critical parts such as wing supports and jet engine
components. Historically, aerospace applications have accounted for a
substantial portion of the worldwide demand for titanium; however, recently
the
number of non-aerospace end-use markets for titanium has substantially expanded.
Today, there are numerous industrial uses for titanium including chemical
plants, power plants, desalination plants and pollution control equipment
and in
emerging markets with such diverse uses as offshore oil and gas production
installations, automotive, geothermal facilities and architectural
applications.
TIMET
is
the only producer with major titanium production facilities located in the
United States and Europe, the world's principal titanium consumption
markets. TIMET is currently the largest producer of titanium sponge, a key
raw material, in the United States. We estimate TIMET had approximately 20%
of
worldwide industry shipments of titanium mill products and approximately
7% of
worldwide titanium sponge production in 2006.
Titanium
industry. The
following graph illustrates TIMET’s estimates of titanium industry mill product
shipments over the last ten years.
Mill
Product Shipments by Industry Sector
The
cyclical nature of the commercial aerospace sector has been the principal
driver
of the historical fluctuations in the performance of most titanium product
producers. Over the past 20 years, the titanium industry has had a variety
of
cyclical peaks and troughs in mill product shipments. Prior to 2004, demand
for
titanium reached its highest level in 1997 when industry mill product shipments
reached approximately 60,700 metric tons. However, since 1997, titanium mill
product demand in the military, industrial and emerging market sectors has
fluctuated significantly, primarily due to the continued development of
innovative uses for titanium products in these other industries. We estimate
that industry shipments approximated 69,000 metric tons in 2005 and 75,000
metric tons in 2006, and we currently expect 2007 total industry mill product
shipments to increase by approximately 7% to 15% as compared to an estimated
9%
increase in 2006.
Demand
for titanium products within the commercial aerospace sector is derived from
both jet engine components (e.g., blades, discs, rings and engine cases)
and
airframe components (e.g., bulkheads, tail sections, landing gear, wing supports
and fasteners). The commercial aerospace sector has a significant influence
on
titanium companies, particularly mill product producers. Deliveries of titanium
generally precede aircraft deliveries by about one year, and our business
cycle
generally correlates to this timeline, although the actual timeline can vary
considerably depending on the titanium product. We estimate that 2007 industry
mill product shipments into the commercial aerospace sector will increase
10% to
15% from 2006.
The
Airline Monitor,
a
leading aerospace publication, traditionally issues forecasts for commercial
aircraft deliveries each January and July. The
Airline Monitor’s
most
recently issued forecast (January 2007) estimates
deliveries of large commercial aircraft (aircraft with over 100 seats) totaled
820 (including 103 twin aisle aircraft) in 2006, and the following table
summarizes its forecast of deliveries of
large
commercial aircraft over the next five years:
|
|
Forecasted
deliveries
|
|
%
increase (decrease)
Over
previous year
|
|
Year
|
|
Total
|
|
Twin
aisle
|
|
Total
|
|
Twin
aisle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
925
|
|
|
117
|
|
|
12.8
|
%
|
|
13.6
|
%
|
2008
|
|
|
1,037
|
|
|
170
|
|
|
12.1
|
%
|
|
45.3
|
%
|
2009
|
|
|
1,086
|
|
|
200
|
|
|
4.7
|
%
|
|
17.6
|
%
|
2010
|
|
|
1,205
|
|
|
250
|
|
|
11.0
|
%
|
|
25.0
|
%
|
2011
|
|
|
980
|
|
|
250
|
|
|
(18.7
|
)%
|
|
-
|
|
The
latest forecast from
The
Airline Monitor
reflects
a 5% increase in forecasted deliveries over the next five years compared
to the
July 2006 forecast over the next five years, in large part due to the record
level of new orders placed for Boeing and Airbus models during 2005 and a
stronger than expected order rate in 2006. Total order bookings for Boeing
and
Airbus in 2006 were 1,857 planes, and current expectations are that new orders
in 2007 will be lower than 2006. However, the strong bookings in 2006 have
increased the order backlog for both Boeing and Airbus, and these backlogs
reflect orders for aircraft to be delivered over the next several years.
Changes
in the economic environment and the financial condition of airlines can result
in rescheduling or cancellation of contractual orders. Accordingly, aircraft
manufacturer backlogs are not necessarily a reliable indicator of near-term
business activity, but may be indicative of potential business levels over
a
longer-term horizon. The latest forecast from The
Airline Monitor
estimates Airbus’ firm order backlog at 329 twin aisle planes and 2,204 single
aisle planes and Boeing’s firm order backlog at 895 twin aisle planes and 1,541
single aisle planes
Twin
aisle planes (e.g., Boeing 747, 777 and 787 and Airbus A330, A340, A350 and
A380) tend to use a higher percentage of titanium in their airframes, engines
and parts than single aisle planes (e.g., Boeing 737 and 757 and Airbus A318,
A319 and A320), and newer models tend to use a higher percentage of titanium
than older models. Additionally, Boeing generally uses a higher percentage
of
titanium in its airframes than Airbus. For example, based on information
we
receive from airframe and engine manufacturers and other industry sources,
we
estimate that approximately 59 metric tons, 45 metric tons and 18 metric
tons of
titanium are purchased for the manufacture of each Boeing 777, 747 and 737,
respectively, including both the airframes and engines. Based on these sources,
we estimate that approximately 25 metric tons, 18 metric tons and 12 metric
tons
of titanium are purchased for the manufacture of each Airbus A340, A330 and
A320, respectively, including both the airframes and engines.
At
year-end 2006, a total of 166 firm orders had been placed for the Airbus
A380, a
program officially launched in 2000 with anticipated first deliveries in
2007.
Based on information we receive from airframe and engine manufacturers and
other
sources, we estimate that approximately 146 metric tons of titanium (120
metric
tons for the airframe and 26 metric tons for the engines) will be purchased
for
each A380 manufactured. Additionally, at year-end 2006, a total of 448 firm
orders have been placed for the Boeing 787, a program officially launched
in
April 2004 with anticipated first deliveries in 2008. Although the 787 will
contain more composite materials than a typical Boeing aircraft, based on
these
services we estimate that approximately 136 metric tons of titanium (125
metric
tons for the airframe and 11 metric tons for the engines) will be purchased
for
each 787 manufactured. We believe significant additional titanium will be
required in the early years of 787 manufacturing until the program reaches
maturity. Additionally, during 2006, Airbus officially launched the A350
XWB
program, which is a major derivative of the Airbus A330, with first deliveries
scheduled for 2012. As of December 31, 2006, a total of 102 firm orders had
been
placed for the A350 XWB. These A350 XWBs will use composite materials and
new
engines similar to those used on the Boeing 787 and are expected to require
significantly more titanium as compared with earlier Airbus models. Based
on
these sources, our preliminary estimates are that at least 51 metric tons
(40
metric tons for the airframe and 11 metric tons for the engines) will be
purchased for each A350 XWB manufactured. However, the final titanium buy
weight
may change as the A350 XWB is still in the design phase.
Titanium
shipments into the military sector are largely driven by government defense
spending in North America and Europe. Military aerospace programs were the
first
to utilize titanium’s unique properties on a large scale, beginning in the
1950s. Titanium shipments to military aerospace markets reached a peak in
the
1980s before falling to historical lows in the early 1990s after the end
of the
Cold War. In recent years, titanium has become an accepted use in ground
combat
vehicles as well as in naval vessels. The importance of military markets
to the
titanium industry is expected to continue to rise in coming years as defense
spending budgets increase in reaction to terrorist activities and global
conflicts and to replace aging conventional armaments. Defense spending for
all
systems is expected to remain strong until at least 2010. Current and future
military strategy leading to light armament and mobility favor the use of
titanium due to light weight and strong ballistic performance.
As
the
strategic environment demands a greater need for global lift and mobility,
the
U.S. military needs more airlift capacity and capability. Airframe programs
are
expected to drive the military market demand for titanium through 2015. The
U.S.
is the world’s largest market for single aisle airframes, and overall is
expected to require approximately 33% of both single aisle and twin aisle
deliveries over the next 20 years. Several of today’s active U.S. military
programs, including the C-17 and F-15 are currently expected to continue
in
production through the end of the current decade, while other programs, such
as
the F/A 18 and F-16, are expected to continue into the middle of the next
decade. European military programs also have active aerospace programs offering
the possibility for increased titanium consumption. Production levels for
the
Saab Gripen, Eurofighter Typhoon, Dassault Rafale and Dassault Mirage 2000
are
all forecasted to remain steady through the end of the decade.
In
addition to the established programs, newer U.S. programs offer growth
opportunities for increased titanium consumption. The F/A-22 Raptor was given
full-rate production approval in April 2005. Additionally, the F-35 Joint
Strike
Fighter, now known as the Lightning II, is expected to enter low-rate initial
production in late 2008, with delivery of the first production aircraft in
2010.
Although no specific delivery patterns have been established, according to
The
Teal Group,
a
leading aerospace publication, procurement is expected to extend over the
next
30 to 40 years and may include as many as approximately 3,500 planes, including
sales to foreign nations.
Utilization
of titanium on military ground combat vehicles for armor appliqué and integrated
armor or structural components continues to gain acceptance within the military
market segment. Titanium armor components provide the necessary ballistic
performance while achieving a mission critical vehicle performance objective
of
reduced weight in new generation vehicles. In order to counteract increased
threat levels, titanium is being utilized on vehicle upgrade programs in
addition to new builds. Based on active programs, as well as programs currently
under evaluation, we believe there will be additional usage of titanium on
ground combat vehicles that will provide continued growth in the military
market
sector.
In armor
and armament, we sell plate and sheet products for fabrication into appliqué
plate and reactive armor for protection of the entire ground combat vehicle
as
well as the vehicle’s primary structure.
Since
titanium’s initial commercial uses, the number of end-use markets for titanium
has expanded significantly. Established industrial uses for titanium include
chemical plants, power plants, desalination plants and pollution control
equipment. Rapid growth of the Chinese and other Southeast Asian economies
has
brought unprecedented demand for titanium-intensive industrial equipment.
In
November 2005, we entered into a joint venture with XI'AN BAOTIMET VALINOX
TUBES
CO. LTD. (“BAOTIMET”) to produce welded titanium tubing in the Peoples Republic
of China. BAOTIMET's production facilities are located in Xi'an, China, and
production began in January 2007.
Titanium
continues to gain acceptance in many emerging market applications, including
automotive, energy (including oil and gas) and architecture. Although titanium
is generally more expensive than other competing metals, over the entire
life
cycle of the application, customers find that titanium is a less expensive
alternative due to its durability and longevity. In many cases customers
also
find the physical properties of titanium to be attractive from the standpoint
of
weight, performance, design alternatives and other factors. We continue to
explore opportunities in these emerging markets through marketing initiatives,
and we actively pursue the research and development of proprietary alloys
designed to provide more cost effective alternatives for these markets.
Although
we estimate that emerging market demand presently represents only about 4%
of
the 2006 total industry demand for titanium mill products, we believe emerging
market demand, in the aggregate, could grow at double-digit rates over the
next
several years. We have ongoing initiatives to actively pursue and expand
these
markets, and these initiatives have resulted in net sales growth from our
mill
product shipments into emerging markets by more than 50% from 2004 to 2005
and
again from 2005 to 2006.
The
automotive market continues to be an attractive emerging market due to its
potential for sustainable long-term growth. We are focused on developing
and
marketing proprietary alloys and processes specifically suited for automotive
applications. Titanium is now used in several consumer car and truck
applications as well as in numerous motorcycles. The decision to select titanium
components for consumer car, truck and motorcycle components remains highly
cost
sensitive; however, we believe titanium’s acceptance in consumer vehicles will
expand as the automotive industry continues to better understand the benefits
titanium offers.
The
oil
and gas market utilizes titanium for down-hole logging tools, critical riser
components, fire water systems and saltwater-cooling systems. Additionally,
as
offshore development of new oil and gas fields moves into the ultra deep-water
depths, market demand for titanium’s light-weight, high-strength and
corrosion-resistance properties is creating new opportunities for the material.
We have focused additional resources on the development of alloys and production
processes to promote the expansion of titanium use in this market and in
other
non-aerospace applications.
Manufacturing,
Operations and Products
-
TIMET is
a vertically integrated titanium manufacturer whose products
include:
|
·
|
titanium
sponge (named for its sponge-like appearance), the basic form of
titanium
metal used in titanium products;
|
|
·
|
melted
products (ingot, electrodes and slab), the result of melting sponge
and
titanium scrap, either alone or with various
alloys;
|
|
·
|
mill
products that are forged and rolled from ingot or slab, including
long
products (billet and bar), flat products (plate, sheet and strip)
and
pipe; and
|
|
·
|
fabrications
(spools, pipefittings, manifolds, vessels, etc.) that are cut,
formed,
welded and assembled from titanium mill products.
|
Titanium
sponge is the commercially pure, elemental form of titanium metal. Titanium
sponge production involves the chlorination of titanium-containing rutile
ores
(derived from beach sand) with chlorine and petroleum coke to produce titanium
tetrachloride. Titanium tetrachloride is first purified and then reacted
with
magnesium in a closed system, producing titanium sponge and magnesium chloride
as co-products. TIMET’s titanium sponge production facility in Nevada
incorporates vacuum distillation process (“VDP”) technology. VDP removes the
magnesium and magnesium chloride residues by applying heat to the sponge
mass
while maintaining a vacuum in the chamber. The combination of heat and vacuum
boils the residues from the sponge mass, the mass is then mechanically pushed
out of the distillation vessel, sheared and crushed, while the residual
magnesium chloride is electrolytically separated and recycled.
Titanium
sponge is melted into ingot (cylindrical solid shape that weighs up to 8
metric
tons) or titanium slab (rectangular solid shape that weighs up to 16 metric
tons). Ingot and slab are formed by melting sponge, scrap or both, usually
with
various alloys such as vanadium, aluminum, molybdenum, tin and zirconium.
The
melting process for ingot and slab is closely controlled and monitored utilizing
computer control systems to maintain product quality and consistency and
to meet
customer specifications. In most cases, TIMET uses its ingot and slab as
the
intermediate material for further processing into mill products; but in some
cases it sells ingot, electrodes and slab to third parties. Titanium scrap
is a
by-product of the forging, rolling, milling and machining operations, and
significant quantities of scrap are generated in the production process for
finished titanium products and components. We typically reprocess scrap
by-product from our mill production processes into the melting process once
we
have sorted and cleaned the scrap.
During
the production process and following the completion of manufacturing, TIMET
performs extensive testing on its products. TIMET believes the inspection
process is critical to ensuring that its products meet the high quality
requirements of its customers, particularly in aerospace component production.
TIMET certifies its products meet customer specification at the time of shipment
for substantially all customer orders.
TIMET
sends certain products to outside vendors for further processing (e.g., certain
rolling, finishing and other processing steps in the U.S., and certain melting
and forging steps in France) before being shipped to customers. In France,
our
processor is also a partner in our 70%-owned subsidiary, TIMET Savoie, S.A.
(“TIMET Savoie”). During 2006, we entered into a 20-year conversion services
agreement with Haynes International, Inc. whereby Haynes will provide us
an
annual output capacity of 4,500 metric tons of titanium mill rolling services
at
their facility in Kokomo, Indiana. We also have the option of increasing
this
output capacity to 9,000 metric tons. This agreement provides us with a
long-term secure source for processing flat products, resulting in a significant
increase in our existing mill product conversion capabilities, which allows
us
to assure our customers of our long-term ability to meet their needs.
TIMET
currently has the following manufacturing facilities in the United States
and
Europe.
|
|
|
|
Annual
Practical Capacity
(3)
|
|
Location
|
|
Products
|
|
Melted
|
|
Mill
|
|
|
|
|
|
(metric
tons)
|
|
|
|
|
|
|
|
|
|
|
|
|
Henderson,
NV
|
|
|
Sponge,
melted
|
|
|
12,250
|
|
|
-
|
|
Morgantown,
PA
|
|
|
Melted,
mill
|
|
|
20,000
|
|
|
-
|
|
Toronto,
OH
|
|
|
Milled,
fabrications
|
|
|
-
|
|
|
11,000
|
|
Vallejo,
CA (1)
|
|
|
Melted
|
|
|
1,600
|
|
|
-
|
|
Ugine,
France (1)(2)
|
|
|
Melted,
mill
|
|
|
2,100
|
|
|
1,500
|
|
Waunarlwydd
(Swansea)
Wales
|
|
|
Mill
|
|
|
-
|
|
|
3,100
|
|
Witton,
England (1)
|
|
|
Melted,
mill
|
|
|
8,700
|
|
|
7,000
|
|
|
(2)
|
Operated
through a 70%-owned subsidiary. CEZUS is the other owner of the
subsidiary. Practical capacity is based on Compagnie Europeenne du
Zirconium-CEZUS S.A. ("CEZUS") contractual obligation with TIMET.
|
|
(3)
|
Practical
capacities are variable based on product mix and are not
additive.
|
TIMET
estimates in 2006 they had approximately 20% of each of the worldwide melting
and mill capacity.
During
the past three years, our major titanium production facilities have operated
at
varying levels of practical capacity. Overall in 2006, our plants operated
at
approximately 88% of practical capacity, as compared to 80% in 2005 and 73%
in
2004. Overall In 2007, our plants are expected to operate at approximately
93%
of practical capacity.
· |
Our
VDP sponge facility in Nevada is expected to operate at 100% of its
annual
practical capacity of 10,600 metric tons during
2007.
|
· |
Our
U.S. melting facilities are expected to operate at approximately
95% of
annual practical capacity in 2007, as compared to 90% in
2006.
|
· |
Our
U.S. forging and rolling facility is expected to operate at approximately
89% of annual practical capacity in 2007, up from 78% in
2006.
|
· |
Our
U.K. melting and mill production facilities are expected to operate
at
approximately 93% and 84%, respectively, of annual practical capacity
in
2007 as compared to 86% and 74%, respectively, in
2006.
|
· |
We
expect to utilize all or substantially all of the maximum annual
capacity
CEZUS is contractually required to provide to us in 2007, just as
we did
in 2006.
|
However,
practical capacity and utilization measures can vary significantly based
upon
the mix of products produced.
The
expansion of the Nevada VDP sponge facility is nearing completion and is
expected to commence commercial production during the second quarter of 2007.
The expansion of the Pennsylvania electron beam cold hearth melt capacity,
which
will increase our total melt capacity by approximately 20% and our cold hearth
melt capacity by approximately 54%, is on schedule, and we anticipate meeting
our completion target of early 2008. In 2006, we entered into an agreement
with
CEZUS that provides for the extension of the term of the conversion services
agreement until 2015 and the expansion of the maximum annual melt capacity
that
CEZUS is contractually required to provide to us to 2,900 metric tons. We
expect
the expansion to be fully operational by the second quarter of
2008.
Raw
Materials
-
The
principal raw materials used in the production of titanium ingot, slab and
mill
products are titanium sponge, titanium scrap and alloys. The following table
summarizes our 2006 raw material usage requirements in the production of
our
melted and mill products:
|
|
Percentage
of total raw material requirements
|
|
|
|
|
|
|
Internally
produced sponge
|
|
|
24
|
%
|
Purchased
sponge
|
|
|
29
|
%
|
Titanium
scrap
|
|
|
40
|
%
|
Alloys
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
100
|
%
|
The
primary raw materials used in the production of titanium sponge are
titanium-containing rutile ore, chlorine, magnesium and petroleum coke. Rutile
ore is currently available from a limited number of suppliers around the
world,
principally located in Australia, South Africa and Sri Lanka. We purchase
the
majority of our supply of rutile ore from Australia. We believe the availability
of rutile ore will be adequate for the foreseeable future and do not anticipate
any interruptions of our rutile supplies.
Chlorine
is currently obtained from a single supplier near our sponge plant in Henderson,
Nevada. While we do not presently anticipate any chlorine supply problems,
we
have taken steps to mitigate this risk in the event of supply disruption,
including establishing the feasibility of certain equipment modifications
to
enable us to utilize material from alternative chlorine suppliers or to purchase
and utilize an intermediate product which will allow us to eliminate the
purchase of chlorine if needed. Magnesium and petroleum coke are generally
available from a number of suppliers.
We
are
currently the largest U.S. producer of titanium sponge. Beginning in 2005,
we
commenced a 47% expansion of our sponge production capacity at our Henderson,
Nevada plant, which is nearing completion, and commercial production from
this
additional capacity is expected to commence during the second quarter of
2007.
During 2006, other producers also increased capacity and announced plans
to
begin construction on additional capacity expansion projects during 2007.
However, the degree to which quality and cost of the sponge produced by our
competitors will be comparable to the high-grade sponge that we produce in
our
Henderson, Nevada facility is unknown. Because we cannot supply all of our
needs
for all grades of titanium sponge internally, we will continue to be dependent
on third parties for a portion of our raw material requirements. Titanium
melted
and mill products require varying grades of sponge and/or scrap depending
on the
customers’ specifications and expected end use. We will continue to purchase
sponge from a variety of sources in 2007, including those sources under existing
supply agreements that end on December 31, 2007. We continue to evaluate
sources
of sponge supply, including new long-term supply agreements or renewals of
existing long-term sponge supply agreements.
We
utilize titanium scrap for melted products that is internally generated from
our
mill product production process or externally purchased from certain of our
customers under various contractual agreements or on the open market. Such
scrap
consists of alloyed and commercially pure solids and turnings. Internally
produced scrap is generated in our factories during both melting and mill
product processing. Scrap obtained through customer arrangements provides
a
“closed-loop” arrangement resulting in certainty of supply and cost stability.
Externally purchased scrap comes from a wide range of sources, including
customers, collectors, processors and brokers. We anticipate that 20% to
25% of
the scrap we will utilize during 2007 will be purchased from external suppliers,
as compared to 25% to 30% for 2006, due to our successful efforts to increase
our closed-loop arrangements. We also occasionally sell scrap, usually in
a form
or grade we cannot economically recycle.
All
of
our major competitors also utilize scrap as a raw material in their melt
operations. In addition to use by titanium manufacturers, titanium scrap
is used
in steel-making operations during production of interstitial-free steels,
stainless steels and high-strength-low-alloy steels. Although the demand
for
scrap remained strong in 2006 from steel-making and titanium melting sectors,
as
evidenced by high market prices for scrap compared to historical levels,
the
steel-making sector did not have as much influence on the availability and
pricing for titanium scrap in 2006 as compared to 2005.
Overall
market forces can significantly impact the supply or cost of externally produced
scrap, as the amount of scrap generated in the supply chain varies during
the
titanium business cycles. Early in the titanium cycle, the demand for titanium
melted and mill products begins to increase the scrap requirements for titanium
manufacturers, which precedes the increase in scrap generation by downstream
customers and the supply chain. The pressure on scrap generation and the
supply
chain places upward pressure on the market price of scrap. The opposite
situation occurs when demand for titanium melted and mill products begins
to
decline, resulting in greater availability of supply and downward pressure
on
the market price of scrap. During the middle of the cycle, scrap generation
and
consumption are in relative equilibrium, minimizing disruptions in supply
or
significant changes in the available supply and market prices for scrap.
Increasing or decreasing cycles tend to cause significant changes in both
the
supply and market price of scrap. These supply chain dynamics result in selling
prices for melted and mill products which tend to correspond with the changes
in
raw material costs. We expect that titanium industry-wide demand increases
will
continue and that average market prices will remain high in 2007. Because
we are
a net purchaser of scrap, this high level of demand and continued high pricing
will continue to influence our raw material costs which will likely also
influence our average selling prices.
In
2006,
we were somewhat limited in our ability to raise prices for the portion of
our
business that is subject to long-term pricing agreements. However, our ability
to offset increased material costs with higher selling prices improved in
2006
compared to 2005, as many of our long-term
agreements (“LTAs”) have
either expired or have been renegotiated with selling price adjustments that
take into account our raw material cost fluctuations. Further, previously
announced sponge expansions, including our VDP sponge expansion, and the
increased generation of scrap as the commercial aerospace cycle advances,
should
help to further reduce the recent imbalance of global supply and demand for
raw
materials. However, we do not believe the raw material shortage will be fully
relieved at any time in the near future, and therefore, we expect relatively
high prices for raw materials to continue for at least the near
term.
Various
alloys used in the production of titanium products are also available from
a
number of suppliers. The recent high level of global demand for steel products
has also resulted in a significant increase in the costs for several alloys,
such as vanadium and molybdenum. In 2006, the cost of these alloys remained
above historical levels of the past 10 years but were well below the
cost
peaks we experienced in the spring of 2005. Although availability is not
expected to be a concern and we have negotiated certain price and cost
protections with suppliers and customers, alloy costs may continue to fluctuate
in the future.
Patents
and Trademarks - TIMET
holds U.S. and foreign patents for certain of its titanium alloys and
manufacturing technology, which expire at various times from 2007 through
2025.
TIMET seeks patent protection as it develops new manufacturing technology
and
occasionally enters into cross-licensing arrangements with third parties.
However, the majority of TIMET’s titanium alloys and manufacturing technologies
do not benefit from patent or other intellectual property protection. TIMET
markets and sells some of its products under the TIMET®
and
TIMETAL®
trademarks.
Sales
-
TIMET
sells its products through its own sales force based in the U.S. and Europe
and
through independent agents and distributors worldwide. TIMET’s distribution
system also includes eight TIMET-owned service centers (five in the U.S.
and
three in Europe), which sell TIMET’s products on a just-in-time basis. The
service centers primarily sell value-added and customized mill products.
TIMET
believes its service centers provide a competitive advantage which allows
TIMET
to foster customer relationships, customize products to suit specific customer
requirements and respond quickly to customer needs.
Customer
Agreements
-
We have
LTAs
with
certain major customers, including, among others, The Boeing Company,
Rolls-Royce plc and its German and U.S. affiliates, United Technologies
Corporation (“UTC,” Pratt & Whitney and related companies), Société
Nationale d´Etude et de Construction de Moteurs d´Aviation (“Snecma”),
Wyman-Gordon Company (a unit of Precision Castparts Corporation (“PCC”)) and
VALTIMET SAS. These agreements expire at various times through 2017, are
subject
to certain conditions and generally include the following
provisions:
· |
minimum
market shares of the customers’ titanium requirements or firm annual
volume commitments;
|
· |
formula-determined
prices (including some elements based on market
pricing); and
|
· |
price
adjustments for certain raw material and energy cost fluctuations.
|
Generally,
the LTAs require our service and product performance to meet specified criteria
and contain a number of other terms and conditions customary in transactions
of
these types.
Certain
provisions of these LTAs have been amended in the past and may be amended
in the
future to meet changing business conditions. TIMET’s 2006 sales revenues to
customers under LTAs were 39% of its total sales revenues, an eight percentage
point decrease from 2005. This decrease primarily reflects LTAs with customers
that expired in 2005, for which our sales to these customers were on an annual
or spot purchase basis in 2006.
In
certain events of nonperformance by us or the customer, the LTAs may be
terminated early. Although it is possible that some portion of the business
would continue on a non-LTA basis, the termination of one or more of the
LTAs
could result in a material effect on our business, results of operations,
financial position or liquidity.
The LTAs
were designed to limit selling price volatility to the customer, while providing
us with a committed volume base throughout the titanium industry business
cycles
and certain mechanisms to adjust pricing for changes in certain cost elements.
Effective
July 1, 2005, we entered into a new LTA with Boeing (which replaced a prior
LTA). The new LTA expires on December 31, 2010 and provides for, among other
things, (i) mutual annual purchase and supply commitments by both parties,
(ii)
continuation of the buffer inventory program currently in place for Boeing
and
(iii) certain improved product pricing, including certain adjustments for
raw
material cost fluctuations. Beginning in 2006, the new LTA also replaced
the
take-or-pay provisions of the previous LTA with an annual makeup payment
early
in the following year in the event Boeing purchases less than its annual
volume
commitment in any year. In 2006, Boeing met its minimum volume commitment,
so no
makeup payment was required. See Item 7 - MD&A for additional information
regarding the Boeing LTA.
Markets
and Customers
Our
business is more dependent on commercial aerospace demand than is the overall
titanium industry. We shipped approximately 59% of our mill products to the
commercial aerospace sector in 2006, whereas we estimate approximately 41%
of
the overall titanium industry’s mill products were shipped to the commercial
aerospace sector in 2006.
Substantially
all of TIMET’s sales and operating income is derived from operations based in
the U.S., the U.K., France and Italy. More than half of TIMET’s sales revenue is
from sales to the commercial aerospace sector. We have LTAs with several
major
aerospace customers, including Boeing, Rolls-Royce, UTC, Snecma and
Wyman-Gordon. This concentration of customers may impact our overall exposure
to
credit and other risks, either positively or negatively, in that all of these
customers may be similarly affected by the same economic or other conditions.
The following table provides supplemental sales revenue
information:
|
|
Year
ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(Percentage
of total sales revenue)
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten
largest customers
|
|
|
48
|
%
|
|
44
|
%
|
|
49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Significant
customers:
|
|
|
|
|
|
|
|
|
|
|
PCC
and PCC-related entities (1)
|
|
|
13
|
%
|
|
13
|
%
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Customers
under LTAs
|
|
|
44
|
%
|
|
47
|
%
|
|
39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Significant
customer under LTAs:
|
|
|
|
|
|
|
|
|
|
|
Rolls-Royce
(1)
(2)
|
|
|
15
|
%
|
|
12
|
%
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) PCC
and PCC-related entities serve as suppliers to Rolls-Royce. Certain
sales
we make directly to PCC and PCC-related entities also count towards,
and
are reflected in, the table above as sales to Rolls-Royce under
the
Rolls-Royce LTA.
(2) Sales
under the Rolls-Royce LTA were less than 10% in
2006.
|
The
primary market for titanium products in the commercial aerospace sector consists
of two major manufacturers of large commercial airframes, Boeing Commercial
Airplanes Group (a unit of Boeing) and Airbus, as well as manufacturers of
large
civil aircraft engines including Rolls-Royce, General Electric Aircraft Engines,
Pratt & Whitney and Snecma. We sell directly to these major manufacturers,
as well as to companies (including forgers such as Wyman-Gordon) that use
our
titanium to produce parts and other materials for such manufacturers.
Approximately 57% of our sales revenue in 2004, 2005 and 2006 was generated
by
sales into the commercial aerospace sector. If any of the major aerospace
manufacturers were to significantly reduce aircraft and/or jet engine build
rates from those currently expected, there could be a material adverse effect,
both directly and indirectly, on our business, results of operations, financial
position and liquidity.
The
market for titanium in the military sector includes sales of melted and mill
titanium products engineered for applications for military aircraft (both
engines and airframes), armor and component parts, armor appliqué on ground
combat vehicles and other integrated armor or structural components. We sell
directly to many of the major manufacturers associated with military programs
on
a global basis. Approximately
14% in 2004, 12% in 2005 and 15% in 2006 of our sales revenue was generated
by
sales into the military sector.
Outside
of commercial aerospace and military sectors, we manufacture a wide range
of
products for customers in the chemical process, oil and gas, consumer, sporting
goods, automotive and power generation sectors. Approximately 16% in 2004,
16%
in 2005 and 17% in 2006 of our sales revenue was generated by sales into
industrial and emerging market sectors, including sales to VALTIMET, which
was
our 43.7% owned affiliate until we sold our interest on December 28, 2006,
for
the production of welded tubing. For the oil and gas industry, we provide
seamless pipe for downhole casing, risers, tapered stress joints and other
offshore oil and gas production equipment, along with firewater piping systems.
In
addition to melted and mill products, which are sold into the commercial
aerospace, military, industrial and emerging markets sectors, we sell certain
other products such as titanium fabrications, titanium scrap and titanium
tetrachloride. Sales of these other products represented 13% of our sales
revenue in 2004, 15% in 2005 and 11% in 2006.
Our
backlog of unfilled orders has grown significantly from approximately $450
million at December 31, 2004, to $870 million at December 31, 2005 and to
$1,125
million at December 31, 2006. Over 83% of the 2006 year-end backlog is scheduled
for shipment during 2007. Our order backlog may not be a reliable indicator
of
future business activity.
We
have
explored and will continue to explore strategic arrangements in the areas
of
product development, production and distribution. We will also continue to
work
with existing and potential customers to identify and develop new or improved
applications for titanium that take advantage of its unique
qualities.
Competition
- The
titanium metals industry is highly competitive on a worldwide basis. Producers
of melted and mill products are located primarily in the United States, Japan,
France, Germany, Italy, Russia, China and the United Kingdom. Additionally,
producers of other metal products, such as steel and aluminum, maintain forging,
rolling and finishing facilities that could be used or modified to process
titanium products. There are also several producers of titanium sponge in
the
world. Four of the major producers are currently in some stage of increasing
sponge production capacity. We believe that entry as a new producer of titanium
sponge would require a significant capital investment, substantial technical
expertise and significant lead time.
Our
principal competitors in the aerospace titanium market are Allegheny
Technologies Incorporated (“ATI”) and RTI International Metals, Inc. (“RTI”),
both based in the United States, and Verkhnaya Salda Metallurgical Production
Organization (“VSMPO”), based in Russia. UNITI (a joint venture between ATI and
VSMPO), RTI and certain Japanese producers are our principal competitors
in the
industrial and emerging markets. We compete primarily on the basis of price,
quality of products, technical support and the availability of products to
meet
customers’ delivery schedules.
In
the
U.S. market, the increasing presence of non-U.S. participants has become
a
significant competitive factor. Until 1993, imports of foreign titanium products
into the U.S. had not been significant. This was primarily attributable to
relative currency exchange rates and, with respect to Japan, Russia, Kazakhstan
and Ukraine, import duties (including antidumping duties). However, since
1993,
imports of titanium sponge, ingot and mill products, principally from Russia
and
Kazakhstan, have increased and have had a significant competitive impact
on the
U.S. titanium industry. To the extent we are able to take advantage of this
situation by purchasing sponge from such countries for use in our own
operations, the negative effect of these imports on us can be somewhat
mitigated.
Research
and Development
-
TIMET’s
research and development activities are directed toward expanding the use
of
titanium and titanium alloys in all market sectors. Key research activities
include the development of new alloys, technology to enhance TIMET’s products
performance in the industrial and aerospace markets and applications for
automotive and other emerging markets. TIMET conducts the majority of its
research and development activities at its Henderson Technical Laboratory
in
Henderson, Nevada, with additional activities at its Witton, England facility.
TIMET’s research and development costs were $2.9 million in 2004, $3.2 million
in 2005 and $4.7 million in 2006.
Regulatory
and Environmental Matters
-
Trade
and Tariffs - Generally,
imports of titanium products into the U.S. are subject to a 15% “normal trade
relations” tariff. For tariff purposes, titanium products are broadly classified
as either wrought (billet, bar, sheet, strip, plate and tubing) or unwrought
(sponge, ingot and slab). Because a significant portion of end-use products
made
from titanium products are ultimately exported, we, along with our principal
competitors and many customers, actively utilize the duty-drawback mechanism
to
recover most of the tariff paid on imports.
From
time-to-time, the U.S. government has granted preferential trade status to
certain titanium products imported from particular countries (notably wrought
titanium products from Russia, which carried no U.S. import duties from
approximately 1993 until 2004). It is possible that such preferential status
could be granted again in the future.
The
Japanese government has raised the elimination or harmonization of tariffs
on
titanium products, including titanium sponge, for consideration in multi-lateral
trade negotiations through the World Trade Organization (the so-called “Doha
Round”). As part of the Doha Round, the United States has proposed the staged
elimination of all industrial tariffs, including those on titanium. The Japanese
government has specifically asked that titanium in all its forms be included
in
the tariff elimination program. We have urged that no change be made to these
tariffs, either on wrought or unwrought products. The negotiations are currently
scheduled to conclude in 2007.
We
will
continue to resist efforts to eliminate duties on titanium products, although
we
may not be successful in these activities. Further reductions in, or the
complete elimination of, any or all of these tariffs could lead to increased
imports of foreign sponge, ingot and mill products into the U.S. and an increase
in the amount of such products on the market generally, which could adversely
affect pricing for titanium sponge, ingot and mill products and thus our
results
of operations, financial position or liquidity.
In
2006,
legislation formerly known as the “Berry Amendment,” was re-enacted by Congress
with minor changes. In general, the Berry Amendment requires that the United
States Department of Defense (“DoD”) expend funds for products containing
specialty metals, including titanium, that have been melted only in the United
States. In 2007, the DoD will adopt regulations implementing the revised
law.
New DoD regulations could have a significant impact on the effectiveness
of the
law. We will continue to work with the DoD toward a successful implementation
of
the revised specialty metals provision. A weakening in the enforcement of
the
specialty metals clause could increase foreign competition for sales of titanium
for defense products, adversely affecting our business, results of operations,
financial position or liquidity.
Environmental
Matters - TIMET’s
operations are governed by various environmental laws and regulations. TIMET
uses and manufactures substantial quantities of substances that are considered
hazardous, extremely hazardous or toxic under environmental and worker safety
and health laws and regulations. As
with
other companies engaged in similar businesses, certain of TIMET’s past and
current operations and products have the potential to cause environmental
or
other damage. TIMET has implemented and continues to implement various policies
and programs in an effort to minimize these risks. TIMET’s policy is to maintain
compliance with applicable environmental laws and regulations at all of its
facilities and to strive to improve its environmental performance. It is
possible that future developments, such as stricter requirements of
environmental laws and enforcement policies, could adversely affect TIMET’s
production, handling, use, storage, transportation, sale or disposal of such
substances as well as TIMET’s consolidated financial position, results of
operations or liquidity.
Our
U.S.
manufacturing operations are governed by federal environmental and worker
health
and safety laws and regulations, principally RCRA, the Occupational Safety
and
Health Act, the Clean Air Act, the Clean Water Act, the Safe Drinking Water
Act
and CERCLA, as well as the state counterparts of these statutes. We believe
our
U.S. facilities are in substantial compliance with applicable requirements
of
these laws or compliance orders issued thereunder.
While
the
laws regulating operations of industrial facilities in Europe vary from country
to country, a common regulatory framework is provided by the European Union
("EU"). The United Kingdom and France are members of the EU and follow its
initiatives. TIMET believes it has obtained all required permits and is in
substantial compliance with applicable EU requirements.
From
time
to time, TIMET’s facilities may be subject to environmental regulatory
enforce-ment under U.S. and foreign statutes. Typically TIMET establish-es
compliance programs to resolve such matters. Occasionally, TIMET may pay
penalties, but to date such penalties have not had a material adverse effect
on
TIMET’s consolidated financial position, results of operations or liquidity. We
believe all of our facilities are in substantial compliance with applicable
environmental laws.
Capital
expenditures related to ongoing environmental compliance, protection and
improvement programs in 2006 were approximately $2.0 million, and are currently
expected to approximate $3.9 million in 2007.
Employees
- As
of
December 31, 2006, TIMET employed approximately 2,380 people as
follows:
|
|
|
|
|
United
States(1)
|
|
|
1,545
|
|
Europe(2)
|
|
|
835
|
|
Total
|
|
|
2,380
|
|
(1)
TIMET’s
production, maintenance, clerical and technical workers in Toronto, Ohio,
and
its production and maintenance workers in Henderson, Nevada (approximately
50%
of TIMET’s total U.S. employees) are represented by the United Steelworkers of
America under contracts expiring in July 2008 and January 2008, respectively.
Employees at TIMET’s other U.S. facilities are not covered by collective
bargaining agreements.
(2)
A
majority of the salaried and hourly employees at TIMET’s European facilities are
represented by various European labor unions. TIMET
recently extended its labor agreement with its U.K. production and maintenance
employees through 2008, and TIMET’s labor agreement with its French and Italian
employees are renewed annually.
TIMET
considers its employee relations to be good.
OTHER
NL
Industries, Inc.
- At
December 31, 2006, NL owned 70% of CompX (principally through CompX Group)
and
36% of Kronos. NL also owns 100% of EWI RE, Inc., an insurance brokerage
and
risk management services company and also holds certain marketable securities
and other investments. See Note 17 to our Consolidated Financial Statements
for additional information.
Tremont
LLC
- Tremont
is primarily a holding company through which we hold most of our 35% interest
in
TIMET at December 31, 2006. See Note 23 to our Consolidated Financial
Statements. Tremont also has indirect ownership interests in Basic Management,
Inc. ("BMI"), which provides utility services to, and owns property (the
"BMI
Complex") adjacent to, TIMET’s facility in Nevada, and The Landwell Company L.P.
("Landwell"), which is engaged in efforts to develop certain land holdings
for
commercial, industrial and residential purposes surrounding the BMI Complex.
Business
Strategy
- We
routinely compare our liquidity requirements and alternative uses of capital
against the estimated future cash flows to be received from our subsidiaries
and
unconsolidated affiliates, and the estimated sales value of those businesses.
As
a result, we have 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 our dividend policy, consider the sale of our
interest in our subsidiaries, business units, marketable securities or other
assets, or take a combination of these or other steps, to increase liquidity,
reduce indebtedness and fund future activities which have in the past and
may in
the future involve related companies. From time to time, we and our related
entities consider restructuring ownership interests among our subsidiaries
and
related companies. We expect to continue this activity in the future.
We
and
other entities that may be deemed to be controlled by or affiliated with
Mr.
Harold C. Simmons routinely evaluate acquisitions of interests in, or
combinations with, companies, including related companies, we perceive to
be
undervalued in the marketplace. These companies may or may not be engaged
in
businesses related to our current businesses. In some instances we actively
manage the businesses we acquire with a focus on maximizing return-on-investment
through cost reductions, capital expenditures, improved operating efficiencies,
selective marketing to address market niches, disposition of marginal
operations, use of leverage and redeployment of capital to more productive
assets. In other instances, we have disposed of our interest in a company
prior
to gaining control. We intend to consider such activities in the future and
may,
in connection with such activities, consider issuing additional equity
securities and increasing our indebtedness.
Website
and Available Information
- Our
fiscal year ends December 31. We furnish our stockholders with annual reports
containing audited financial statements. In addition, we file annual, quarterly
and current reports, proxy and information statements and other information
with
the SEC. Our consolidated subsidiaries (Kronos, NL and CompX) and our
significant equity method investee (TIMET) also file annual, quarterly and
current reports, proxy and information statements and other information with
the
SEC. We also make our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments thereto, available free
of
charge through our website at www.valhi.net
as soon
as reasonably practical after they have been filed with the SEC. We also
provide
to anyone, without charge, copies of such documents upon written request.
Requests should be directed to the attention of the Corporate Secretary at
our
address on the cover page of this Form 10-K.
Additional
information, including our Audit Committee charter, our Code of Business
Conduct
and Ethics and our Corporate Governance Guidelines, can also be found on
our
website. Information contained on our website is not part of this Annual
Report.
The
general public may read and copy any materials we file with the SEC at the
SEC’s
Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public
may
obtain information on the operation of the Public Reference Room by calling
the
SEC at 1-800-SEC-0330. We are an electronic filer. The SEC maintains an Internet
website at www.sec.gov that contains reports, proxy and information statements
and other information regarding issuers that file electronically with the
SEC,
including us.
ITEM 1A. RISK
FACTORS
Listed
below are certain risk factors associated with us and our businesses. In
addition to the potential effect of these risk factors discussed below, any
risk
factor which could result in reduced earnings or operating losses, or reduced
liquidity, could in turn adversely affect our ability to service our liabilities
or pay dividends on our common stock or adversely affect the quoted market
prices for our securities.
Our
assets consist primarily of investments in our operating subsidiaries, and
we
are dependent upon distributions from our subsidiaries to service our
liabilities.
A
significant portion of our assets consists of ownership interests in our
subsidiaries and affiliates. A majority of our cash flows are generated by
our
subsidiaries, and our ability to service our liabilities and to pay dividends
on
our common stock depends to a large extent upon the cash dividends or other
distributions we receive from our subsidiaries. Our subsidiaries are separate
and distinct legal entities and they have no obligation, contingent or
otherwise, to pay cash dividends or other distributions to us. In addition,
in
some cases our subsidiaries’ ability to pay dividends or other distributions
could be subject to restrictions as a result of debt covenants, applicable
tax
laws, foreign currency exchange regulations or other restrictions imposed
by
current or future agreements. Events beyond our control, including changes
in
general business and economic conditions, could adversely impact the ability
of
our subsidiaries to pay dividends or make other distributions to us. If our
subsidiaries should become unable to make sufficient cash dividends or other
distributions to us, our ability to service our liabilities and to pay dividends
on our common stock could be adversely affected. In addition, if the level
of
dividends and other distributions we receive from our subsidiaries were to
decrease to such a level that we were required to liquidate any of our
investments in the securities of our subsidiaries or affiliates in order
to
generate funds to satisfy our liabilities, we may be required to sell such
securities at a time or times at which we would not be able to realize what
we
believe to be the actual value of such assets.
Demand
for, and prices of, certain of our products are cyclical and we may experience
prolonged depressed market conditions for our products, which may result
in
reduced earnings or operating losses.
A
significant portion of our revenues is attributable to sales of TiO2.
Pricing
within the global TiO2
industry
over the long term is cyclical, and changes in industry economic conditions,
especially in Western industrialized nations, can significantly impact our
earnings and operating cash flows. This may result in reduced earnings or
operating losses.
Historically,
the markets for many of our TiO2
products
have experienced alternating periods of tight supply, causing selling prices
and
profit margins to increase, followed by periods of capacity additions, and
demand reductions resulting in oversupply and declining selling prices and
profit margins. At times, our costs to produce TiO2
may
increase during periods when our selling prices are declining, which would
further depress our profit margins. Future growth in demand for TiO2
may not
be sufficient to alleviate any future conditions of excess industry capacity,
and such conditions may not be sustained or may be further aggravated by
anticipated or unanticipated capacity additions or other events. The demand
for
TiO2
during
a
given year is also subject to annual seasonal fluctuations. TiO2
sales
are
generally higher in the first half of the year than in the second half of
the
year due in part to the increase in paint production in the spring to meet
the
spring and summer painting season demand.
The
titanium industry has historically derived a substantial portion of its business
from the commercial aerospace sector. TIMET’s business
is more dependent on commercial aerospace demand than the titanium industry
as a
whole. Consequently,
the cyclical nature of the commercial aerospace sector has been the principal
driver of fluctuations in TIMET’s performance. We believe we are in the
beginning of a long term sustain demand for titanium; however, outside events
could adversely affect the commercial aerospace sector, such as future terrorist
attacks, world health crises or reduced orders from commercial airlines
resulting from continued operating losses at the airlines. If these events
were
to occur, industry wide titanium demand could decline rapidly and significantly
which in turn would significantly decrease TIMET’s results of operations or
liquidity.
We
sell several of our products in mature and highly competitive industries
and
face price pressures in the markets in which we operate, which may result
in
reduced earnings or operating losses.
The
global markets in which Kronos, CompX, TIMET and WCS operate their businesses
are highly competitive. Competition is based on a number of factors, such
as
price, product quality and service. Some of our competitors may be able to
drive
down prices for our products because their costs are lower than our costs.
In
addition, some of our competitors' financial, technological and other resources
may be greater than our resources, and these competitors may be better able
to
withstand changes in market conditions. Our competitors may be able to respond
more quickly than we can to new or emerging technologies and changes in customer
requirements. Further, consolidation of our competitors or customers in any
of
the industries in which we compete may result in reduced demand for our products
or make it more difficult for us to compete with our competitors. In addition,
in some of our businesses new competitors could emerge by modifying their
existing production facilities so they could manufacture products that compete
with our products. The occurrence of any of these events could result in
reduced
earnings or operating losses.
Higher
costs or limited availability of our raw materials may reduce our earnings
or
decrease our liquidity. The
number of sources and availability of certain raw materials is specific to
the
particular geographical regions in which our facilities are located. For
example, titanium-containing feedstocks suitable for use in our TiO2
and
titanium metal facilities are available from a limited number of suppliers
around the world. While chlorine is generally widely available, TIMET obtains
its chlorine requirements for its Nevada production facility from a single
supplier near its plant. In addition, TIMET cannot supply internally all
of its
needs for all grades of titanium sponge and titanium scrap, and is dependent
on
third parties for a substantial portion of its raw material requirements.
In
addition to use by titanium manufacturers, titanium scrap is used in certain
steel-making operations. Current demand for these steel products, especially
from China, have produced a significant increase in demand for titanium scrap.
Political and economic instability in the countries from which we purchase
certain raw material supplies could adversely affect their availability.
If our
worldwide vendors are not able to meet their contractual obligations and
we were
otherwise unable to obtain necessary raw materials or if we would have to
pay
more for our raw materials and other operating costs, we may be required
to
reduce production levels or reduce our gross margins if we were unable to
pass
price increased onto our customers, which may decrease our liquidity and
operating income and results of operations.
We
could incur significant costs related to legal and environmental remediation
matters.
NL
formerly manufactured lead pigments for use in paint. NL and others pigment
manufacturers have been named as defendants in various legal proceedings
seeking
damages for personal injury, property damage and governmental expenditures
allegedly caused by the use of lead-based paints. These
lawsuits seek recovery under a variety of theories, including public and
private
nuisance, negligent product design, negligent failure to warn, strict liability,
breach of warranty, conspiracy/concert of action, aiding and abetting,
enterprise liability, market share or risk contribution liability, intentional
tort, fraud and misrepresentation, violations of state consumer protection
statutes, supplier negligence and similar claims. The
plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and health concerns associated with
the
use of lead-based paints, including damages for personal injury, contribution
and/or indemnification for medical expenses, medical monitoring expenses
and
costs for educational programs. As with all legal proceedings, the outcome
is
uncertain. Any liability NL might incur in the future could be material.
See
also Item 3.
Certain
properties and facilities used in our former businesses are the subject of
litigation, administrative proceedings or investigations arising under various
environmental laws. These proceedings seek cleanup costs, personal injury
or
property damages and/or damages for injury to natural resources. Some of
these
proceedings involve claims for substantial amounts. Environmental obligations
are difficult to assess and estimate for numerous reasons, and we may incur
costs for environmental remediation in the future in excess of amounts currently
estimated. Any liability we might incur in the future could be material.
See
also Item 3.
Adverse
changes to or interruptions in TIMET’s relationships with its major aerospace
customers could reduce its revenues, profitability and liquidity.
TIMET’s
business
is more dependent on commercial aerospace demand than the titanium industry
as a
whole. Sales under long-term agreements with certain customers in the aerospace
industry account for a significant portion of TIMET’s revenues. If we are unable
to renew or maintain our relationships with our major aerospace customers,
including The Boeing Company, Rolls Royce, Snecma, UTC and Wyman Gordon Company,
TIMET’s sales could decrease substantially, resulting in lower equity in
earnings and net income to us.
TIMET’s
failure to develop new markets will result in our continued dependence on
the
cyclical commercial aerospace industry. TIMET
is
devoting resources to developing new markets and applications for its titanium
products, principally in the automotive, oil and gas and other emerging markets
in an effort to reduce our dependence on the commercial aerospace market,
which
historically has had volatile swings in titanium demand. Developing new
applications involves substantial risk and uncertainties because titanium
must
compete with less expensive alternative materials in these potential markets
or
applications. Significant time may be required for to develop these new markets
or applications for our products and we may not be successful. In addition,
we
are uncertain to the extent to which we will face competition from titanium
and
other manufacturers.
The
rapid increase in titanium prices may cause our customers to look for
alternatives to titanium in their products. The
price
for melted and mill titanium has on average increased 71% and 35%, respectively,
in each of the last two years as a result of a sharp increase in titanium
demand
that has exceeded industry expansion. If prices for titanium are sustained
at
this record level, new markets and application opportunities for titanium
may
diminish as the use of titanium becomes too costly for many manufacturers.
In
addition, manufacturers that currently use titanium for their products may
look
for less expensive alternatives for titanium in existing products and
applications. If these events were to occur, TIMET’s sales and operating results
could decrease substantially, resulting in lower equity in earnings and net
income to us.
Reductions
in, or the complete elimination of, any or all tariffs on imported titanium
products into the United States could lead to increased imports of foreign
sponge, ingot and mill products into the U.S. which could decrease pricing
for
our titanium products.
In
the
U.S. titanium market, the increasing presence of foreign participants has
become
a significant competitive factor. Until 1993, imports of foreign titanium
products had not been significant primarily as a result of the relative currency
exchange rates and, with respect to Japan, Russia, Kazakhstan and Ukraine,
import duties (including antidumping duties). However, since 1993, imports
of
titanium sponge, ingot and mill products, principally from Russia and
Kazakhstan, have increased and have had a significant competitive impact
on the
U.S. titanium industry.
Generally,
imports of titanium products into the U.S. are subject to a 15% “normal trade
relations” tariff. For tariff purposes, titanium products are broadly classified
as either wrought (billet, bar, sheet, strip, plate and tubing) or unwrought
(sponge, ingot and slab). From time-to-time, the U.S. government has granted
preferential trade status to certain titanium products imported from particular
countries (notably wrought titanium products from Russia, which carried no
U.S.
import duties from approximately 1993 until 2004). It is possible that such
preferential status could be granted again in the future. While TIMET has
resisted efforts to eliminate duties or tariffs on titanium products, we
may not
be successful in the future.
Our
development of new component products as well as innovative features for
our
current component products is critical to sustaining and growing our Component
Product Segment sales.
Historically, our ability to provide value-added custom engineered component
products that address requirements of technology and space utilization has
been
a key element of our success. The introduction of new products and features
requires the coordination of the design, manufacturing and marketing of such
products with potential customers. The ability to implement such coordination
may be affected by factors beyond our control. While we will continue to
emphasize the introduction of innovative new products that target
customer-specific opportunities, there can be no assurance that any new products
we introduce will achieve the same degree of success that we have achieved
with
our existing products. Introduction of new products typically requires us
to
increase production volume on a timely basis while maintaining product quality.
Manufacturers often encounter difficulties in increasing production volumes,
including delays, quality control problems and shortages of qualified personnel.
As we attempt to introduce new products in the future, there can be no assurance
that we will be able to increase production volume without encountering these
or
other problems, which might negatively impact our financial condition or
results
of operations.
Our
leverage may impair our financial condition or limit our ability to operate
our
businesses. We
have a
significant amount of debt, substantially all of which relates to Kronos’ Senior
Secured Notes and our loans from Snake River Sugar Company. Our level of
debt
could have important consequences to our stockholders and creditors,
including:
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making
it more difficult for us to satisfy our obligations with respect
to our
liabilities;
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increasing
our vulnerability to adverse general economic and industry
conditions;
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requiring
that a portion of our cash flow from operations be used for the
payment of
interest on our debt, reducing our ability to use our cash flow
to fund
working capital, capital expenditures, dividends on our common
stock,
acquisitions and general corporate
requirements;
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limiting
our ability to obtain additional financing to fund future working
capital,
capital expenditures, acquisitions or general corporate
requirements;
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limiting
our flexibility in planning for, or reacting to, changes in our
business
and the industry in which we operate;
and
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placing
us at a competitive disadvantage relative to other less leveraged
competitors.
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In
addition to our indebtedness, we are party to various lease and other agreements
pursuant to which we are committed to make minimum payments. Our ability
to make
payments on and refinance our debt, and to fund planned capital expenditures,
depends on our ability to generate cash flow. To some extent, this is subject
to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control. In addition, our ability to borrow
additional funds under our subsidiaries’ credit facilities may in some instances
depend in part on our subsidiaries’ ability to maintain specified financial
ratios and satisfy certain financial covenants contained in the applicable
credit agreements. Our business may not generate sufficient cash flows from
operating activities to allow us to pay our debts when they become due and
to
fund our other liquidity needs. As a result, we may need to refinance all
or a
portion of our debt before maturity. We may not be able to refinance any
of our
debt on favorable terms, if at all. Our inability to generate sufficient
cash
flows or to refinance our debt on favorable terms could have a material adverse
effect on our financial condition.
None.
ITEM 2. PROPERTIES
We
along
with our subsidiaries: Kronos, CompX, WCS, TIMET and NL lease office space
for
our principal executive offices in Dallas, Texas. A list of operating facilities
for each of our subsidiaries is described in the applicable business sections
of
Item 1 - "Business." We believe our facilities are generally adequate and
suitable for their respective uses.
ITEM 3. LEGAL
PROCEEDINGS
We
are
involved in various legal proceedings. In addition to information included
below, certain information called for by this Item is included in Note 18
to our Consolidated Financial Statements, which is incorporated herein by
reference.
Lead
pigment litigation - NL
NL’s
former operations included the manufacture of lead pigments for use in paint
and
lead-based paint. We, other former manufacturers of lead pigments for use
in
paint and lead-based paint (together, the “former pigment manufacturers”), and
the Lead Industries Association (“LIA”), which discontinued business operations
in 2002, have been named as defendants in various legal proceedings seeking
damages for personal injury, property damage and governmental expenditures
allegedly caused by the use of lead-based paints. Certain of these actions
have
been filed by or on behalf of states, counties, cities or their public housing
authorities and school districts, and certain others have been asserted as
class
actions. These lawsuits seek recovery under a variety of theories, including
public and private nuisance, negligent product design, negligent failure
to
warn, strict liability, breach of warranty, conspiracy/concert of action,
aiding
and abetting, enterprise liability, market share or risk contribution liability,
intentional tort, fraud and misrepresentation, violations of state consumer
protection statutes, supplier negligence and similar claims.
The
plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and health concerns associated with
the
use of lead-based paints, including damages for personal injury, contribution
and/or indemnification for medical expenses, medical monitoring expenses
and
costs for educational programs. A number of cases are inactive or have been
dismissed or withdrawn. Most of the remaining cases are in various pre-trial
stages. Some are on appeal following dismissal or summary judgment rulings
in
favor of either the defendants or the plaintiffs. In addition, various other
cases are pending (in which we are not a defendant) seeking recovery for
injury
allegedly caused by lead pigment and lead-based paint. Although we are not
a
defendant in these cases, the outcome of these cases may have an impact on
cases
that might be filed against us in the future.
We
believe that these actions are without merit, and we intend to continue to
deny
all allegations of wrongdoing and liability and to defend against all actions
vigorously. We have never settled any of these cases, nor have any final
adverse
judgments against us been entered. However, see the discussion below in
The
State of Rhode Island
case.
See also Note 18 to our Consolidated Financial Statements. We have not accrued
any amounts for pending lead pigment and lead-based paint litigation. Liability
that may result, if any, cannot currently be reasonably estimated. We can
not
assure you that we 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 we were to incur any
such
future liability, it could have a material adverse effect on our consolidated
financial position, results of operations and liquidity.
In
August
1992, we were served with an amended complaint in Jackson,
et al. v. The Glidden Co., et al.,
Court
of Common Pleas, Cuyahoga County, Cleveland, Ohio (Case No. 236835). In 2002,
defendants filed a motion for summary judgment on all claims, which was granted
in January 2006. In January 2007, the dismissal was affirmed by the appeals
court. Plaintiff has not yet sought review by the Ohio Supreme Court. The
time
for appeal has not expired.
In
September 1999, an amended complaint was filed in Thomas
v. Lead Industries Association, et al.
(Circuit Court, Milwaukee, Wisconsin, Case No. 99-CV-6411) adding as defendants
the former pigment manufacturers to a suit originally filed against plaintiff's
landlords. Plaintiff, a minor, alleges injuries purportedly caused by lead
on
the surfaces of premises in homes in which he resided. Plaintiff seeks
compensatory and punitive damages, and we have denied liability. All of the
plaintiff’s claims, except for the failure to warn claim, have been dismissed by
the trial court. In December 2006, plaintiff moved for reconsideration of
his
negligence claim. Trial is scheduled to begin in October 2007.
In
October 1999, we were served with a complaint in State
of Rhode Island v. Lead Industries Association, et al.
(Superior Court of Rhode Island, No. 99-5226). The State seeks compensatory
and
punitive damages, as well as reimbursement for public and private building
abatement expenses and funding of a public education campaign and health
screening programs. In a 2002 trial on the sole question of whether lead
pigment
in paint on Rhode Island buildings is a public nuisance, the trial judge
declared a mistrial when the jury was unable to reach a verdict on the question,
with the jury reportedly deadlocked 4-2 in defendants' favor. In 2005, the
trial
court dismissed both the conspiracy claim with prejudice, and the State
dismissed its Unfair Trade Practices Act claim against us without prejudice.
A
second trial commenced against us and three other defendants on November
1, 2005
on the State’s remaining claims of public nuisance, indemnity and unjust
enrichment. Following the State’s presentation of its case, the trial court
dismissed the State’s claims of indemnity and unjust enrichment. The public
nuisance claim was sent to the jury in February 2006, and the jury found
that we
and two other defendants substantially contributed to the creation of a public
nuisance as a result of the collective presence of lead pigments in paints
and
coatings on buildings in Rhode Island. The jury also found that we and the
two
other defendants should be ordered to abate the public nuisance. Following
the
trial, the trial court dismissed the State’s claim for punitive damages. In
February 2007, the court denied the defendants’ post-trial motions to dismiss,
for a new trial and for judgment notwithstanding the verdict. Additionally,
the
court set a hearing in March 2007 to enter a judgment and order. The court
established a schedule over 60 days following entry of a judgment for briefing
on the issue of the appointment of a special master to advise the court on,
among other things, the extent, nature and cost of any abatement remedy.
The
scope of the abatement remedy will be determined by the judge with the
assistance of the special master who has not yet been selected. The extent,
nature and cost of such remedy are not currently known and will be determined
only following additional proceedings. We intend to appeal any judgment that
the
trial court may enter against us.
In
October 1999, we were served with a complaint in Smith,
et al. v. Lead Industries Association, et al.
(Circuit Court for Baltimore City, Maryland, Case No. 24-C-99-004490).
Plaintiffs, seven minors from four families, each seek compensatory damages
of
$5 million and punitive damages of $10 million for alleged injuries due to
lead-based paint. Plaintiffs allege that the former pigment manufacturers
and
other companies alleged to have manufactured paint and/or gasoline additives,
the LIA and the National Paint and Coatings Association are jointly and
severally liable. We have denied liability. In February 2006, the trial court
issued orders dismissing the Smith family’s case and severing and staying the
cases of the three other families. In March 2006, the plaintiffs appealed.
In
September 2006, the plaintiffs filed a certiorari petition with the Maryland
Court of Appeals, which was denied in November 2006. The matter is now
proceeding in the appellate court.
In
February 2000, we were served with a complaint in City
of St. Louis v. Lead Industries Association, et al.
(Missouri Circuit Court 22nd
Judicial
Circuit, St. Louis City, Cause No. 002-245, Division 1). Plaintiff seeks
compensatory and punitive damages for its expenses discovering and abating
lead-based paint, detecting lead poisoning and providing medical care and
educational programs for city residents, and the costs of educating children
suffering injuries due to lead exposure. Plaintiff seeks judgments of joint
and
several liability against the former pigment manufacturers and the LIA. In
November 2002, defendants’ motion to dismiss was denied. In May 2003, plaintiffs
filed an amended complaint alleging only a nuisance claim. Defendants’ renewed
motion to dismiss and motion for summary judgment were denied by the trial
court
in March 2004, but the trial court limited plaintiff’s complaint to monetary
damages from 1990 to 2000, specifically excluding future damages. In March
2005,
defendants filed a motion for summary judgment, which was granted in January
2006. Plaintiffs appealed and in December 2006, the appellate court ruled
in
favor of defendants, but referred the matter to the Missouri Supreme
Court.
In
April
2000, we were served with a complaint in County
of Santa Clara v. Atlantic Richfield Company, et al. (Superior
Court of the State of California, County of Santa Clara, Case No. CV788657)
brought against the former pigment manufacturers, the LIA and certain paint
manufacturers. The County of Santa Clara seeks to represent a class of
California governmental entities (other than the state and its agencies)
to
recover compensatory damages for funds the plaintiffs have expended or will
in
the future expend for medical treatment, educational expenses, abatement
or
other costs due to exposure to, or potential exposure to, lead paint,
disgorgement of profit, and punitive damages. Solano, Alameda, San Francisco,
Monterey and San Mateo counties, the cities of San Francisco, Oakland, Los
Angeles and San Diego, the Oakland and San Francisco unified school districts
and housing authorities and the Oakland Redevelopment Agency have joined
the
case as plaintiffs. In February 2003, defendants filed a motion for summary
judgment, which was granted in July 2003. In March 2006, the appellate court
affirmed the dismissal of plaintiffs’ trespass claim, Unfair Competition Law
claim and public nuisance claim for government-owned properties, but reversed
the dismissal of plaintiffs’ public nuisance claim for residential housing
properties, plaintiffs’ negligence and strict liability claims for
government-owned buildings and plaintiffs’ fraud claim. In January 2007,
plaintiffs amended the complaint to drop all of the claims except for the
public
nuisance claim.
In
June
2000, a complaint was filed in Illinois state court, Lewis,
et al. v. Lead Industries Association, et al. (Circuit
Court of Cook County, Illinois, County Department, Chancery Division, Case
No. 00CH09800). Plaintiffs seek to represent two classes, one consisting of
minors between the ages of six months and six years who resided in housing
in
Illinois built before 1978, and another consisting of individuals between
the
ages of six and twenty years who lived in Illinois housing built before 1978
when they were between the ages of six months and six years and who had blood
lead levels of 10 micrograms/deciliter or more. The complaint seeks damages
jointly and severally from the former pigment manufacturers and the LIA to
establish a medical screening fund for the first class to determine blood
lead
levels, a medical monitoring fund for the second class to detect the onset
of
latent diseases, and a fund for a public education campaign. In March 2002,
the
court dismissed all claims. Plaintiffs appealed, and in June 2003 the appellate
court affirmed the dismissal of five of the six counts of plaintiffs, but
reversed the dismissal of the conspiracy count. In May 2004, defendants filed
a
motion for summary judgment on plaintiffs’ conspiracy count, which was granted
in February 2005. In February 2006, the court of appeals reversed the trial
court’s dismissal of the case and remanded the case for further proceedings.
In
February 2001, we were served with a complaint in Barker,
et al. v. The Sherwin-Williams Company, et al. (Circuit
Court of Jefferson County, Mississippi, Civil Action No. 2000-587, and formerly
known as Borden,
et al. vs. The Sherwin-Williams Company, et al.).
The
complaint seeks joint and several liability for compensatory and punitive
damages from more than 40 manufacturers and retailers of lead pigment and/or
paint, including us, on behalf of 18 adult residents of Mississippi who were
allegedly exposed to lead during their employment in construction and repair
activities. The claims of all but three of the plaintiffs have been dismissed
without prejudice with respect to us, and the matter is proceeding in the
trial
court with regard to the three remaining claims.
In
May
2001, we were served with a complaint in City
of Milwaukee v. NL Industries, Inc. and Mautz Paint
(Circuit
Court, Civil Division, Milwaukee County, Wisconsin, Case No. 01CV003066).
Plaintiff seeks compensatory and equitable relief for lead hazards in Milwaukee
homes, restitution for amounts it has spent to abate lead and punitive damages.
We have denied all liability. In July 2003, defendants' motion for summary
judgment was granted by the trial court, but the appellate court reversed
this
ruling in November 2004 and remanded the case. In October 2006, the court
set a
trial date of May 23, 2007. In
February 2007, pursuant to a stipulated order, Mautz Paint was severed from
the
case for purposes of the May trial. If Mautz is tried, that trial would not
take
place until after January 1, 2008.
In
January and February 2002, we were served with complaints by 25 different
New
Jersey municipalities and counties which have been consolidated as In
re: Lead Paint Litigation
(Superior Court of New Jersey, Middlesex County, Case Code 702). Each complaint
seeks abatement of lead paint from all housing and all public buildings in
each
jurisdiction and punitive damages jointly and severally from the former pigment
manufacturers and the LIA. In November 2002, the court entered an order
dismissing this case with prejudice. In August 2005, the appellate court
affirmed the trial court’s dismissal of all counts except for the state’s public
nuisance count, which has been reinstated. In November 2005, the New Jersey
Supreme Court granted defendants’ petition seeking review of the appellate
court’s ruling on the public nuisance count.
In
January 2002, we were served with a complaint in Jackson,
et al., v. Phillips Building Supply of Laurel, et al.
(Circuit
Court of Jones County, Mississippi, Dkt. Co. 2002-10-CV1). The complaint
seeks
joint and several liability from three local retailers and six non-Mississippi
companies that sold paint for compensatory and punitive damages on behalf
of
three adults for injuries alleged to have been caused by the use of lead
paint;
however, plaintiffs have voluntarily dismissed all but one of the plaintiffs.
We
have denied all liability. In January 2006, the court set a trial date of
April
2007; however, the plaintiff’s attorney withdrew from the case leaving the
plaintiff unprepared to proceed with the trial. In January 2007, the court
scheduled a hearing date on our motion for summary judgment for March
2007.
In
April
2003, we were served with a complaint in Jones
v. NL Industries, Inc., et al. (United
States District Court, Northern District of Mississippi, Case No.
4:03cv229-M-B). The plaintiffs, fourteen children from five families, sued
us
and one landlord alleging strict liability, negligence, fraudulent concealment
and misrepresentation, and seek compensatory and punitive damages for alleged
injuries caused by lead paint. The case was tried in July 2006, and in August
2006 the jury returned a verdict in favor of the defendants on all counts.
In
November 2006, plaintiffs filed a notice of appeal.
In
November 2003, we were served with a complaint in Lauren
Brown v. NL Industries, Inc., et al. (Circuit
Court of Cook County, Illinois, County Department, Law Division, Case No.
03L
012425). The complaint seeks damages against us and two local property owners
on
behalf of a minor for injuries alleged to be due to exposure to lead paint
contained in the minor’s residence. We have denied all allegations of liability.
Discovery is proceeding.
In
December 2004, we were served with a complaint in Terry,
et al. v. NL Industries, Inc., et al. (United
States District Court, Southern District of Mississippi, Case No. 4:04 CV
269
PB). The plaintiffs, seven children from three families, sued us and one
landlord alleging strict liability, negligence, fraudulent concealment and
misrepresentation, and seek compensatory and punitive damages for alleged
injuries caused by lead paint. The plaintiffs in the Terry
case
are
alleged to have resided in the same housing complex as the plaintiffs in
the
Jones
case.
We
have denied all allegations of liability and have filed a motion to dismiss
plaintiffs’ fraud claim. The matter is now proceeding in the trial
court.
In
October 2005, we were served with a complaint in Evans
v. Atlantic Richfield Company, et al.
(Circuit Court, Milwaukee, Wisconsin, Case No. 05-CV-9281). Plaintiff, a
minor,
alleges injuries purportedly caused by lead on the surfaces of the homes
in
which she resided. Plaintiff seeks compensatory and punitive damages. We
have
denied all allegations of liability. In July 2006, defendants filed a motion
to
dismiss the defective product damages claims.
In
December 2005, we were served with a complaint in Hurkmans
v. Salczenko, et al.
(Circuit
Court, Marinette County, Wisconsin, Case No. 05-CV-418). Plaintiff, a minor,
alleges injuries purportedly caused by lead on the surfaces of the home in
which
he resided. Plaintiff seeks compensatory damages. We have denied all liability.
In February 2006, defendants filed a motion to dismiss the defective product
damages claim. The matter is proceeding in the trial court.
In
January 2006, we were served with a complaint in Hess,
et al. v. NL Industries, Inc., et al.
(Missouri Circuit Court 22nd
Judicial
Circuit, St. Louis City, Cause No. 052-11799). Plaintiffs are two minor children
who allege injuries purportedly caused by lead on the surfaces of the home
in
which they resided. Plaintiffs seek compensatory and punitive damages.
We
denied
all allegations of liability. The case is proceeding in the trial
court.
In
October 2006, we were served with a complaint in Davis
v. Millennium Holding LLC, et al. (District
Court, Douglas County, Nebraska, Case No. 1061-619). In November 2006, the
complaint was dismissed. The plaintiff did not file a timely appeal.
In
October 2006, we were served with a complaint in Tyler
v. Sherwin Williams Company et al.
(District Court, Douglas County, Nebraska, Case No. 1058-174). Plaintiff
alleges
injuries purportedly caused by lead on the surfaces of various homes in which
he
resided. Plaintiff seeks punitive and compensatory damages, as well as equitable
relief to move the plaintiff’s family from a home alleged to contain lead paint.
Our motion to dismiss the complaint was granted in December 2006. In January
2007, the plaintiff appealed the decision.
In
October 2006, we were served with a complaint in City
of Akron, Ohio v. Sherwin-Williams Company et al. (Court
of
Common Pleas, Summit County, Ohio, Case No. CV-2006-106309). In November
2006,
the plaintiff dismissed its complaint without prejudice.
In
October 2006, we were served with a complaint in City
of E. Cleveland, Ohio v. Sherwin-Williams Company et al. (Court
of
Common Pleas, Cuyahoga County, Ohio, Case No. CV06602785). The City seeks
compensatory and punitive damages, detection and abatement in residences,
schools, hospitals and public and private buildings within the City accessible
to children and damages for funding of a public education campaign and health
screening programs. Plaintiff seeks judgments of joint and several liability
against the former pigment manufacturers and the LIA. In December 2006, the
defendants filed a motion to dismiss the claims.
In
October 2006, we were served with a complaint in City
of Lancaster, Ohio v. Sherwin-Williams Company et al. (Court
of
Common Pleas, Fairfield County, Ohio, Case No. 2006 CV 01055). The City seeks
compensatory and punitive damages, detection and abatement in residences,
schools, hospitals and public and private buildings within the City accessible
to children and damages for funding of a public education campaign and health
screening programs. Plaintiff seeks judgments of joint and several liability
against the former pigment manufacturers and the LIA. In December 2006, the
defendants filed a motion to dismiss the claims.
In
October 2006, we were served with a complaint in City
of Toledo, Ohio v. Sherwin-Williams Company et al. (Court
of
Common Pleas, Lucas County, Ohio, Case No. G-4801-CI-200606040-000). The
City
seeks compensatory and punitive damages, detection and abatement in residences,
schools, hospitals and public and private buildings within the City accessible
to children and damages for funding of a public education campaign and health
screening programs. Plaintiff seeks judgments of joint and several liability
against the former pigment manufacturers and the LIA. In December 2006, the
defendants filed a motion to dismiss the claims.
In
January 2007, we were served with a complaint in City
of Canton, Ohio v. Sherwin-Williams Company et al. (Court
of
Common Pleas, Stark County, Ohio, Case No. 2006CV05048). The City seeks
compensatory and punitive damages, detection and abatement in residences,
schools, hospitals and public and private buildings within the City accessible
to children and damages for funding of a public education campaign and health
screening programs. Plaintiff seeks judgments of joint and several liability
against the former pigment manufacturers and the LIA. In January 2007, the
defendants filed a motion to dismiss the claims.
In
January 2007, we were served with a complaint in City
of Cincinnati, Ohio v. Sherwin-Williams Company et al. (Court
of
Common Pleas, Hamilton County, Ohio, Case No. A 0611226). The City seeks
compensatory and punitive damages, detection and abatement in residences,
schools, hospitals and public and private buildings within the City accessible
to children and damages for funding of a public education campaign and health
screening programs. Plaintiff seeks judgments of joint and several liability
against the former pigment manufacturers and the LIA. In February 2007, the
defendants filed a motion to dismiss the claims.
In
January 2007, we were served with a complaint in Columbus
City, Ohio v. Sherwin-Williams Company et al. (Court
of
Common Pleas, Franklin County, Ohio, Case No. 06CVH-12-16480). The City seeks
compensatory and punitive damages, detection and abatement in residences,
schools, hospitals and public and private buildings within the City accessible
to children and damages for funding of a public education campaign and health
screening programs. Plaintiff seeks judgments of joint and several liability
against the former pigment manufacturers and the LIA. In February 2007, the
defendants filed a motion to dismiss the claims.
In
January and February 2007, we were served with 30 complaints, the majority
of
which were filed in Circuit Court in Milwaukee County, Wisconsin. In some
cases,
complaints have been filed elsewhere in Wisconsin. The plaintiff(s) are minor
children who allege injuries purportedly caused by lead on the surfaces of
the
homes in which they reside. Plaintiffs seek compensatory and punitive damages.
The defendants in these cases include us, American Cyanamid Company, Armstrong
Containers, Inc., E.I. Du Pont de Nemours & Company, Millennium Holdings,
LLC, Atlanta Richfield Company, The Sherwin-Williams Company, Conagra Foods,
Inc. and the Wisconsin Department of Health and Family Services. In some
cases,
additional lead paint manufacturers and/or property owners are also
defendants. We have denied all liability in those cases in which we have
been required to answer and we intend to deny all liability in the other
cases. We further intend to defend against all of the claims
vigorously.
In
January 2007, we were served with a complaint in Smith
et al. v. 2328 University Avenue Corp. et al.
(Supreme
Court, State of New York, Case No. 13470/02). Plaintiffs, two minors and
their
mother, allege negligence, strict liability, and breach of warranty and seek
compensatory and punitive damages for injuries purportedly caused by lead
paint
on the surfaces of the apartment in which they resided. We intend to deny
liability and to defend against all of the claims vigorously.
In
addition to the foregoing litigation, various legislation and administrative
regulations have, from time to time, been proposed that seek to (a) impose
various obligations on present and former manufacturers of lead pigment and
lead-based paint with respect to asserted health concerns associated with
the
use of such products and (b) effectively overturn court decisions in which
we
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 our consolidated financial position, results of operations
or
liquidity, the imposition of market share liability or other legislation
could
have such an effect.
Environmental
Matters and Litigation
General
- Our
operating companies are governed by various environmental laws and regulations.
Certain of our businesses are and have been engaged in the handling, manufacture
or use of substances or compounds that may be considered toxic or hazardous
within the meaning of applicable environmental laws and regulations. As with
other companies engaged in similar businesses, certain of our past and current
operations and products have the potential to cause environmental or other
damage. Our operating companies have implemented and continue to implement
various policies and programs in an effort to minimize these risks. Our
policy is for our operating companies to maintain compliance with applicable
environmental laws and regulations at all plants and to strive to improve
environmental performance. From time to time, our operating companies 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
our operating companies’ production, handling, use, storage, transportation,
sale or disposal of such substances. We believe that all of our operating
companies’ plants are in substantial compliance with applicable environmental
laws.
Certain
properties and facilities used in our former operations, 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 operating practices, we are currently involved as a defendant,
potentially responsible party (“PRP”) or both, pursuant to the CERCLA, and
similar state laws in various governmental and private actions associated
with
waste disposal sites, mining locations, and facilities currently or previously
owned, operated or used by us or our subsidiaries, or their predecessors,
certain of which are on the United States Environmental Protection Agency’s
(“EPA”) 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 we may be jointly and severally
liable for such costs, in most cases we are only one of a number of PRPs
who may
also be jointly and severally liable.
In
addition, we are a party to a number of personal injury lawsuits filed in
various jurisdictions alleging claims related to environmental conditions
alleged to have resulted from our operations.
Environmental
obligations are difficult to assess and estimate for numerous reasons
including:
· |
complexity
and differing interpretations of governmental
regulations,
|
· |
number
of PRPs and the PRPs' ability or willingness to fund such allocation
of
costs,
|
· |
financial
capabilities and the allocation of such costs among
PRPs,
|
· |
multiplicity
of possible solutions, and
|
· |
number
of 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 we are potentially responsible for the release of
hazardous substances at other sites, could result in expenditures
in excess of amounts currently estimated by us to be required for such matters.
In addition, with
respect to other PRPs and the fact that we may be jointly and severally liable
for the total remediation cost at certain sites, we ultimately could be liable
for amounts in excess of our accruals due to, among other things, reallocation
of costs among PRPs or the insolvency of one or more PRPs. We cannot assure
you
that
actual costs will not exceed accrued amounts or the upper end of the range
for
sites for which estimates have been made, and we cannot assure you that costs
will not be incurred with respect to sites as to which no estimate presently
can
be made. Further, we cannot assure you that additional environmental matters
will not arise in the future. If we were to incur any such future liability,
this could have a material adverse effect on our consolidated financial
statements, results of operations and liquidity.
We
record
liabilities related to environmental remediation obligations when estimated
future expenditures are probable and reasonably estimable. We adjust such
accruals as further information becomes available or circumstances change.
We
generally do not discount estimated future expenditures to their present
value.
We recognize recoveries of remediation costs from other parties, if any,
as
assets when their receipt is deemed probable. At December 31, 2006, we have
not
recognized any receivables for such recoveries.
We
do not
know and cannot estimate the exact time frame over which we will make payments
with respect to our accrued environmental costs. The timing of payments depends
upon a number of factors including, among other things, the timing of the
actual
remediation process which in turn depends on factors outside our control.
At
each balance sheet date, we estimate the amount of our accrued environmental
costs which we expect to pay over the subsequent 12 months, and we classify
such
amount as a current liability. We classify the remainder of the accrued
environmental costs as a noncurrent liability.
NL
-
On
a
quarterly basis, NL evaluates the potential range of our liability at sites
where we have been named as a PRP or defendant. At December 31, 2006, NL
had
accrued approximately $51 million for those environmental matters which we
believe are reasonably estimable. We believe that it is not possible to estimate
the range of costs for certain sites. The upper end of the range of reasonably
possible costs to us for sites for which we believe it is possible to estimate
costs is approximately $75 million. We have not discounted these estimates
of
such liabilities to present value.
At
December 31, 2006, there are approximately 20 sites for which NL is currently
unable to estimate a range of costs. For these sites, generally the
investigation is in the early stages, and it is either unknown as to whether
or
not we actually had any association with the site, or if we had an association
with the site, the nature of our responsibility, if any, for the contamination
at the site and the extent of contamination. The timing on when information
would become available to us to allow us to estimate a range of loss is unknown
and dependent on events outside of our the control, such as when the party
alleging liability provides information to us. At certain of these sites
that
had previously been inactive, we have received general and special notices
of
liability from the EPA alleging that we, along with other PRPs, are liable
for
past and future costs of remediating environmental contamination allegedly
caused by former operations conducted at such sites. These notifications
may
assert that we, along with other PRPs, are liable for past clean-up costs
that
could be material to us if we were ultimately found liable.
In
January 2003, we received a general notice of liability from the U.S. EPA
regarding the site of a formerly owned lead smelting facility located in
Collinsville, Illinois. In July 2004, we and the EPA entered into an
administrative order on consent to perform a removal action with respect
to
residential properties located at the site. We have completed the clean-up
work
associated with the order. In April 2006, we and the EPA entered into an
administrative order on consent to perform an additional removal action with
respect to ponds located at the site. In October 2006, we completed this
additional removal action.
In
December 2003, we were served with a complaint in The
Quapaw Tribe of Oklahoma et al. v. ASARCO Incorporated et al. (United
States District Court, Northern District of Oklahoma, Case No. 03-CII-846H(J)).
The complaint alleges public nuisance, private nuisance, trespass, unjust
enrichment, strict liability, deceit by false representation and asserts
claims
under CERCLA and RCRA against us and six other mining companies with respect
to
former operations in the Tar Creek mining district in Oklahoma. The complaint
seeks class action status for former and current owners, and possessors of
real
property located within the Quapaw Reservation. Among other things, the
complaint seeks actual and punitive damages from defendants. We have moved
to
dismiss the complaint and have denied all of plaintiffs’ allegations. In June
2004, the court dismissed plaintiffs’ claims for unjust enrichment and fraud as
well as one of the RCRA claims. In February 2006, the court of appeals affirmed
the trial court’s ruling that plaintiffs waived their sovereign immunity to
defendants’ counter claim for contribution and indemnity.
In
February 2004, we were served in Evans
v. ASARCO (United
States District Court, Northern District of Oklahoma, Case No. 04-CV-94EA(M)),
a
purported class action on behalf of two classes of persons living in the
town of
Quapaw, Oklahoma: (1) a medical monitoring class of persons who have lived
in
the area since 1994, and (2) a property owner class of residential, commercial
and government property owners. Four individuals are named as plaintiffs,
together with the mayor of the town of Quapaw, Oklahoma, and the School Board
of
Quapaw, Oklahoma. Plaintiffs allege causes of action in nuisance and seek
a
medical monitoring program, a relocation program, property damages and punitive
damages. We answered the complaint and denied all of plaintiffs’ allegations.
The trial court subsequently stayed all proceedings in this case pending
the
outcome of a class certification decision in another case that had been pending
in the same U.S. District Court, a case from which we have been dismissed
with
prejudice.
In
January 2006, we were served in Brown
et al. v. NL Industries, Inc. et al. (Circuit
Court Wayne County, Michigan, Case No. 06-602096 CZ). Plaintiffs, property
owners and other past or present residents of the Krainz Woods Neighborhood
of
Wayne County, Michigan, allege causes of action in negligence, nuisance,
trespass and under the Michigan Natural Resources and Environmental Protection
Act with respect to a lead smelting facility formerly operated by us and
another
defendant. Plaintiffs seek property damages, personal injury damages, loss
of
income and medical expense and medical monitoring costs. In February 2006,
we
filed a petition to remove the case to federal court. In April 2006, the
defendants filed a motion to dismiss the plaintiffs’ claims for trespass and
violations of certain Michigan laws. We have denied all allegations of
liability. Discovery
is proceeding.
In
June
2006, we and several other PRPs received a Unilateral Administrative Order
from
the EPA regarding a formerly-owned mine and milling facility located in Park
Hills, Missouri. The Doe Run Company is the current owner of the site, and
its
predecessor purchased the site from us in approximately 1936. Doe Run is
also
named in the Order. In August 2006, Doe Run ceased to negotiate with us
regarding an appropriate allocation of costs for the remediation. In January
2007, the parties agreed to engage in mediation regarding an appropriate
allocation of costs for the remediation. If this mediation is unsuccessful,
we
intend to pursue Doe Run for its share of the costs associated with complying
with the Order.
In
June
2006, we were served with a complaint in Donnelly
and Donnelly v. NL Industries, Inc.
(State
of New York Supreme Court, County of Rensselaer, Cause No. 218149). The
plaintiffs, a man who claims to have worked near one of our former sites
in New
York, and his wife allege that he suffered injuries (which are not described
in
the complaint) as a result of exposure to harmful levels of toxic substances
as
a result of NL’s conduct. Plaintiffs claim damages for negligence, product
liability and derivative losses on the part of the wife. In July 2006, we
removed this case to Federal Court. In August 2006, we answered the complaint
and denied all of the plaintiffs’ allegations. Discovery is
proceeding.
In
July
2006, we were served with a complaint in Norampac
Industries, Inc. v. NL Industries, Inc.
(United
States District Court, Western District of New York, Case No. 06-CV-0479).
The
plaintiff sued under CERCLA and New York’s Navigation Law for contribution for
costs that have been, or will be, expended by the plaintiff to clean up a
former
Magnus Metals facility. The complaint also alleges common-law claims for
negligence, public nuisance, private nuisance, indemnification, natural resource
damages and declaratory relief. In September 2006, we denied all liability
for,
and we intend to defend vigorously against, all of the claims raised in the
complaint. In October 2006, the matter was referred to mediation by the
court.
In
October 2006, we entered into a consent decree in the United States District
Court for the District of Kansas, in which we agreed to perform remedial
design
and remedial actions in OU-6, Waco Subsite, of the Cherokee County Superfund
Site. We conducted milling activities on the portion of the site which we
have
agreed to remediate. We are also sharing responsibility with other PRPs as
well
as EPA for remediating a tributary that drains the portions of the site in
which
the PRPs operated. We will also reimburse EPA for a portion of its past and
future response costs related to the site.
See
also
Item 1.
Tremont
- In
July
2000, Tremont, another of our wholly-owned subsidiaries, 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
had entered into an agreement with Halliburton Energy Services, Inc., another
PRP for this site that provides for, among other things, the interim sharing
of
remediation costs associated with the site pending a final allocation of
costs
and an agreed-upon procedure through arbitration with the first hearing now
to
be held in June 2007 to determine the final allocation of costs. On December
9,
2005, Halliburton and DII Industries, LLC, another PRP of this site, filed
suit
in the United States District Court for the Southern District of Texas, Houston
Division, Case No. H-05-4160, against NL, Tremont and certain of its
subsidiaries, M-I, L.L.C., Milwhite, Inc. and Georgia-Pacific Corporation
seeking:
|
·
|
to
recover response and remediation costs incurred at the site,
|
|
·
|
a
declaration of the parties’ liability for response and remediation costs
incurred at the site,
|
|
·
|
a
declaration of the parties’ liability for response and remediation costs
to be incurred in the future at the site; and
|
|
·
|
a
declaration regarding the obligation of Tremont to indemnify Halliburton
and DII for costs and expenses attributable to the site.
|
On
December 27, 2005, a subsidiary of Tremont filed suit in the United States
District Court for the Western District of Arkansas, Hot Springs Division,
Case
No. 05-6089, against Georgia-Pacific, seeking to recover response costs it
has
incurred and will incur at the site. Plaintiffs in the Houston
litigation agreed to stay that litigation by entering into an amendment with
NL,
Tremont and its affiliates to the arbitration agreement previously agreed
upon
for resolving the allocation of costs at the site. Tremont subsequently has
also
agreed with Georgia Pacific to stay the Arkansas
litigation,
and subsequently that matter was consolidated with the Houston
litigation, where the Houston
court
recently agreed to stay the plaintiffs claims against Tremont and its
subsidiaries, and denied Tremont’s motions to dismiss and to stay the claims
made by M-I, Milwhite and Georgia Pacific. Tremont has accrued for this site
based upon the agreed-upon interim cost sharing allocation. Tremont
has $2.7 million accrued at December 31, 2006 which represents the probable
and
reasonably estimable costs to be incurred through 2008 with respect to the
interim remediation measures. Tremont currently expects it will be at least
2008
before the nature and extent of any final remediation measures for this site
are
known. Tremont has not accrued costs for any final remediation measures at
this
site because no reasonable estimate can currently be made of the cost of
any
final remediation measures.
TIMET
- At
December 31, 2006, TIMET had accrued approximately $1.8 million for
environmental cleanup matters, principally related to their facility in Nevada.
The upper end of the range of reasonably possible costs related to these
matters, including the current accrual, is approximately $4.0
million.
Other
- We
have
also accrued approximately $6.3 million at December
31,
2006
for other environmental cleanup matters related to us. This accrual is near
the
upper end of the range of our estimate of reasonably possible costs for such
matters.
Insurance
coverage claims.
We
are
involved in various legal proceedings with certain of our former insurance
carriers regarding the nature and extent of the carriers’ obligations to us
under insurance policies with respect to certain lead pigment lawsuits. In
addition to information that is included below, we have included certain
of the
information called for by this Item in Note 18 to our Consolidated Financial
Statements, and we are incorporating that information here by
reference.
The
issue
of whether insurance coverage for defense costs or indemnity or both will
be
found to exist for our lead pigment litigation depends upon a variety of
factors, and we cannot assure you that such insurance coverage will be
available. We have not considered any potential insurance recoveries for
lead pigment or environmental litigation matters in determining related
accruals.
We
have
an agreement with a former insurance carrier pursuant to which the carrier
reimburses us for a portion of our past and future lead pigment litigation
defense costs. We are not able to determine how much we ultimately will
recover from the carrier for past defense costs incurred by us, because the
carrier has certain discretion regarding which past defense costs qualify
for
reimbursement. See Note 18 to our Consolidated Financial Statements. While
we continue to seek additional insurance recoveries, we do not know if we
will
be successful in obtaining reimbursement for either defense costs or
indemnity. We have not considered any additional potential insurance
recoveries in determining accruals for lead pigment litigation matters.
Any additional insurance recoveries would be recognized when the receipt
is
probable and the amount is determinable.
We
have
settled
insurance coverage claims concerning environmental claims with certain of
our
principal former carriers. We do not expect further material settlements
relating to environmental remediation coverage.
New
York cases
-
In
October 2005 we were served with a complaint in OneBeacon
American Insurance Company v. NL Industries, Inc., et al.
(Supreme Court of the State of New York, County of New York, Index No.
603429-05). The plaintiff, a former insurance carrier, seeks a declaratory
judgment of its obligations to us under insurance policies issued to us by
the
plaintiff’s predecessor with respect to certain lead pigment lawsuits filed
against us. In March 2006, the trial court denied our motion to dismiss.
In
April 2006, we filed a notice of appeal of the trial court’s ruling.
In
February 2006, we were served with a complaint in Certain
Underwriters at Lloyds, London v. Millennium Holdings LLC
et al.
(Supreme Court of the State of New York, County of New York, Index No.
06/60026). The plaintiff, a former insurance carrier of ours, seeks a
declaratory judgment of its obligations to us under insurance policies issued
to
us by plaintiff with respect to certain lead pigment lawsuits. In April 2006,
the trial court denied our motion to dismiss. In October 2006, we filed a
notice
of appeal of the trial court’s ruling.
Texas
cases
- In
November 2005, we filed an action against OneBeacon and certain other insurance
companies, which also issued insurance policies to us in the past, captioned
NL
Industries, Inc. v. OneBeacon America Insurance Company, et.
al.
(District Court for Dallas County, Texas, Case No. 05-11347). In this action,
we
are asserting that OneBeacon breached its contractual obligations to us under
its insurance policies and are also seeking a declaratory judgment as to
OneBeacon’s and the other insurance companies’ rights and obligations pursuant
to the policies issued to us in connection with certain lead pigment actions.
In
January 2007, the parties filed a stipulation with the court in which we
agreed
that the claims in this action would be added to NL
Industries, Inc. v. American Re Insurance Company, et al
(described below).
In
April
2006, we filed a comprehensive action against all of the insurance companies
which issued policies to us that potentially could provide insurance for
lead
pigment actions and/or asbestos actions asserted against us, captioned
NL
Industries, Inc. v. American Re Insurance Company, et al.
(Dallas
County Court at Law, Texas, Case No. CC-06-04523-E). In this action, we assert
that defendants have breached their obligations to us under such insurance
policies with respect to lead pigment and asbestos claims, and we seek a
declaration as to the rights and obligations of each insurance company with
respect to such claims. In October 2006, the court stayed this proceeding
pending outcome of the appeal in the New York action captioned OneBeacon
American Insurance Company v. NL Industries, Inc., et. al.
(described above).
In
September 2006, we filed a declaratory judgment action against OneBeacon
and
certain other former insurance companies, captioned NL
Industries, Inc. v. OneBeacon America Insurance Company, et al.
(Dallas
County Court at Law, Texas, Case No. CC-06-13934-A) seeking interpretation
of a
Stand-Still Agreement, which is governed by Texas law. In December 2006,
this
case was consolidated into NL
Industries, Inc. v. American Re Insurance Company, et al
(described above).
ITEM 4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART
II
ITEM
5.
|
MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS
AND
ISSUER PURCHASES OR EQUITY
SECURITIES
|
Common
Stock and Dividends -
Our
common stock is listed and traded on the New York Stock Exchange (symbol:
VHI).
As of February 28, 2007, we had approximately 3,100 holders of record of
our
common stock. The following table sets forth the high and low closing per
share
sales prices for our common stock and dividends for the periods indicated.
On
February 28, 2007 the closing price of our common stock was $22.42.
|
|
High
|
|
Low
|
|
Cash
dividends
paid
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
21.43
|
|
$
|
14.87
|
|
$
|
.10
|
|
Second Quarter
|
|
|
22.47
|
|
|
17.00
|
|
|
.10
|
|
Third Quarter
|
|
|
18.26
|
|
|
16.94
|
|
|
.10
|
|
Fourth Quarter
|
|
|
19.14
|
|
|
17.20
|
|
|
.10
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
18.90
|
|
$
|
17.00
|
|
$
|
.10
|
|
Second Quarter
|
|
|
25.81
|
|
|
18.14
|
|
|
.10
|
|
Third Quarter
|
|
|
27.50
|
|
|
22.75
|
|
|
.10
|
|
Fourth Quarter
|
|
|
27.92
|
|
|
22.92
|
|
|
.10
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter 2007 through February 28
|
|
$
|
27.28
|
|
$
|
22.28
|
|
|
-
|
|
We
paid
regular quarterly dividends of $.10 per share during 2005 and 2006. In February
2007, our board of directors declared a first quarter 2007 dividend of $.10
per
share, to be paid on March 30, 2007 to shareholders of record as of March
12,
2007. In addition to our regular dividend, on February 28, 2007 our board
of
directors declared a special dividend of TIMET common stock payable on March
26,
2007 to stockholders of record as of March 12, 2007. In the special
dividend we will distirbute approximately 56.8 million shares of TIMET common
stock, which amount represents all of the TIMET common stock we own and
approximately 35.1% of the outstanding TIMET common stock. However,
declaration and payment of future dividends, and the amount thereof, is
discretionary and is dependent upon our results of operations, financial
condition, cash requirements for our businesses, contractual requirements
and
restrictions and other factors deemed relevant by our Board of
Directors.
The
amount and timing of past dividends is not necessarily indicative of the
amount
or timing of any future dividends which we might pay. In this regard, our
revolving bank credit facility currently limits the amount of our quarterly
dividends to $.10 per share, plus an additional aggregate amount of $164.1
million at December 31, 2006. We have received a waive under our bank
credit facility regarding the special dividend.
Performance
Graph - Set
forth
below is a line graph comparing the yearly change in our cumulative total
stockholder return on our common stock against the cumulative total return
of
the S&P 500 Composite Stock Price Index and the S&P 500 Industrial
Conglomerates Index for the period from December 31, 2001 through December
31,
2006. The graph shows the value at December 31 of each year assuming an original
investment of $100 at December 31, 2001 and the reinvestment of
dividends.
|
|
December
31,
|
|
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valhi
common stock
|
|
$
|
100
|
|
$
|
67
|
|
$
|
123
|
|
$
|
135
|
|
$
|
158
|
|
$
|
226
|
|
S&P
500 Composite Stock Price Index
|
|
|
100
|
|
|
78
|
|
|
100
|
|
|
111
|
|
|
117
|
|
|
135
|
|
S&P
500 Industrial Conglomerates Index
|
|
|
100
|
|
|
59
|
|
|
80
|
|
|
96
|
|
|
92
|
|
|
100
|
|
The
information contained in the performance graph shall not be deemed “soliciting
material” or “filed” with the SEC, or subject to the liabilities of Section 18
of the Securities Exchange Act, except to the extent we specifically request
that the material be treated as soliciting material or specifically incorporate
this performance graph by reference into a document filed under the Securities
Act or the Securities Exchange Act.
Treasury
Stock Purchases -
In
March 2005, our board of directors authorized the repurchase of up to 5.0
million shares of our common stock in open market transactions, including
block
purchases, or in privately negotiated transactions, which may include
transactions with our affiliates. In November 2006, our board of directors
authorized the repurchase of an additional 5.0 million shares. We may purchase
the stock 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, we could terminate
the
program prior to completion. We will use our cash on hand to acquire the
shares.
Repurchased shares will be retired and cancelled or may be added to our treasury
stock and used for employee benefit plans, future acquisitions or other
corporate purposes. See Notes 14 and 17 to the Consolidated Financial
Statements.
The
following table discloses certain information regarding the shares of our
common
stock we purchased during the fourth quarter of 2006. All of these purchases
were made under the repurchase program in open market transactions, except
for
1.0 million shares we purchased from one of our affiliates as discussed in
Note
17 to the Consolidated Financial Statements.
Period
|
|
Total
number of shares purchased
|
|
Average
price
paid
per
share, including
commissions
|
|
Total
number of shares purchased as part of a publicly-announced
plan
|
|
Maximum
number of shares that may yet be purchased under the publicly-announced
plan at end
of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2006
to October 31,
2006
|
|
|
31,200
|
|
$
|
23.48
|
|
|
31,200
|
|
|
619,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1, 2006
to November 30,
2006
|
|
|
1,008,700
|
|
|
23.53
|
|
|
1,008,700
|
|
|
4,610,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 1, 2006
to December 31,
2006
|
|
|
21,600
|
|
|
25.75
|
|
|
21,600
|
|
|
4,589,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,061,500
|
|
|
|
|
|
1,061,500
|
|
|
|
|
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
The
following selected financial data has been derived from our audited Consolidated
Financial Statements. The following selected financial data should be read
in
conjunction with our Consolidated Financial Statements and related Notes
and
Item 7 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
|
|
Years
ended December 31,
|
|
|
|
2002
(1)
|
|
2003
(1)
|
|
2004
(1)
|
|
2005
(1)
|
|
2006
|
|
|
|
(As
Adjusted)
|
|
(As
Adjusted)
|
|
(As
Adjusted)
|
|
(As
Adjusted)
|
|
|
|
|
|
(In
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STATEMENTS
OF OPERATIONS DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemicals
|
|
$
|
875.2
|
|
$
|
1,008.2
|
|
$
|
1,128.6
|
|
$
|
1,196.7
|
|
$
|
1,279.5
|
|
Component products
|
|
|
166.7
|
|
|
173.9
|
|
|
182.6
|
|
|
186.3
|
|
|
190.1
|
|
Waste management
|
|
|
8.4
|
|
|
4.1
|
|
|
8.9
|
|
|
9.8
|
|
|
11.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales
|
|
$
|
1,050.3
|
|
$
|
1,186.2
|
|
$
|
1,320.1
|
|
$
|
1,392.8
|
|
$
|
1,481.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemicals
|
|
$
|
84.6
|
|
$
|
123.6
|
|
$
|
102.4
|
|
$
|
165.6
|
|
$
|
138.1
|
|
Component products
|
|
|
4.4
|
|
|
9.1
|
|
|
16.2
|
|
|
19.3
|
|
|
20.6
|
|
Waste management
|
|
|
(7.0
|
)
|
|
(11.5
|
)
|
|
(10.2
|
)
|
|
(12.1
|
)
|
|
(9.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating income
|
|
$
|
82.0
|
|
$
|
121.2
|
|
$
|
108.4
|
|
$
|
172.8
|
|
$
|
149.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings (losses) of
TIMET
|
|
$
|
(29.0
|
)
|
$
|
(2.3
|
)
|
$
|
22.7
|
|
$
|
64.9
|
|
$
|
101.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
5.5
|
|
$
|
(84.8
|
)
|
$
|
225.5
|
|
$
|
82.1
|
|
$
|
141.7
|
|
Discontinued operations
|
|
|
(.2
|
)
|
|
(2.9
|
)
|
|
3.7
|
|
|
(.3
|
)
|
|
-
|
|
Cumulative effect of change in
accounting principle
|
|
|
-
|
|
|
.6
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
5.3
|
|
$
|
(87.1
|
)
|
$
|
229.2
|
|
$
|
81.8
|
|
$
|
141.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
Operations
|
|
$
|
.05
|
|
$
|
(.71
|
)
|
$
|
1.87
|
|
$
|
.69
|
|
$
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
.05
|
|
$
|
(.73
|
)
|
$
|
1.90
|
|
$
|
.69
|
|
$
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends
|
|
$
|
.24
|
|
$
|
.24
|
|
$
|
.24
|
|
$
|
.40
|
|
$
|
.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
Outstanding
|
|
|
115.8
|
|
|
119.9
|
|
|
120.4
|
|
|
118.5
|
|
|
116.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STATEMENTS OF CASH FLOW DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided
(used in) by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
106.8
|
|
$
|
108.5
|
|
$
|
142.1
|
|
$
|
104.3
|
|
$
|
86.3
|
|
Investing activities
|
|
|
(67.1
|
)
|
|
(33.8
|
)
|
|
(58.1
|
)
|
|
20.4
|
|
|
(89.5
|
)
|
Financing activities
|
|
|
(103.3
|
)
|
|
(71.2
|
)
|
|
78.4
|
|
|
(115.8
|
)
|
|
(87.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET DATA (at year end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
(2)
|
|
$
|
2,167.8
|
|
$
|
2,307.2
|
|
$
|
2,690.5
|
|
$
|
2,578.4
|
|
$
|
2,804.7
|
|
Long-term debt
|
|
|
605.7
|
|
|
632.5
|
|
|
769.5
|
|
|
715.8
|
|
|
785.3
|
|
Stockholders’ equity
(2)
|
|
|
689.8
|
|
|
631.2
|
|
|
876.1
|
|
|
797.3
|
|
|
866.8
|
|
(1) |
Chemicals
operating income and total operating income, income (loss) from
continuing
operations and net income (loss), and related per share amounts,
for the
years ended December 31, 2002, 2003, 2004 and 2005, and stockholders’
equity as of December 31, 2002, 2003, 2004 and 2005, have each
been
adjusted from amounts previously disclosed due to the adoption
of FASB
Staff Position (“FSP”) No. AUG AIR-1 effective December 31, 2006, see Note
19 to our Consolidated Financial Statements. Chemicals operating
income
and total operating income, as presented above, differs from amounts
previously reported by a $.3 million increase in 2002 and by a
$1.4
million increase in 2003. Income (loss) from continuing operations
and net
income, as presented above, differs from amounts previously reported
by a
$.1 million increase in 2002 ($.01 per diluted share) and by a
$.6 million
increase in 2003 (which did not change the diluted share amount).
Stockholders’ equity, as presented above, is greater than amounts
previously reported by $1.3 million at December 31, 2002.
|
(2)
|
We
adopted Statement of Financial Accounting Standard (“SFAS”) No. 158. See
Notes 11 and 19 to our Consolidated Financial
Statements.
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
RESULTS
OF OPERATIONS
Business
Overview
We
are
primarily a holding company. We operate through our wholly-owned and
majority-owned subsidiaries, including
NL,
Kronos, CompX, Tremont LLC and WCS. We are also the largest shareholder of
TIMET
although we own less than a majority interest. Kronos, NL, CompX and TIMET
each
file periodic reports with the Securities and Exchange Commission (“SEC”).
We
have
three consolidated operating segments:
|
·
|
Chemicals
-
Our Chemicals Segment is operated through our majority ownership
of
Kronos. Kronos is a leading global producer and marketer of value-added
TiO2.
TiO2
is
used for a variety of manufacturing applications, including plastics,
paints, paper and other industrial
products.
|
|
·
|
Component
Products
-
We operate in the component products industry through our majority
ownership of CompX. CompX is a leading manufacturer of security
products,
precision ball bearing slides and ergonomic computer support systems
used
in office furniture, transportation, tool storage and a variety
of other
industries. CompX has recently entered the performance marine components
industry through the acquisition of two performance marine
manufacturers.
|
|
·
|
Waste
Management
-
WCS is our wholly-owned subsidiary which owns and operates a West
Texas
facility for the processing, treatment, storage and disposal of
hazardous,
toxic and certain types of low level radioactive waste. WCS is
in the
process of seeking to obtain regulatory authorization to expand
its
low-level and mixed low-level radioactive waste handling
capabilities.
|
In
addition, we account for our 35% less than majority interest in TIMET by
the
equity method. On
February 28, 2007 our board of directors declared a special dividend of all
of
the TIMET common stock we own. The special dividend is payable on March 26,
2007
to stockholders of record as of March 12, 2007. After the special dividend
is completed the only ownership interest we will have in TIMET will be a
nominal
amount through our NL subsidiary. See Note 23 to our Consolidated Financial
Statements. TIMET
is
a leading global producer of titanium sponge, melted products and milled
products. Titanium is used for a variety of commercial, aerospace, military,
medical and other emerging markets. TIMET is also the only titanium producer
with major production facilities in both of the world’s principal titanium
markets: the U.S. and Europe.
Income
From Continuing Operations Overview
Year
Ended December 31, 2005 Compared to Year Ended December 31, 2006 -
We
reported income from continuing operations of $141.7 million, or $1.20 per
diluted share, in 2006 compared to income of $82.1 million, or $.69 per diluted
share, in 2005 and $225.5 million, or $1.87 per diluted share, in 2004. As
discussed is Note 19 to the Consolidated Financial Statements, we have restated
our Consolidated Financial statements as a result of our adoption of FSP
No. AUG
AIR-1 effective December 31, 2006.
Our
diluted earnings per share increased from 2005 to 2006 due primarily to the
net
effects of:
|
·
|
lower
effective income tax rate in 2006 primarily due to the favorable
resolution in 2006 related to audits in our Chemicals Segment’s operations
in Germany, Belgium and Norway and a provision in 2005 related
to a change
in the permanent reinvestment conclusion for earnings of certain
foreign
subsidiaries of our Component Products Segment;
|
|
·
|
higher
equity in earnings from TIMET in
2006.
|
|
·
|
the
gain in 2006 from the sale of certain land in Nevada;
|
|
·
|
lower
operating income from our segments, as improvements in operating
income
from our Component Products and Waste Management Segments were
more than
offset by a decline in operating income at our Chemicals Segment;
|
|
·
|
a
charge in 2006 from the redemption of our 8.875% Senior Secured
Notes;
|
|
·
|
the
write-off of accrued interest in 2005 on our prior loan to Snake
River
Sugar Company;
|
|
·
|
securities
transaction gains realized in 2005;
and
|
|
·
|
lower
interest and dividend income in 2006 primarily due to lower distributions
received from The Amalgamated Sugar Company LLC in
2006.
|
Our
income from continuing operations in 2005 includes (net of tax and minority
interest, as applicable):
|
·
|
income
related to certain income tax benefits recognized by TIMET of $.11
per
diluted share;
|
|
·
|
gains
from NL’s sales of shares of Kronos common stock of $.05 per diluted
share;
|
|
·
|
a
non-cash income tax expense of $.03 per diluted share related to
developments in certain income tax audits at NL and our Chemicals
Segment
and a change in the permanent reinvestment conclusion for earnings
of
certain foreign subsidiaries of our Component Products
Segment;
|
|
·
|
a
gain from the sale of our passive interest in a Norwegian smelting
operation of $.02 per diluted share;
|
|
·
|
income
related to TIMET’s sale of certain real property adjacent to its Nevada
operations of $.02 per diluted share; and
|
|
·
|
income
of $.01 per diluted share related to certain insurance recoveries
recognized by NL.
|
Our
income from continuing operations in 2006 includes (net of tax and minority
interest, as applicable):
|
·
|
net
income tax benefit of $.21 per diluted share at our Chemicals Segment
related to the net effect of the withdrawal of certain income tax
assessments previously made by Belgian and Norwegian tax authorities,
the
favorable resolution of certain income tax issues related to our
German
and Belgian operations and the enactment of a reduction in Canadian
federal income tax rates offset by the unfavorable resolution of
certain
other income tax issues related to our German operations;
|
|
·
|
income
of $.20 per diluted share related to the sale of our land in Nevada;
|
|
·
|
a
charge related to the redemption of our 8.875% Senior Secured Notes
of
$.09 per diluted share;
|
|
·
|
a
gain of $.09 per diluted share related to TIMET’s sale of its minority
interest in VALTIMET, a manufacturing joint venture located in
France;
and
|
|
·
|
income
of $.03 per diluted share related to certain insurance recoveries
recognized by NL.
|
We
discuss these amounts more fully below.
Year
Ended December 31, 2004 Compared to Year Ended December 31, 2005 -
We
reported income from continuing operations of $82.1 million, or $.69 per
diluted
share, in 2005 compared to income of $225.5 million, or $1.87 per diluted
share,
in 2004. Our diluted
earnings per share declined from 2004 to 2005 primarily due to the net effects
of:
|
·
|
certain
income tax benefits recognized by Kronos and NL in
2004;
|
|
·
|
higher
equity in earnings from TIMET in 2005;
|
|
·
|
higher
operating income from our segments in 2005, as improvements in
operating
income from our Chemicals and Component Products Segments more
than offset
an increase in the operating loss generated by our Waste Management
Segment;
|
|
·
|
higher
interest and dividend income in 2005 primarily due to higher distributions
received from The Amalgamated Sugar Company
LLC;
|
|
·
|
the
write-off of accrued interest in 2005 on our prior loan to Snake
River
Sugar Company; and
|
|
·
|
certain
securities transaction gains realized in 2005.
|
Significant
items included in our income from continuing operations in 2005 are discussed
above. Our income from continuing operations in 2004 includes (net of tax
and
minority interest,
as
applicable):
|
·
|
income
of $1.91 per diluted share related to the reversal of Kronos’ deferred
income tax asset valuation allowance in
Germany;
|
|
·
|
income
of $.34 per diluted share related to the reversal of the deferred
income
tax asset valuation allowance related to EMS and the adjustment
of
estimated income taxes due upon the IRS settlement related to
EMS;
|
|
·
|
income
of $.03 per diluted share related to Kronos’ contract dispute
settlement;
|
|
·
|
income
of $.03 per diluted share related to our pro-rata share of TIMET’s
non-operating gain from TIMET’s exchange of its convertible preferred debt
securities for a new issue of TIMET convertible preferred
stock;
|
|
·
|
income
of $.01 per diluted share related to NL’s sales of Kronos common stock in
market transactions; and
|
|
·
|
income
of $.01 per diluted share related to our pro-rata share of TIMET’s income
tax benefit resulting from TIMET’s utilization of a capital loss
carryforward, the benefit of which TIMET had not previously recognized.
|
We
discuss these amounts more fully below.
Current
Forecast for 2007 -
We
currently believe net income for the full year 2007 will be significantly
lower
in 2007 as compared to 2006 due primarily to the net effects of:
· |
lower
equity in earnings of TIMET resulting from the March 2007 distribution
of
our TIMET shares to our
stockholders;
|
· |
lower
expected operating income from our Chemicals Segment in
2007;
|
· |
the
gain from the land we sold in 2006;
and
|
· |
the
aggregate income tax benefit recognized by our Chemicals Segment
in
2006.
|
Critical
accounting policies and estimates
We
have
based the accompanying “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” upon our Consolidated Financial Statements.
We prepare our Consolidated Financial Statements in accordance with accounting
principles generally accepted in the United States of America (“GAAP”). In many
cases the accounting treatment of a particular transaction does not require
us
to make estimates and judgements. However, in other cases we are required
to
make estimates and judgments that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements, and the reported amounts of revenues and expenses
during the reported period. On an ongoing basis, we evaluate our estimates,
including those related impairments of investments in marketable securities
and
investments accounted for by the equity method, the recoverability of other
long-lived assets (including goodwill and other intangible assets), pension
and
other postretirement benefit obligations and the underlying actuarial
assumptions related thereto, the realization of deferred income tax assets
and
accruals for environmental remediation, litigation and income tax contingencies.
We base our estimates on historical experience and on various other assumptions
we believe are reasonable under the circumstances, the results of which form
the
basis for making judgments about the reported amounts of assets, liabilities,
revenues and expenses. Actual results might differ significantly from
previously-estimated amounts under different assumptions or conditions.
“Our
critical accounting policies” relate to amounts having a material impact on our
financial position and results of operations, and that require our most
subjective or complex judgments. See Note 1 to our Consolidated Financial
Statements for a detailed discussion of our significant accounting
policies.
|
·
|
Marketable
securities - We
own investments in certain companies that we account for as marketable
securities carried at fair value or that we account for under the
equity
method. For these investments, evaluate the fair value at each
balance
sheet date. We record an impairment charge when we believe an investment
has experienced an other than temporary decline in fair value below
its
cost basis (for marketable securities) or below its carrying value
(for
equity method investees). Future adverse changes in market conditions
or
poor operating results of underlying investments could result in
losses or
our inability to recover the carrying value of the investments
that may
not be reflected in an investment’s current carrying value, thereby
possibly requiring us to recognize an impairment charge in the
future.
|
At
December 31, 2006, the carrying value (which equals their fair value) of
substantially all of our marketable securities equaled or exceeded the cost
basis of each of such investment. Our investment in The Amalgamated Sugar
Company LLC represents approximately 92% of the aggregate carrying value
of all
of our marketable securities at December 31, 2006. The $250 million carrying
value is the same as its cost basis. At December 31, 2006, the $29.51 per
share
quoted market price of our investment in TIMET (the only one of our equity
method investees for which quoted market prices are available) was more than
six
times our per share net carrying value of our investment in TIMET.
|
·
|
Goodwill
- Our
goodwill totaled $385.2 million at December 31, 2006 resulting
primarily
from our various step acquisitions of Kronos and NL. In accordance
with
SFAF No. 142, Goodwill
and other Intangible Assets,
we do not amortize goodwill.
|
|
|
Goodwill
is evaluated for impairment at least annually. Goodwill is also
evaluated
for impairment if the book value of its reporting unit exceeds
its
estimated fair value. A reporting unit can be a segment or an operating
division. For our Chemicals Segment we compare the book value to
the
publicly traded market price to assess impairment. For our Component
Products Segment we use a discounted cash flow technique. If the
fair
value is less than the book value the asset is written down to
the
estimated fair value.
|
|
|
Considerable
management judgment is necessary to evaluate the impact of operating
changes and to estimate future cash flows. Assumptions used in
our
impairment evaluations, such as forecasted growth rates and our
cost of
capital, are consistent with our internal projections and operating
plans.
|
We
did
not recognize an impairment charge for goodwill during 2006.
|
·
|
Long-lived
assets - We
account for our long-lived assets, including our investment in
WCS, in
accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
We
assess property, equipment and capitalized permit costs for impairment
only when circumstances indicate an impairment may exist. During
2006, as
a result of continued operating losses, certain long-lived assets
of our
Waste Management Segment were evaluated for impairment as of December
31,
2006. Our analysis, based on estimated future undiscounted cash
flows of
WCS’ operations, indicated no impairment was present as the estimate
exceeded the carrying value of WCS’ net assets. Considerable management
judgment is necessary to evaluate the impact of operating changes
and to
estimate future cash flows. Assumptions used in our impairment
evaluations, such as forecasted growth rates and our cost of capital,
are
consistent with our internal projections and operating
plans.
|
|
·
|
Employee
benefit plan costs - We
provide a range of benefits including various defined benefit pension
and
other postretirement benefits for our employees. We record annual
amounts
related to these plans based upon calculations required by GAAP,
which
make use of various actuarial assumptions, such as: discount rates,
expected rates of returns on plan assets, compensation increases,
employee
turnover rates, mortality rates and expected health care trend
rates. We
review our actuarial assumptions annually and make modifications
to the
assumptions based on current rates and trends when we believe appropriate.
As required by GAAP, modifications to the assumptions are generally
recorded and amortized over future periods. Different assumptions
could
result in the recognition of different expense amounts over different
periods of times. These assumptions are more fully described below
under
“—Assumptions on defined benefit pension plans and postretirement
benefit
plans.”
|
|
·
|
Income
taxes - Deferred
taxes are recognized for future tax effects of temporary differences
between financial and income tax reporting. We record a valuation
allowance to reduce our gross deferred income tax assets to the
amount we
believe will be realized under the more-likely-than-not recognition
criteria of SFAS No. 109, Accounting
for Income Taxes.
While we have considered future taxable income and ongoing prudent
and
feasible tax planning strategies in assessing the need for a valuation
allowance, it is possible that in the future we may change our
estimate of
the amount of the deferred income tax assets that would
more-likely-than-not be realized in the future. If such changes
take
place, there is a risk that an adjustment to the deferred income
tax asset
valuation allowance may be required that would either increase
or
decrease, as applicable, our reported net income in the period
such change
in estimate was made. We did not adjust our valuation allowance
in
2006.
|
We
also
evaluate at the end of each reporting period whether some or all of the
undistributed earnings of our foreign subsidiaries are permanently reinvested
(as that term is defined in GAAP). While we may have concluded in the past
that
some undistributed earnings are permanently reinvested, facts and circumstances
can change in the future, such as a change in the expectation regarding the
capital needs of our foreign subsidiaries, could result in a conclusion that
some or all of the undistributed earnings are no longer permanently reinvested.
If our prior conclusions change, we would recognize a deferred income tax
liability in an amount equal to the estimated incremental U.S. income tax
and
withholding tax liability that would be generated if all of such
previously-considered permanently reinvested undistributed earnings were
distributed to us. We did not change the conclusion on our undistributed
foreign
earnings in 2006.
From
time
to time, tax authorities will examine certain of our income tax returns.
We provide accruals for our estimate of additional taxes and related interest
expense which could ultimately result from these tax examinations. Tax
authorities may interpret tax regulations differently than we do.
Judgments and estimates made at a point in time may change based on the outcome
of tax audits and changes to or further interpretations of regulations, thereby
resulting in an increase or decrease in the amount we are required to accrue
for
such matters (and therefore a decrease or increase our reported net income
in
the period of such change).
Litigation
and environmental liabilities -
We are
involved in numerous legal and environmental actions in part due to NL’s former
involvement in the manufacture of lead-based products. In accordance with
SFAS
No. 5, Accounting
for Contingencies, we
record
accruals for these liabilities when estimated future expenditures associated
with such contingencies become probable, and we can reasonably estimate the
amounts of such future expenditures. However, new information may become
available to us, or circumstances (such as applicable laws and regulations)
may
change, thereby resulting in an increase or decrease in the amount we are
required to accrue for such matters (and therefore a decrease or increase
in our
reported net income in the period of such change). At December 31, 2006 we
have
recorded total environmental liabilities of $59.7 million dollars.
Operating
income for each of our three operating segments are impacted by certain of
these
significant judgments and estimates, as summarized below:
|
·
|
Chemicals
- reserves for obsolete or unmarketable inventories, impairment
of equity
method investees, goodwill and other long-lived assets, defined
benefit
pension and OPEB plans and loss
accruals.
|
|
·
|
Component
Products - reserves for obsolete or unmarketable inventories, impairment
of long-lived assets and loss
accruals.
|
|
·
|
Waste
Management - impairment of long-lived assets and loss
accruals.
|
In
addition, general corporate and other items are impacted by the significant
judgments and estimates for impairment of marketable securities and equity
method investees, defined benefit pension and OPEB plans, deferred income
tax
asset valuation allowances and loss accruals.
Segment
Operating Results - 2005 Compared to 2006 and 2004 Compared to 2005
-
Chemicals
-
We
consider TiO2
to be a
“quality of life” product, with demand affected by gross domestic product
(“GDP”) in various regions of the world. Over the long-term, we expect demand
for TiO2
will
grow by 2% to 3% per year, consistent with our expectations for the long-term
growth in GDP. However, even if we and our competitors maintain consistent
shares of the worldwide market, demand for TiO2
in any
interim or annual period may not change in the same proportion as the change
in
GDP, in part due to relative changes in the TiO2
inventory levels of our customers. We believe our customers’ inventory levels
are partly influenced by their expectation for future changes in market
TiO2
selling
prices.
The
factors having the most impact on our reported operating results
are:
|
·
|
TiO2
average selling prices;
|
|
·
|
foreign
currency exchange rates (particularly the exchange rate for the
U.S.
dollar relative to the euro and the Canadian dollar);
|
|
·
|
TiO2
sales and production volumes; and
|
|
·
|
manufacturing
costs, particularly maintenance and energy-related
expenses.
|
The
key
performance indicators for our Chemicals Segment are TiO2
average
selling prices, and TiO2
sales
and production volumes.
|
|
Years
ended December 31,
|
|
%
Change
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
2004-05
|
|
2005-06
|
|
|
|
(Dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,128.6
|
|
$
|
1,196.7
|
|
$
|
1,279.5
|
|
|
6
|
%
|
|
7
|
%
|
Cost of sales
|
|
|
882.0
|
|
|
884.1
|
|
|
980.8
|
|
|
-
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
246.6
|
|
$
|
312.6
|
|
$
|
298.7
|
|
|
27
|
%
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
102.4
|
|
$
|
165.6
|
|
$
|
138.1
|
|
|
62
|
%
|
|
(17
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
sales
|
|
|
78
|
%
|
|
74
|
%
|
|
77
|
%
|
|
|
|
|
|
|
Gross margin
|
|
|
22
|
%
|
|
26
|
%
|
|
23
|
%
|
|
|
|
|
|
|
Operating income
|
|
|
9
|
%
|
|
14
|
%
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TiO2 operating statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales volumes*
|
|
|
500
|
|
|
478
|
|
|
511
|
|
|
(4
|
)%
|
|
7
|
%
|
Production volumes*
|
|
|
484
|
|
|
492
|
|
|
516
|
|
|
2
|
%
|
|
5
|
%
|
Production rate as
percent of capacity
|
|
|
Full
|
|
|
99
|
%
|
|
Full
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent change in net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TiO2 Product pricing
|
|
|
|
|
|
|
|
|
|
|
|
8
|
%
|
|
-
|
%
|
TiO2 Sales volumes
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)%
|
|
7
|
%
|
TiO2 product mix
|
|
|
|
|
|
|
|
|
|
|
|
1
|
%
|
|
-
|
%
|
Changes
in currency exchange rates
|
|
|
|
|
|
|
|
1
|
%
|
|
-
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
6
|
%
|
|
7
|
%
|
*Thousands
of metric tons
Net
Sales
- Our
Chemicals Segment’s sales increased by 7% or $82.8 million in 2006 compared to
2005 due primarily to an 7% increase in TiO2 sales volumes and to a lesser
extent the favorable effect of fluctuations in foreign currency exchange
rates,
which increased sales by approximately $2.0 million, or less than 1%. Our
Chemicals Segment’s sales volumes in 2006 were a new record for us. The increase
in our TiO2 sales volumes in 2006 was due primarily to higher sales volumes
in
the United States, Europe and in export markets, which were partially offset
by
lower sales volumes in Canada. Our sales volumes in Canada have been impacted
by
decreased demand for TiO2 used in paper products.
Our
Chemicals Segment’s net sales increased 6% or $68.1 million in 2005 compared to
2004, primarily due to an 8% increase in average TiO2
selling
prices and favorable foreign currency exchange rates, offset somewhat by
a 4%
decrease in sales volumes. We estimate the favorable effect of changes in
currency exchange rates increased our net sales for 2005 by approximately
$16
million, or 1%, compared to 2004. Our 4% decrease in sales volumes for 2005
is
primarily due to lower sales volumes in all regions of the world. Worldwide
demand for TiO2
in 2005
was estimated to have declined by approximately 5% from 2004. We attribute
this
decline to slower overall economic growth and inventory destocking by our
customers.
Cost
of Sales
- Our
Chemicals Segment’s cost of sales increased in 2006 primarily due to the impact
of higher sales volumes and higher operating costs. Cost of sales as a
percentage of sales increased in 2006 primarily due to a 15% increase in
utility
costs (primarily energy costs), a 4% increase in raw material costs and currency
fluctuations (primarily the Canadian dollar). The negative impact of the
increase in raw materials and energy costs on our Chemicals Segment’s gross
margin and operating income comparisons was somewhat offset by record TiO2
production volumes which increased 5% in 2006 as compared to 2005. We continued
to gain operational efficiencies by enhancing our processes and debottlenecking
production to meet long-term demand. Our operating rates were near full capacity
in 2005 and at full capacity in 2006, and our TiO2 production volumes in
2006
were a new record for us for the fifth consecutive year.
Our
Chemicals
Segment’s cost of sales increased slightly in 2005 as compared to 2004 as the
effect of lower sales volumes was more than offset by a 4% increase in raw
material and a 9% increase in utility costs (primarily energy costs). Cost
of
sales as a percentage of sales decreased in 2005 primarily due to the effects
of
higher average selling prices which more than offset the increases in raw
material and other operating costs. TiO2
production
volumes increased 2% for the year ended December 31, 2005 compared to the
same
period in 2004, which favorably impacted our income from operations comparisons.
Our operating rates were at full capacity in 2004 and near full capacity
in
2005.
Through
our debottlenecking program, we added finishing capacity in our German
chloride-process facility which along with equipment upgrades and enhancements
in several locations, have allowed us to reduce downtime for maintenance
activities. Our production capacity has increased by approximately 30% over
the
past ten years with only moderate capital expenditures. We believe our annual
attainable TiO2
production capacity for 2007 is approximately 525,000 metric tons, with some
additional capacity expected to be available in 2008 through our continued
debottlenecking efforts.
Operating
Income - Our
Chemicals Segment’s operating income declined in 2006 primarily due to the
decrease in gross margin and the effect of fluctuations in foreign currency
exchange rates. While our sales volumes were higher in 2006, our gross margin
has decreased as we were not able to achieve pricing levels to offset the
negative impact of our increased operating costs (primarily energy and raw
materials costs). Changes in currency rates also negatively affected our
gross
margin. We estimate the negative effect of changes in foreign currency exchange
rates decreased operating income by $20 million in 2006 as compared to 2005.
Our
Chemicals Segment’s operating income increased in 2005 as compared to 2004 due
primarily to
the
improvement in gross margin. While our sales volumes were lower in 2005,
our
gross margin increased primarily because of higher average TiO2
selling
prices and higher production volumes, which more than offset the impact of
lower
sales volumes and higher raw material and maintenance costs and the $6.3
million
of income related to a contract dispute settlement with a customer that
we recognized in 2004. Changes in currency rates favorably affected our
gross margin. We estimate the favorable effect of changes in foreign currency
exchange rates increased operating income by approximately $6 million, when
comparing 2005 to 2004.
Our
Chemicals Segment’s operating income is net of amortization of purchase
accounting adjustments made in conjunction with our acquisitions of interests
in
NL and Kronos. As a result, we recognize additional depreciation expense
above
the amounts Kronos reports separately, substantially all of which is included
within cost of goods sold. We recognized additional depreciation expense
of
$16.2 million in 2004, $16.6 million in 2005 and $13.2 million in 2006, which
reduced our reported Chemicals Segment’s operating income as compared to amounts
reported by Kronos.
Changes
in the amount of this additional depreciation expense during between 2004
and
2005 are due primarily to the effect of relative changes in foreign currency
exchange rates. In the third quarter of 2006, certain of the basis differences
became fully amortized, and as a result the amortization of our purchase
accounting adjustments was lower in 2006 as compared to 2005 and 2004. We
estimate such amortization will be approximately $4 million in
2007.
Foreign
Currency Exchange Rates - Our
Chemicals Segment has substantial operations and assets located outside the
United States (primarily in Germany, Belgium, Norway and Canada). The majority
of sales generated from our foreign operations are denominated in foreign
currencies, principally the euro, other major European currencies and the
Canadian dollar. A portion of our sales generated from our foreign operations
are denominated in the U.S. dollar. Certain raw materials used worldwide,
primarily titanium-containing feedstocks, are purchased in U.S. dollars,
while
labor and other production costs are purchased primarily in local currencies.
Consequently, the translated U.S. dollar value of our 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 foreign currency
exchange rates had the following effects on our Chemicals Segment’s net sales
and operating income in 2006 and 2005 as compared to the respective prior
year.
|
|
Increase
(decrease) -
Year
ended December
31,
|
|
|
|
2004 vs.
2005
|
|
2005 vs.
2006
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
Impact
on:
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
16
|
|
$
|
2
|
|
Operating
income
|
|
|
6
|
|
|
(20
|
)
|
Other
- On
September 22, 2005, the chloride-process TiO2
facility
operated by our 50%-owned joint venture, Louisiana Pigment Company (“LPC”),
temporarily halted production due to Hurricane Rita. Although storm damage
to
core processing facilities was not extensive, a variety of factors, including
loss of utilities, limited access and availability of employees and raw
materials, prevented the resumption of partial operations until October 9,
2005
and full operations until late 2005. The majority of LPC’s property damage and
unabsorbed fixed costs for periods in which normal production levels were
not
achieved were covered by insurance, and insurance covered our lost profits
(subject to applicable deductibles) resulting from our share of the loss
of
production at LPC. Both we and LPC filed claims with our insurers. We recognized
a gain of $1.8 million related to our business interruption claim in the
fourth
quarter of 2006, which is included in other income on our Consolidated Statement
of Income.
Outlook
- We
expect
our Chemicals Segment’s income from operations in 2007 will be lower than 2006,
due to continued downward pricing pressures and increased energy and raw
materials costs, offset in part by the effect of higher expected sales and
production volumes. Our expectations as to the future of the TiO2
industry
are based upon a number of factors beyond our control, including worldwide
growth of GDP, competition in the marketplace, unexpected or earlier than
expected capacity additions and technological advances. If actual developments
differ from our expectations, our results of operations could be unfavorably
affected.
Component Products
-
The
key
performance indicator for our Component Products Segment is operating income
margin.
|
|
Years
ended December 31,
|
|
%
Change
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
2004-05
|
|
2005-06
|
|
|
|
(Dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
182.6
|
|
$
|
186.3
|
|
$
|
190.1
|
|
|
2
|
%
|
|
2
|
%
|
Cost
of sales
|
|
|
142.8
|
|
|
142.6
|
|
|
143.6
|
|
|
-
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
$
|
39.8
|
|
$
|
43.7
|
|
$
|
46.5
|
|
|
10
|
%
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
16.2
|
|
$
|
19.3
|
|
$
|
20.6
|
|
|
18
|
%
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
78
|
%
|
|
77
|
%
|
|
76
|
%
|
|
|
|
|
|
|
Gross
margin
|
|
|
22
|
%
|
|
23
|
%
|
|
24
|
%
|
|
|
|
|
|
|
Operating
income
|
|
|
9
|
%
|
|
10
|
%
|
|
11
|
%
|
|
|
|
|
|
|
Net
Sales - Our
Component Product Segment’s net sales increased in 2006 as compared to 2005
primarily due to new sales volumes generated from the August 2005 and April
2006
acquisitions of two marine component businesses, which increased sales by
$11.3
million in 2006. Other factors contributing to the increase in sales include
sales volume increases in security products resulting from improved demand
and
the favorable effects of currency exchange rates on furniture component sales,
offset in part by sales volume decreases for certain furniture components
products due to competition from lower priced Asian manufacturers.
Our
Component Product Segment’s net sales were higher in 2005 as compared to 2004
primarily due to increases in selling prices for certain products across
all
segments to recover volatile raw material prices, sales volume associated
with
the August 2005 acquisition of a marine components business which increased
sales by $4.2 million in 2005, and the favorable effect of fluctuations in
currency exchange rates, partially offset by sales volume decreases for certain
furniture component products resulting from Asian competition.
Cost
of Sales - Our
Component Products Segment’s cost
of
sales decreased as a percentage of net sales in 2006 compared to 2005, and
as a
result gross margin increased over the same period. The gross margin improvement
is primarily due to an improved product mix, with a decline in lower-margin
furniture components sales and an increase in sales of higher margin security
and marine component products, as well as a continued focus on reducing costs,
offset in part by higher raw material costs and the unfavorable effect of
changes in currency exchange rates.
Cost
of
sales as a percentage of net sales decreased in 2005 as compared to 2004
as the
favorable impact of continued reductions in manufacturing and overhead costs
more than offset the negative impact of changes in foreign currency exchange
rates and higher raw material costs.
Operating
Income - Our Component
Products Segment’s gross margin and operating income increased in 2006 primarily
due to the increase in sales and the favorable change in product mix, as
well as
decreased operational costs as a result of a continuous focus on reducing
costs
across all product lines, partially offset by the negative impact of currency
exchange rates and higher raw material costs.
Our
Component Products Segment’s operating income increased in 2005 as compared to
2004 as the favorable impact of continued
reductions in costs, offset in part by the negative impact of changes in
foreign
currency exchange rates and higher raw material costs.
Foreign
Currency Exchange Rates - Our Component
Products Segment has substantial operations and assets located outside the
United States in Canada and Taiwan. The majority of sales generated from
our
foreign operations are denominated in the U.S. dollar, with the rest denominated
in foreign currencies, principally the Canadian dollar and the New Taiwan
dollar. Most of our raw materials, labor and other production costs for foreign
operations are denominated primarily in local currencies. Consequently, the
translated U.S. dollar values of our 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. Overall, fluctuations in foreign currency
exchange rates had the following effects on our Component Products Segment’s
sales and operating income in 2006 as compared to 2005.
|
|
Increase
(decrease) -
Year
ended December
31,
|
|
|
|
2004 vs.
2005
|
|
2005 vs.
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Impact
on:
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,541
|
|
$
|
1,138
|
|
Operating
income
|
|
|
(2,251
|
)
|
|
(1,132
|
)
|
Outlook
- While
demand has stabilized across most product lines, certain customers continue
to
seek lower cost Asian sources as alternatives to our products. We believe
the
impact of this will be mitigated through 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 share in certain markets. Our strategy
in responding to the competitive
pricing pressure has included reducing production costs through product
reengineering, improvement in manufacturing processes through lean manufacturing
techniques and moving production to lower-cost facilities, including our
own
Asian based manufacturing facilities. In addition, we continue to develop
sources for lower cost components for certain product lines to strengthen
our
ability to meet competitive pricing when practical. We also emphasize and
focus
on opportunities where we can provide value-added customer support services
that
Asian based manufacturers are generally unable to provide. This strategy
accepts forgoing certain segment sales where profitability is not possible
in
favor of developing new product and new market opportunities where we believe
the combination of our cost control initiatives and value added approach
will
produce better results for our shareholders. We
also
expect raw material cost volatility to continue during 2007 which we may
not be
able to fully recover through price increases or surcharges due to the
competitive nature of the markets we serve.
Waste
Management -
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
8.9
|
|
$
|
9.8
|
|
$
|
11.8
|
|
Cost
of goods sold
|
|
|
13.3
|
|
|
15.4
|
|
|
15.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
$
|
(4.4
|
)
|
$
|
(5.6
|
)
|
$
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
$
|
(10.2
|
)
|
$
|
(12.1
|
)
|
$
|
(9.5
|
)
|
General
- We
continue to operate WCS’s waste management facility on a relatively limited
basis while we navigate the regulatory licensing requirements to receive
permits
for the disposal of byproduct 11.e(2) waste material and for a broad range
of
low-level and mixed low-level radioactive wastes. We have previously filed
license applications for such disposal capabilities with the applicable Texas
state agencies, but we are uncertain as to the length of time it will take
for
the agencies to complete their reviews and act upon our license applications.
We
currently believe the applicable state agency will not issue a final decision
on
our application for 11.e(2) waste material until late 2008, but we do not
expect
to receive a final decision on our application for low-level and mixed low-level
radioactive waste disposal until January 2009. We do not know if we will
be
successful in obtaining these licenses. While the approvals for these licenses
are still in process, we currently have permits which allow us 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.
Net
sales and operating loss - Our
Waste
Management Segment’s sales increased in 2006 as compared to 2005, and our Waste
Management operating loss decreased over the same periods, as we obtained
new
customers and existing customers increased their utilization of our waste
management services. We continue to seek to increase our Waste Management
Segment’s sales volumes from waste streams permitted under our current licenses.
Our
Waste
Management Segment’s sales increased in 2005 as compared to 2004, but our Waste
Management Segment’s operating loss also increased over the same periods, as
higher operating costs more than offset the effect of higher utilization
of
certain waste management services.
Outlook
- We
are
also exploring opportunities to obtain certain types of new business (including
disposal and storage of certain types of waste) that, if obtained, could
help to
further increase Waste Management Segment’s sales, and decrease Waste Management
Segment’s operating losses, in 2007. Our ability to achieve increased Waste
Management Segment’s sales volumes through these waste streams, together with
improved operating efficiencies through further cost reductions and increased
capacity utilization, are important factors in improving our Waste Management
operating results and cash flows. Until we are able to increase our Waste
Management Segment’s sales volumes, we expect we will continue to generally
report operating losses in our Waste Management Segment. While achieving
increased sales volumes could result in operating profits, we currently do
not
believe we will report any significant levels of Waste Management operating
profit until we have obtained the licenses discussed above.
We
believe WCS can become a viable, profitable operation, even if we are
unsuccessful in obtaining a license for the disposal of a broad range of
low-level and mixed low-level radioactive wastes. However, we do not know
if we
will be successful in improving WCS’s cash flows. We have in the past, and we
may in the future, consider strategic alternatives with respect to WCS. We
could
report a loss in any such strategic transaction.
Equity
in earnings of TIMET -
As
noted
earlier, our board of directors declared a special dividend of all the TIMET
common stock we own. After the special dividend is completed the only ownership
interest we will have in TIMET will be a nominal amount through our NL
subsidiary. See Note 23 to our Consolidated Financial Statements a nominal
amount.
|
|
Years
ended December 31,
|
|
%
Change
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
2004-05
|
|
2005-06
|
|
|
|
(Dollars
in millions, except as indicated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported by TIMET:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
501.8
|
|
$
|
749.8
|
|
$
|
1,183.2
|
|
|
49
|
%
|
|
58
|
%
|
Cost of sales
|
|
|
438.1
|
|
|
550.4
|
|
|
747.1
|
|
|
26
|
%
|
|
36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
63.7
|
|
|
199.4
|
|
|
436.1
|
|
|
213
|
%
|
|
119
|
%
|
Other operating expenses, net
|
|
|
20.7
|
|
|
28.3
|
|
|
53.3
|
|
|
37
|
%
|
|
88
|
%
|
Operating income
|
|
|
43.0
|
|
|
171.1
|
|
|
382.8
|
|
|
298
|
%
|
|
124
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of VALTIMET
|
|
|
-
|
|
|
-
|
|
|
40.9
|
|
|
|
|
|
|
|
Gain on sale of land
|
|
|
-
|
|
|
13.9
|
|
|
-
|
|
|
|
|
|
|
|
Gain on exchange of
convertible preferred
securities
|
|
|
15.5
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Other, net
|
|
|
.8
|
|
|
4.3
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
Interest expense
|
|
|
(12.5
|
)
|
|
(4.0
|
)
|
|
(3.4
|
)
|
|
|
|
|
|
|
Pre-tax income
|
|
|
46.8
|
|
|
185.3
|
|
|
418.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
(benefit)
|
|
|
(2.1
|
)
|
|
24.5
|
|
|
128.3
|
|
|
|
|
|
|
|
Minority interest
|
|
|
1.2
|
|
|
4.9
|
|
|
8.8
|
|
|
|
|
|
|
|
Dividends on preferred stock
|
|
|
4.4
|
|
|
12.2
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to
Common stockholders
|
|
$
|
43.3
|
|
$
|
143.7
|
|
$
|
274.5
|
|
|
232
|
%
|
|
91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our
equity in earnings of TIMET
|
|
$
|
22.7
|
|
$
|
64.9
|
|
$
|
101.1
|
|
|
186
|
%
|
|
56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
87
|
%
|
|
73
|
%
|
|
63
|
%
|
|
|
|
|
|
|
Gross margin
|
|
|
13
|
%
|
|
27
|
%
|
|
37
|
%
|
|
|
|
|
|
|
Operating income
|
|
|
9
|
%
|
|
23
|
%
|
|
32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shipment volumes (metric tons):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Melted products
|
|
|
5,360
|
|
|
5,655
|
|
|
5,900
|
|
|
6
|
%
|
|
4
|
%
|
Mill products
|
|
|
11,365
|
|
|
12,660
|
|
|
14,160
|
|
|
11
|
%
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
16,725
|
|
|
18,315
|
|
|
20,060
|
|
|
10
|
%
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
selling price ($ per kilogram):
|
|
|
|
|
|
|
|
|
|
|
|
|
Melted
products
|
|
$
|
13.45
|
|
$
|
19.85
|
|
$
|
38.30
|
|
|
48
|
%
|
|
93
|
%
|
Mill
products
|
|
|
32.05
|
|
|
41.75
|
|
|
57.85
|
|
|
30
|
%
|
|
39
|
%
|
Net
Sales - We
experienced significant growth in our Titanium Metals sales and operating
income
during 2006 and 2005 as compared to the respective prior years, as we and
the
titanium industry as a whole have benefited significantly from continued
strong
demand for titanium across all major industry market sectors that has driven
melted and mill titanium prices to record levels. As a result of these market
factors, our average selling prices for melted and milled products in 2006
increased 93% and 39%, respectively, as compared to 2005. These increases
in
2006 followed similar increases from 2004 to 2005, when our average selling
prices for melted and mill products increased 48% and 30%, respectively.
In
addition to improved pricing, we delivered 4% more melted and 12% more mill
products compared to 2005. Sales of other products increased 27% in 2006
primarily due to improved demand for our fabrication products related mainly
to
increased construction of chemical, power and other industrial facilities.
During 2005, our volumes of melted product shipments were 6% higher than
2004,
while volumes of mill products were up 11%.
Our
ability to grow sales through sales volumes increases is limited by capacity
constraints. We are currently producing at approximately 88% of capacity
at the
majority of our Titanium Metals facilities. As a result of current production
levels, current demand and future outlook for demand for our titanium products,
we have initiated several strategic capital improvement projects at our existing
facilities that will add capacity to capitalize on the anticipated increase
in
demand. We expect to maintain production levels near 93% of practical capacity
during 2007.
Cost
of Sales and Gross Margin - Our
cost of sales increased significantly in 2006 as compared to 2005. A
substantial portion of the increase in our cost of sales is due to higher
cost
of raw materials, including purchased titanium sponge and purchased titanium
scrap. The higher cost of our purchased sponge is due principally to our
utilization in 2005 of lower-cost sponge we had purchased from the U.S. Defense
Logistics Agency stockpile. We purchased sponge from the DLA stockpile
since 2000, but the stockpile was fully depleted in 2005.
The higher cost of our purchased titanium scrap is due to increased
industry-wide demand as well as demand in non-titanium markets that use titanium
as an alloying agent. The impact of market increases in the cost of sponge
and scrap was mitigated in part because certain of our raw material purchases
are subject to long term agreements. In addition to the impact of higher
raw material costs, our cost of sales increased as we increased our
manufacturing employee headcount by approximately 150 full time equivalents
in
2006 as compared to the 2005 in order to support the continued growth of
our
business. These negative cost increases were somewhat offset by a
favorably product mix and plant operating rates, which increased to 88% of
practical capacity in 2006 from 80% in 2005.
Our
cost
of sales increased significantly in 2005 as compared to 2004. A
substantial portion of the increase in our cost of sales is due to higher
cost
of raw materials, energy and accruals for certain performance-based employee
incentive compensation as well as a $1.2 million noncash impairment charge
in
2005 related to certain abandoned manufacturing equipment. In addition to
the
impact of higher raw material costs, our cost of sales increased as we increased
our manufacturing employee headcount by approximately 145 full time equivalents
in 2005 as compared to 2004 in order to support the growth of our
business. These negative cost increases were somewhat offset by improved
plant operating rates, which increased from 73% in 2004 to 80% in 2005, and
higher gross margin from the sale of titanium scrap (which we can not
economically recycle) and other non-mill products.
Equity
in Earnings of TIMET - In
addition to the improved Titanium Metals operating income, our Titanium Metals
comparisons were also impacted by the following non-operating items recognized
by TIMET during the past three years:
|
·
|
a
$17.1 million income tax benefit in 2004 related to the utilization
of a
capital loss carryforward and net operating losses primarily in
the U.S.
and U.K., the benefit of which had not been previously recognized
by
TIMET;
|
|
·
|
a
$15.5 million gain in 2004 related to TIMET’s exchange
of
certain of its convertible preferred debt securities for a new
issue of
TIMET preferred stock, as the carrying value of the new preferred
stock
was less than the carrying value of the convertible preferred debt
securities;
|
|
·
|
Boeing
take-or-pay income of $22.1
million in 2004 and $17.1 million in 2005 for Boeing’s failure to purchase
specified volumes of titanium product from
us;
|
|
·
|
a
$50.2 million income tax benefit in 2005 related to the reversal
of
TIMET’s valuation allowance attributable to its U.S. and U.K. deferred
income tax assets due to TIMET’s change in estimate of its ability to
utilize its net operating loss carryforward and other deductible
temporary
differences in the U.S. and the
U.K.;
|
|
·
|
a
pre-tax gain of $13.9 million in 2005 on the sale of certain property
not
used in TIMET’s operations;
|
|
·
|
a
$40.9 million gain on the sale of our investment in VALTIMET in
2006;
and
|
|
·
|
a
$17.1 million income tax benefit in 2006 related to the utilization
of a
capital loss carryforward, the benefit of which had not previously
been
recognized by TIMET.
|
Outlook
- We
achieved record levels for net sales, operating income and net income through
2006. These strong operating results, which we expect to continue in 2007,
were
largely driven by increased demand in all market sectors (commercial aerospace,
industrial, military and other emerging markets), as well as cost efficiency
benefits from improved production levels. Capacity constraints for both melted
and mill products in the titanium industry coupled with relatively tight
supplies of raw materials also contributed to improved selling prices for
both
melted and mill products. Our backlog at December 31, 2006 was $1.1 billion,
compared to $870 million at December 31, 2005 and $450 million at December
31,
2004. With our plant production levels near practical capacity, we have
initiated several strategic capital improvement projects at our existing
facilities that will add capacity to capitalize on the anticipated increase
in
demand including:
· |
In
May 2005, we announced our plans to expand our existing titanium
sponge
facility in Henderson, Nevada, and this expansion will provide
the
capacity to produce an additional 4,000 metric tons of sponge annually,
an
increase of approximately 47% over the current sponge production
capacity
levels at our Nevada facility. The expansion project is nearing
completion
and is expected to commence commercial production during the second
quarter of 2007.
|
· |
In
April 2006, we announced our plans for the expansion of our electron
beam
cold hearth melt capacity in Morgantown, Pennsylvania. This expansion,
which we currently expect to complete by early 2008, will have,
depending
on product mix, the capacity to produce an additional 8,500 metric
tons of
melted products, an increase of approximately 54% over the current
production capacity levels at our facility.
|
· |
In
November 2006, we entered into a conversion services agreement
with
Haynes. Haynes will provide us dedicated annual rolling capacity
of 4,500
metric tons at its facility, and we have the option of increasing
the
output capacity to 9,000 metric tons. This agreement provides us
with a
long-term secure source for processing flat products, resulting
in a
significant increase in our existing mill product conversion capabilities
which allows us to provide assurance to our customers of our long-term
ability to meet their needs.
|
We
intend
to continue to explore other opportunities to expand our existing production
and
conversion capacities, through internal expansion and long-term third party
arrangements, as well as potential joint ventures and acquisitions. We expect
our ongoing expansion projects as well as the other alternatives that we
are
evaluating to provide a significant increase in existing production
capabilities, and we remain committed to our ongoing efforts to capitalize
on
opportunities to expand our market presence.
We
expect
that industry-wide demand trends will continue for the foreseeable future.
While
the industry has experienced some negative effect on near-term demand relative
to the production delays for the Airbus A380 commercial aircraft, recent
announcement of resolution of production issues should mitigate these near-term
impacts. We currently expect to see production and shipment volume increases
similar to 2006, with overall capacity utilization expected to approximate
93%
of practical capacity for 2007. However, practical capacity utilization measures
can vary significantly based on product mix. Additionally, once our additional
electron beam (“EB”) cold hearth melt capacity becomes operational in 2008, we
anticipate our EB melt practical capacity to increase 54% or 8,500 metric
tons.
Our
cost
of sales is affected by a number of factors including customer and product
mix,
material yields, plant operating rates, raw material costs, labor costs and
energy costs. Raw material costs, which include sponge, scrap and alloys,
represent the largest portion of our manufacturing cost structure, and, as
previously discussed, continued cost increases for certain raw materials
occurred during 2006. We expect the availability of certain raw materials
to
remain tight in the near term and improve as announced capacity expansion
throughout the industry becomes operational. Consequently, we expect prices
for
these raw materials to remain relatively high in 2007, and we are unable
to
predict the extent to which these market driven costs will impact our future
results of operations. In addition, we have certain long-term customer
agreements that will somewhat limit our ability to pass on all of our increased
raw material costs.
Other
- We
account for our interest in TIMET by the equity method. Our equity in earnings
in TIMET is net of amortization and purchase accounting adjustments made
in
conjunction with our acquisition of our interest in TIMET. As a result, our
equity in earnings differs from the amount that would be expected by applying
our ownership percentage to TIMET’s stand-alone earnings. The net effect of
these differences increased our equity in earnings in TIMET by $5.0 million
in
2004, $4.2 million in 2005 and $3.7 million in 2006. The percentage increase
in
our equity in earnings of TIMET in 2006 and 2005 as compared to 2005 and
2004 is
lower than the percentage increase in TIMET’s separately-reported net income
attributable to common stockholders during the same periods because we owned
a
lower percentage of TIMET in 2006 and 2005 as compared to 2005 and 2004 due
to
TIMET’s issuance of shares of its common stock, primarily from the conversion of
shares of its convertible preferred stock into common stock and stock option
exercises by TIMET employees.
As
a
result of the previously discussed special dividend, we will only recognize
equity in earnings of TIMET through the first quarter of 2007.
General
Corporate Items, Interest Expense, Provision for Income Taxes, Minority Interest
and Discontinued Operations
Interest
and Dividend Income - A
significant portion of our interest
and dividend income in 2004, 2005 and 2006 relates to the distributions we
received from The Amalgamated Sugar Company LLC and, in 2004 and 2005, from
the
interest income we earned on our $80 million loan to Snake River Sugar Company
that Snake River prepaid in October 2005. We recognized dividend income from
the
LLC of $23.8 million in 2004, $45.0 million in 2005 and $31.1 million in
2006.
We also recognized interest income on our $80 million loan to Snake River
of
$5.2 million in 2004 and $3.9 million in 2005 before the loan was prepaid
in
October 2005.
In
October 2005, we and Snake River amended the Company Agreement of the LLC
pursuant to which, among other things, the LLC is required to make higher
minimum levels of distributions to its members (including us) as compared
to
levels required under the prior Company Agreement. Under the new agreement,
we
should receive annually aggregate distributions from the LLC of approximately
$25.4 million. In addition, because certain specified conditions were met
during
the 15-month period that commenced on October 1, 2005, the LLC was required
to
distribute to us an additional $25 million during the 15-month period. This
distribution is in addition to the $25.4 million distribution noted above.
We
received approximately $20 million of this additional amount in the fourth
quarter of 2005, and the remaining $6 million during 2006. We do not expect
to
receive a similar additional amounts during 2007; therefore, we expect our
interest and dividend income for all of 2007 will be lower than 2006. See
Notes
4 and 15 to our Consolidated Financial Statements.
Insurance
Recoveries - Insurance
recoveries in 2004, 2005 and 2006 relate to amounts NL received from certain
of
its former insurance carriers, and relate principally to recovery of prior
lead
pigment litigation defense costs incurred by NL. We have an agreement with
a former insurance carrier in which the carrier will reimburse us for a portion
of our past and future lead pigment litigation defense costs, and the insurance
recoveries in 2005 and 2006 include amounts we received from this carrier.
We are not able to determine how much we will ultimately recover from the
carrier for past defense costs incurred because the carrier has certain
discretion regarding which past defense costs qualify for reimbursement.
Insurance recoveries in 2004, 2005 and 2006 also include amounts we received
for
prior legal defense and indemnity coverage for certain of its environmental
expenditures. We do not expect to receive any further material insurance
settlements relating to environmental remediation matters.
While
we
continue to seek additional insurance recoveries for lead pigment litigation
matters, we do not know if we will be successful in obtaining reimbursement
for
either defense costs or indemnity. We have not considered any additional
potential insurance recoveries in determining accruals for lead pigment
litigation matters. Any additional insurance recoveries would be
recognized when the receipt is probable and the amount is determinable. See
Note
15 to our Consolidated Financial Statements.
Securities
Transactions - Net
securities transactions gains in 2005 relate principally to a $14.7 million
pre-tax gain related to NL’s sales of shares of Kronos common stock in market
transactions and a $5.4 million gain related to Kronos’ sale of its passive
interest in a Norwegian smelting operation, which had a nominal carrying
value
for financial reporting purposes. Net securities transactions gains in 2004
includes a $2.2 million gain related to NL’s sales of shares of Kronos common
stock in market transactions. See Note 15 to our Consolidated Financial
Statements.
Other
general corporate income items - The
gain
on disposal of fixed assets in 2006 relates to the sale of certain land in
Nevada that was not associated with any of our operations. NL has certain
real
property, including some subject to environmental remediation, which might
be
sold in the future for a profit. See Note 15 to the Consolidated Financial
Statements.
Corporate
Expenses, Net - Corporate
expenses were $5.2 million higher in 2005 as compared to 2004 due primarily
to
higher litigation and related expenses and to higher environmental remediation
expenses at NL. Corporate expenses were flat in 2006 as compared to 2005
as
higher litigation and environmental expenses at NL were offset by lower
environmental and pension expenses for other subsidiaries. We expect corporate
expenses in 2007 will be higher
than 2006, in part due to higher expected litigation and related expenses
at NL.
Obligations
for environmental remediation costs are difficult to assess and estimate,
and it
is possible that actual costs for environmental remediation will exceed accrued
amounts or that costs will be incurred in the future for sites in which we
cannot currently estimate the liability. If these events were to occur during
2007, our corporate expenses would be higher than our current estimates.
See
Note 18 to our Condensed Consolidated Financial Statements.
Loss
on Prepayment of Debt -
In April
2006, we issued our euro 400 million aggregate principal amount of 6.5% Senior
Secured Notes due 2013, and used the proceeds to redeem our euro 375 million
aggregate principal amount of 8.875% Senior Secured Notes in May 2006. As
a
result of this prepayment, we recognized a $22.3 million pre-tax interest
expense charge in 2006, representing the call premium on the old Notes and
the
write-off of deferred financing costs and the existing unamortized premium
on
the old Notes. See Note 9 to our Consolidated Financial Statements. The annual
interest expense on the new 6.5% Notes will be approximately euro 6 million
less
than on the old 8.875% Notes.
Interest
Expense -
We have
a significant amount of indebtedness denominated in the euro, primarily through
our subsidiary Kronos International, Inc. (“KII”). From
January 2004 to November 2004, KII had euro 285 million aggregate principal
amount of 8.875% Senior Secured Notes outstanding.
In
November 2004, KII issued an additional euro 90 million principal amount
of the
8.875% Notes, so from November
2004 until May 2006, KII had euro 375 million aggregate principal amount
of
8.875% Senior Secured Notes outstanding. KII
had
euro 400 million aggregate principal amount of 6.5% Senior Secured Notes
outstanding
since April 2006. The
interest expense we recognize on these fixed rate Notes will vary with
fluctuations in the euro exchange rate. See also Item 7A, “Quantitative and
Qualitative Disclosures About Market Risk.”
Interest
expense decreased slightly from 2005 to 2006, from $69.2 million in 2005
to
$67.6 million in 2006. Interest expense was lower in 2006 as the decreased
interest rate on the new 6.5% Notes offset the effect of the 30 days of interest
expense in April 2006 when both issues of the Senior Secured Notes were
outstanding and the effect of changes in currency exchange rates.
Interest
expense increased $6.3 million from 2004 to 2005, from $62.9 million in 2004
to
$69.2 million in 2005. Interest expense was higher in 2005 primarily due
to
the
interest expense associated with the additional euro 90 million principal
amount
of the 8.875% 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
the
KII 8.875% Senior Secured Notes outstanding during all of both 2004 and 2005
by
approximately $1 million.
Assuming
currency exchange rates do not change significantly from their current levels,
we expect interest expense will be lower in 2007 as compared to 2006 due
to the
lower interest expense associated with the 6.5% Senior Secured Notes as compared
to the 8.875% Senior Secured Notes.
Provision
for Income Taxes
- We
recognized an income tax benefit of $193.8 million in 2004 compared to income
tax expense of $104.6 million in 2005 and $63.8 million in 2006. See Note
12 to
our Consolidated Financial Statements for a tabular reconciliation of our
statutory tax expense to our actual tax expense. Some of the more significant
items impacting this reconciliation are summarized below.
Our
income tax expense in 2006 includes:
· |
an
income tax benefit of $21.7 million related to an increase in the
amount
of our German trade tax net operating loss carryforward, as a result
of
the resolution of certain income tax audits in
Germany;
|
· |
an
income tax benefit of $10.4 million primarily resulting from the
reduction
in our income tax contingency reserves related to favorable developments
of income tax audit issues in Belgium, Norway and Germany;
|
|
·
|
an
income tax benefit of $1.4 million related to the favorable resolution
of
certain income tax audit issues in Germany and Belgium;
and
|
|
·
|
a
$1.3 million benefit resulting from the enactment of a reduction
in
Canadian income tax rates.
|
Our
income tax expense in 2005 includes:
|
·
|
an
income tax benefit of $11.5 million related to the favorable effects
of
developments with respect to certain non-U.S. income tax audits
of Kronos,
principally in Belgium and Canada;
|
|
·
|
an
income tax benefit of $7.0 million related to the favorable effect
of
developments with respect to certain income tax items of
NL;
|
|
·
|
a
$17.5 million provision for income taxes related to the loss of
certain
income tax attributes of Kronos in Germany;
and
|
|
·
|
a
provision for income taxes of $9.0 million related to a change
in CompX’s
permanent reinvestment conclusion regarding certain of its non-U.S.
subsidiaries.
|
Our
income tax expense in 2004 includes:
|
·
|
an
income tax benefit of $280.7 million related to the reversal of
Kronos’
deferred income tax asset valuation allowance in Germany;
and
|
|
·
|
an
income tax benefit of $48.5 million related to NL’s favorable settlement
with the IRS concerning a prior restructuring transaction of NL.
|
In
addition, as discussed in Note 1 to our Consolidated Financial Statements,
we
recognize deferred income taxes with respect to the excess of the financial
reporting carrying amount over the income tax basis of our direct investment
in
Kronos. The amount of such deferred income taxes can vary from period to
period
and have a significant impact on our overall effective income tax rate. The
aggregate amount of such deferred income taxes included in our provision
for
income taxes was $83.7 million in 2004, $10.4 million in 2005 and $13.8 million
in 2006.
Minority
Interest in Continuing Operations - Minority
interest in earnings declined $36.8 million from 2004 to 2005, from $48.5
million in 2004 to $11.7 million in 2005. This decline is due primarily to
lower
income at both Kronos and NL, offset in part by higher earnings of CompX.
The
lower earnings of NL and Kronos were due in large part to the $280.7 million
income tax benefit recognized by Kronos in 2004 as discussed above. In addition,
we purchased additional shares of Kronos and CompX common stock throughout
2004
and 2005 which increased our weighted average ownership of these companies
in
2005 as compared to 2004.
Minority
interest in earnings increased slightly from $11.7 million in 2005 to $12.0
million in 2006. This increase is due to higher earnings at CompX and Kronos.
These increases were mostly offset by an increase in our ownership percentage
of
Kronos and CompX in 2006 as compared to 2005 through our purchases of their
common stock throughout 2005 and 2006 as well as by lower income at NL. In
addition, see Note 13 to our Condensed Consolidated Financial Statements.
Discontinued
Operations -
Discontinued operations relates to CompX’s former European operations that we
sold in January 2005. Discontinued operations in 2004 includes (i) a $6.5
million goodwill impairment charged associated with the assets sold and (ii)
a
$4.2 million income tax
benefit associated with the U.S. capital loss realized in 2005 upon completion
of the sale of the European operations. In accordance with GAAP, we recognized
the benefit of the capital loss in 2004 when we classified the operations
as
held for sale. Our discontinued operations in 2005 is related to additional
expenses we incurred on the sale. See
Note
16 to our Consolidated Financial Statements.
Related
Party Transactions - We
are a
party to certain transactions with related parties. See Note 17 to our
Consolidated Financial Statements.
Assumptions
on defined benefit pension plans and OPEB plans.
Defined
benefit pension plans. We
maintain various defined benefit pension plans in the U.S., Europe and Canada.
See Note 11 to our Consolidated Financial Statements. At December 31, 2006,
the
projected benefit obligations for all defined benefit plans was comprised
of
$92.4 million related to U.S. plans and $455.5 million related to foreign
plans.
Substantially, all of the projected benefit obligations attributable to foreign
plans related to plans maintained by Kronos, and approximately 47%, 16% and
37%
of the projected benefit obligations attributable to U.S. plans related to
plans
maintained by NL, Kronos and Medite Corporation, a former business unit of
Valhi
("the Medite plan”).
We
account for our defined benefit pension plans using SFAS No. 87, Employer’s
Accounting for Pensions, as
amended by SFAS No. 158 effective December 31, 2006. See Note 11 to our
Consolidated Financial Statements. Under SFAS No. 87, we recognize defined
benefit pension plan expense and prepaid and accrued pension costs based
on
certain actuarial assumptions, principally the assumed discount rate, the
assumed long-term rate of return on plan assets and the assumed increase
in
future compensation levels. Prior to December 31, 2006, we did not recognize
the
full funded status of our plans in our Consolidated Balance Sheet; instead,
certain gains and losses resulting primarily from differences between our
actuarial assumptions and actual results were deferred and recognized as
a
component of defined benefit pension plan expense and prepaid and accrued
pension costs in future periods. Upon adoption of SFAS No. 158 effective
December 31, 2006, we now recognize the full funded status of our defined
benefit pension plans as either an asset (for overfunded plans) or a liability
(for underfunded plans) in our Consolidated Balance Sheet.
We
recognized consolidated defined benefit pension plan expense of $13.5 million
in
2004, $13.1 million in 2005 and $16.0 million in 2006. The amount of funding
requirements for these defined benefit pension plans is generally based upon
applicable regulation (such as ERISA in the U.S.), and will generally differ
from pension expense recognized under SFAS No. 87 for financial reporting
purposes. We made contributions to all of our defined benefit pension plans
of
$17.8 million in 2004, $19.2 million in 2005 and $28.1 million in
2006.
The
discount rates we utilize for determining defined benefit pension expense
and
the related pension obligations are based on current interest rates earned
on
long-term bonds that receive one of the two highest ratings given by recognized
rating agencies in the applicable country where the defined benefit pension
benefits are being paid. In addition, we receive advice about appropriate
discount rates from our third-party actuaries, who may in some cases utilize
their own market indices. We adjust these discount rates as of each valuation
date (September 30th
for the
Kronos and NL plans and December 31st
for the
Medite plan) to reflect then-current interest rates on such long-term bonds.
We
use these discount rates to determine the actuarial present value of the
pension
obligations as of December 31st
of that
year. We also use these discount rates to determine the interest component
of
defined benefit pension expense for the following year.
Approximately
65%, 14%, 14% and 3% of the projected benefit obligations attributable to
plans
maintained by Kronos at December 31, 2006 related to Kronos plans in Germany,
Norway, Canada and the U.S., respectively. The Medite plan and NL’s plans are
all in the U.S. We use several different discount rate assumptions in
determining our consolidated defined benefit pension plan obligations and
expense because we maintain defined benefit pension plans in several different
countries in North America and Europe and the interest rate environment differs
from country to country.
We
used
the following discount rates for our defined benefit pension plans:
|
|
Discount
rates used for:
|
|
|
|
Obligations
at
December
31, 2004 and expense in 2005
|
|
Obligations
at
December
31, 2005 and expense in 2006
|
|
Obligations
at
December
31, 2006 and expense in 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Kronos
and NL plans:
|
|
|
|
|
|
|
Germany
|
|
|
5.0
|
%
|
|
4.0
|
%
|
|
4.5
|
%
|
Norway
|
|
|
5.0
|
%
|
|
4.5
|
%
|
|
4.8
|
%
|
Canada
|
|
|
6.0
|
%
|
|
5.0
|
%
|
|
5.0
|
%
|
U.S.
|
|
|
5.8
|
%
|
|
5.5
|
%
|
|
5.8
|
%
|
Medite
plan
|
|
|
5.7
|
%
|
|
5.5
|
%
|
|
5.8
|
%
|
The
assumed long-term rate of return on plan assets represents the estimated
average
rate of earnings we expect to be earned on the funds invested or to be invested
in the plans’ assets provided to fund the benefit payments inherent in the
projected benefit obligations. Unlike the discount rate, which is adjusted
each
year based on changes in current long-term interest rates, the assumed long-term
rate of return on plan assets will not necessarily change based upon the
actual,
short-term performance of the plan assets in any given year. Defined benefit
pension expense each year is based upon the assumed long-term rate of return
on
plan assets for each plan and the actual fair value of the plan assets as
of the
beginning of the year. Differences between the expected return on plan assets
for a given year and the actual return are deferred and amortized over future
periods based either upon the expected average remaining service life of
the
active plan participants (for plans for which benefits are still being earned
by
active employees) or the average remaining life expectancy of the inactive
participants (for plans for which benefits are not still being earned by
active
employees).
At
December 31, 2006, the fair value of plan assets for all defined benefit
plans
was comprised of $130.4 million related to U.S. plans and $268.7 million
related
to foreign plans. All of such plan assets attributable to foreign plans related
to plans maintained by Kronos, and approximately 42%, 15% and 43% of the
plan
assets attributable to U.S. plans related to plans maintained by NL and Kronos
and the Medite plan, respectively. Approximately 52%, 19%, 18% and 7% of
the
plan assets attributable to plans maintained by Kronos at December 31, 2006
related to plans in Germany, Norway, Canada and the U.S., respectively. We
use
several different long-term rates of return on plan asset assumptions in
determining our consolidated defined benefit pension plan expense because
we
maintain defined benefit pension plans in several different countries in
North
America and Europe, the plan assets in different countries are invested in
a
different mix of investments and the long-term rates of return for different
investments differs from country to country.
In
determining the expected long-term rate of return on plan asset assumptions,
we
consider the long-term asset mix (e.g. equity vs. fixed income) for the assets
for each of its plans and the expected long-term rates of return for such
asset
components. In addition, we receive advice about appropriate long-term rates
of
return from our third-party actuaries. Such assumed asset mixes are summarized
below:
|
·
|
During
2006, substantially all of the Kronos, NL and Medite plan assets
in the
U.S. were invested in The Combined Master Retirement Trust (“CMRT”), a
collective investment trust sponsored by Contran to permit the
collective
investment by certain master trusts which fund certain employee
benefits
plans sponsored by Contran and certain of its affiliates. Harold
Simmons
is the sole trustee of the CMRT. The CMRT’s long-term investment objective
is to provide a rate of return exceeding a composite of broad market
equity and fixed income indices (including the S&P 500 and certain
Russell indices) while utilizing both third-party investment managers
as
well as investments directed by Mr. Simmons. During the 18-year
history of
the CMRT through December 31, 2006, the average annual rate of
return has
been approximately 14% (including a 36% return during 2005 and
a 17%
return during 2006). At December 31, 2006, the asset mix of the
CMRT was
97% in equity securities and limited partnerships, 2% in fixed
income
securities and 1% in real estate
investments.
|
· |
In
Germany, the composition of our plan assets is established to satisfy
the
requirements of the German insurance commissioner. The plan asset
allocation at December 31, 2006 was 23% to equity managers, 48%
to fixed
income managers, 14% to real estate and other investments 15% (2005
- 23%,
48%, 14% and 15%, respectively).
|
· |
In
Norway, we currently have a plan asset target allocation of 14%
to equity
managers and 65% to fixed income managers and the remainder primarily
to
cash and liquid investments. The expected long-term rate of return
for
such investments is approximately 8%, 4.5% to 5% and 4%, respectively.
The
plan asset allocation at December 31, 2006 was 13% to equity managers,
64%
to fixed income managers and the remaining 23% primarily to cash
and
liquid investments (2005 - 16%, 62% and 22%,
respectively).
|
· |
In
Canada, we currently have a plan asset target allocation of 65%
to equity
managers and 35% to fixed income managers, with an expected long-term
rate
of return for such investments to average approximately 125 basis
points
above the applicable equity or fixed income index. The current
plan asset
allocation at December 31, 2006 was 66% to equity managers, 32%
to fixed
income managers and 2% to other investments (2005 - 64%, 32% and
4%,
respectively).
|
We
regularly review our actual asset allocation for each of our plans, and
periodically rebalance the investments in each plan to more accurately reflect
the targeted allocation when considered appropriate.
The
assumed long-term rates of return on plan assets used for purposes of
determining net period pension cost for 2004, 2005 and 2006 were as follows:
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Kronos
and NL plans:
|
|
|
|
|
|
|
|
|
|
|
Germany
|
|
|
6.0
|
%
|
|
5.5
|
%
|
|
5.3
|
%
|
Norway
|
|
|
6.0
|
%
|
|
5.5
|
%
|
|
5.0
|
%
|
Canada
|
|
|
7.0
|
%
|
|
7.0
|
%
|
|
7.0
|
%
|
U.S.
|
|
|
10.0
|
%
|
|
10.0
|
%
|
|
10.0
|
%
|
Medite
plan
|
|
|
10.0
|
%
|
|
10.0
|
%
|
|
10.0
|
%
|
We
currently expect to utilize the same long-term rates of return on plan asset
assumptions in 2007 as we used in 2006 for purposes of determining our 2007
defined benefit pension plan expense.
To
the
extent that a plan’s particular pension benefit formula calculates the pension
benefit in whole or in part based upon future compensation levels, the projected
benefit obligations and the pension expense will be based in part upon expected
increases in future compensation levels. For all of our plans for which the
benefit formula is so calculated, we generally base the assumed expected
increase in future compensation levels on the average long-term inflation
rates
for the applicable country.
In
addition to the actuarial assumptions discussed above, because Kronos maintains
defined benefit pension plans outside the U.S., the amounts we recognize
for
defined benefit pension expense and prepaid and accrued pension costs will
vary
based upon relative changes in foreign currency exchange rates.
As
discussed above, assumed discount rates and rate of return on plan assets
are
re-evaluated annually. A reduction in the assumed discount rate generally
results in an actuarial loss, as the actuarially-determined present value
of
estimated future benefit payments will increase. Conversely, an increase
in the assumed discount rate generally results in an actuarial gain. In
addition, an actual return on plan assets for a given year that is greater
than
the assumed return on plan assets results in an actuarial gain, while an
actual
return on plan assets that is less than the assumed return results in an
actuarial loss. Other actual outcomes that differ from previous
assumptions, such as individuals living longer or shorter than assumed in
mortality tables which are also used to determine the actuarially-determined
present value of estimated future benefit payments, changes in such mortality
table themselves or plan amendments, will also result in actuarial losses
or
gains. Historically, under GAAP, we did not recognize all of such
actuarial gains and losses in earnings currently; instead these amounts are
deferred and amortized into income in the future as part of net periodic
defined
benefit pension cost. However, upon adoption of SFAS No. 158 effective
December 31, 2006, these amounts are recognized in other comprehensive income.
In addition, any actuarial gains generated in future periods would reduce
the
negative amortization effect included in earnings of any cumulative unrecognized
actuarial losses, while any actuarial losses generated in future periods
would
reduce the favorable amortization effect included in earnings of any cumulative
unrecognized actuarial gains.
During
2006, our defined benefit pension plans generated a net actuarial gain of
$25.2
million. This actuarial gain, resulted primarily from the general overall
increase in the assumed discount rates from 2005 to 2006 as well as an actual
return on plan assets in excess of the assumed return.
Based
on
the actuarial assumptions described above and our current expectations for
what
actual average foreign currency exchange rates will be during 2007, we currently
expect our aggregate defined benefit pension expense will approximate $14.8
million in 2007. In comparison, we currently expect to be required to make
approximately $26.3 million of aggregate contributions to such plans during
2007.
As
noted
above, defined benefit pension expense and the amounts recognized as prepaid
and
accrued pension costs are based upon the actuarial assumptions discussed
above.
We believe all of the actuarial assumptions used are reasonable and appropriate.
If Kronos and NL had lowered the assumed discount rates by 25 basis points
for
all of their plans as of December 31, 2006, their aggregate projected benefit
obligations would have increased by approximately $20.8 million at that date,
and their aggregate defined benefit pension expense would be expected to
increase by approximately $2.3 million during 2007. Similarly, if Kronos
and NL
lowered the assumed long-term rates of return on plan assets by 25 basis
points
for all of their plans, their defined benefit pension expense would be expected
to increase by approximately $1 million during 2007. Similar assumed changes
with respect to the discount rate and expected long-term rate of return on
plan
assets for the Medite plan would not be significant.
OPEB
plans. We
provide certain health care and life insurance benefits for certain of our
eligible retired employees. See Note 11 to our Consolidated Financial
Statements. At December 31, 2006, approximately 35%, 31% and 33% of our
aggregate accrued OPEB costs relate to Tremont, NL and Kronos, respectively.
Kronos provides such OPEB benefits to retirees in the U.S. and Canada, and
NL
and Tremont provide such OPEB benefits to retirees in the U.S. We account
for
such OPEB costs under SFAS No. 106, Employers
Accounting for Postretirement Benefits other than Pensions, as
amended by SFAS No. 158. See Note 11. Under SFAS No. 106, OPEB expense and
accrued OPEB costs are based on certain actuarial assumptions, principally
the
assumed discount rate and the assumed rate of increases in future health
care
costs. Prior to December 31, 2006, we did not recognize the full funded status
of our plans in our Consolidated Balance Sheet; instead, certain gains and
losses resulting primarily from differences between our actuarial assumptions
and actual results were deferred and recognized as a component of OPEB expense
and accrued OPEB costs in future periods. Upon adoption of SFAS No. 158
effective December 31, 2006, we now recognize the full unfunded status of
our
OPEB plans as a liability.
We
recognized consolidated OPEB expense of $2 million in 2004, $1.2 million
in 2005
and $2.3 million in 2006. Similar to defined benefit pension benefits, the
amount of funding will differ from the expense recognized for financial
reporting purposes, and contributions to the plans to cover benefit payments
aggregated $5.7 million in 2004, $5.0 million in 2005 and $4.4 million in
2006.
Substantially all of our accrued OPEB costs relates to benefits being paid
to
current retirees and their dependents, and no material amount of OPEB benefits
are being earned by current employees. As a result, the amount we recognize
for
OPEB expense for financial reporting purposes has been, and is expected to
continue to be, significantly less than the amount of OPEB benefit payments
we
make each year. Accordingly, the amount of accrued OPEB costs we recognize
has
been, and is expected to continue to, decline gradually.
The
assumed discount rates we utilize for determining OPEB expense and the related
accrued OPEB obligations are generally based on the same discount rates we
utilize for our U.S. and Canadian defined benefit pension plans.
In
estimating the health care cost trend rate, we consider our actual health
care
cost experience, future benefit structures, industry trends and advice from
third-party actuaries. In certain cases, NL has the right to pass on to retirees
all or a portion of any increases in health care costs; for these retirees,
any
future increase in health care costs will have no effect on the amount of
OPEB
expense and accrued OPEB costs we recognize. During each of the past three
years, we have assumed that the relative increase in health care costs will
generally trend downward over the next several years, reflecting, among other
things, assumed increases in efficiency in the health care system and
industry-wide cost containment initiatives. For example, at December 31,
2006,
the expected rate of increase in future health care costs ranges from 7%
to 7.5%
in 2007, declining to rates of between 4% and 4.5% in 2009 to 2010 and
thereafter.
Based
on
the actuarial assumptions described above and Kronos’ current expectation for
what actual average foreign currency exchange rates will be during 2007,
we
expect our consolidated OPEB expense will approximate $2.2 million in 2007.
In
comparison, we expect to be required to make approximately $3.9 million of
contributions to such plans during 2007.
As
noted
above, OPEB expense and the amount we recognize as accrued OPEB costs are
based
upon the actuarial assumptions discussed above. We believe all of the actuarial
assumptions we use are reasonable and appropriate. If we had lowered the
assumed
discount rates by 25 basis points for all of our OPEB plans as of December
31,
2006, our aggregate projected benefit obligations would have increased by
approximately $600,000 at that date, our OPEB expense would be expected to
increase by approximately $200,000 during 2007. Similarly, if the assumed
future
health care cost trend rate had been increased by 100 basis points, our
accumulated OPEB obligations would have increased by approximately $2.1 million
at December 31, 2006, and OPEB expense would be expected to increase by $300,000
in 2007.
Foreign
operations
We
have
substantial operations located outside the United States, principally Chemicals
operations in Europe and Canada and Component Products operations in Canada
and
Taiwan. TIMET
also has substantial operations and assets located in Europe, principally
in the
United Kingdom, France and Italy. The
functional currency of these operations is the local currency. As a result,
the
reported amount of our assets and liabilities related to these foreign
operations will fluctuate based upon changes in currency exchange rates.
LIQUIDITY
AND CAPITAL RESOURCES
Consolidated
Cash Flows
Operating
Activities
-
Trends
in
cash flows from operating activities (excluding the impact of significant
asset
dispositions and relative changes in assets and liabilities) are generally
similar to trends in our operating income.
Cash
flows provided by our operating activities decreased from $142.1 million
in 2004
to $104.3 million in 2005. This $37.8 million decrease in cash provided was
due
primarily to the net effects of the following items:
|
·
|
higher
net cash used by changes in receivables, inventories, payables
and accrued
liabilities in 2005 of $45.4 million, due primarily to relative
changes in
Kronos’ inventory levels;
|
|
·
|
higher
consolidated operating income in 2005 of $64.4 million, due primarily
to
the higher earnings in our Chemicals Segment;
|
|
·
|
higher
net cash paid for income taxes in 2005 of $74.7 million, due in
large part
to $44.7 million of aggregate income tax refunds Kronos received
in 2004
related to refunds of prior year income taxes and a $21 million
payment we
made by NL in 2005 to settle a prior-year income tax
audit;
|
|
·
|
higher
general corporate interest and dividends received of $23.2 million
in
2005, due primarily to a higher level of distributions received
from The
Amalgamated Sugar Company LLC;
|
|
·
|
lower
distributions received from our Louisiana TiO2
joint venture of $3.8 million due to relative changes in their
cash
requirements in 2005; and
|
|
·
|
higher
cash paid for environmental remediation expenditures of $4.4 million
in
2005.
|
Cash
flows provided by our operating activities decreased from $104.3 million
in 2005
to $86.3 million in 2006. This decrease in cash provided was due primarily
to
the net effects of the following items:
|
·
|
higher
net cash provided by changes in receivables, inventories, payables
and
accrued liabilities in 2006 of $39.0 million, due primarily to
relative
changes in Kronos’ inventory levels;
|
|
·
|
lower
consolidated operating income in 2006 of $23.6 million, due primarily
to
the lower earnings in our Chemicals Segment;
|
|
·
|
the
$20.9 million call premium we paid in 2006 when we prepaid our
8.875%
Senior Secured Notes, which GAAP requires to be included in the
determination of cash flows from operating activities;
|
|
·
|
lower
general corporate interest and dividends received in 2006 of $16.2
million, primarily due to a lower level of distributions received
from The
Amalgamated Sugar Company LLC in
2006;
|
|
·
|
lower
cash paid for environmental remediation expenditures of $6.7 million
in
2006;
|
|
·
|
lower
cash paid for income taxes in 2006 of $11.3 million, due in part
to the
$21.0 million tax payment we made in 2005 to settle NL’s prior-year income
tax audit that was offset in part by the 2006 payment of approximately
$19.2 million of income taxes associated with the settlement of
prior year
income tax audits;
|
|
·
|
lower
cash paid for interest in 2006 of $7.0 million, primarily as a
result of
the May 2006 redemption of our 8.875% Senior Secured Notes (which
paid
interest semiannually in June and December) and the April 2006
issuance of
our 6.5% Senior Secured Notes (which will pay interest semiannually
in
April and October starting in October 2006);
and
|
|
·
|
lower
distributions received from our Louisiana joint venture of $2.6
million
due to relative changes in their cash requirements in 2006.
|
Relative
changes in working capital assets and liabilities can have a significant
effect
on cash flows from operating activities. Changes
in working capital were affected by accounts receivable and inventory changes
as
follows:
|
l |
Kronos'
average days sales outstanding ("DSO") decreased from 60 days at
December
31, 2004 to 55 days at December 31, 2005, due to the timing of
collection. CompX's average DSO increased from 38 days at December
31, 2004 to 40 days at December 31, 2005 due to timing of collection
on
the slightly higher accounts receivable balance at the end of
2005. |
|
l |
Kronos'
average number of days in inventory ("DII") increased from 97 days
at
December 31, 2004 to 102 days at December 31, 2005 due to the effects
of
higher production volumes and lower sales volumes. CompX's average
DII increased from 52 days at December 31, 204 to 59 days at December
31,
2005 due primarily to higher raw material quantity and prices, primarily
steel. |
|
l |
Kronos'
average DFO increased from 55 days at December 31, 2005 to 61 days
at
December 31, 2006 due to the timing of collection in higher
accounts receivable balances at the end of December. CompX's average
DSO increased slightly from 40 days at December 31, 2005 to 41 days
at
December 31, 2006 due to slightly higher accounts receivable balance
at
the end of 2005. |
|
·
|
Kronos’
average DSI increased from 102 days at December 31, 2005 to 117
days at
December 31, 2006, as their record TiO2
production volumes in 2006 exceeded their record TiO2 sales
volumes during the period. CompX’s average DSI decreased slightly from 59
days at December 31, 2005 to 57 days at December 31, 2006 due primarily
to
reductions in raw materials during 2006 as we utilized the higher
than
normal balance in inventory at the end of 2005 that was acquired
during
2005 as part of our efforts to mitigate the impact of volatility
in raw
material prices.
|
We
do not
have complete access to the cash flows of our majority-owned subsidiaries,
due
in part to limitations contained in certain credit agreements of our
subsidiaries and because we do not own 100% of these subsidiaries. A detail
of
our consolidated cash flows from operating activities is presented in the
table
below. Intercompany dividends have been eliminated.
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
Kronos
|
|
$
|
151.0
|
|
$
|
97.8
|
|
$
|
71.8
|
|
NL
Parent
|
|
|
8.8
|
|
|
(20.1
|
)
|
|
6.9
|
|
CompX
|
|
|
30.2
|
|
|
20.0
|
|
|
27.4
|
|
Waste
Control Specialists
|
|
|
(7.4
|
)
|
|
(7.7
|
)
|
|
(3.9
|
)
|
Tremont
|
|
|
2.0
|
|
|
(5.0
|
)
|
|
(1.5
|
)
|
Valhi
Parent
|
|
|
24.8
|
|
|
101.4
|
|
|
96.6
|
|
Other
|
|
|
(.3
|
)
|
|
(.7
|
)
|
|
(1.1
|
)
|
Eliminations
|
|
|
(67.0
|
)
|
|
(81.4
|
)
|
|
(109.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
142.1
|
|
$
|
104.3
|
|
$
|
86.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities
-
We
disclose capital expenditures by our business segments in Note 2 to our
Consolidated Financial Statements.
We
purchased the following securities in market transactions during
2006:
|
·
|
shares
of Kronos common stock for $25.4 million;
|
|
·
|
shares
of TIMET common stock for $18.7
million;
|
|
·
|
shares
of CompX common stock for $2.3 million;
and
|
|
·
|
other
marketable securities for $43.4 million.
|
In
addition, during 2006 we:
|
·
|
sold
other marketable securities for $42.9
million;
|
|
·
|
sold
certain land holdings in Nevada for $37.9
million;
|
|
·
|
acquired
a performance marine components products company for approximately
$9.8
million; and
|
|
·
|
capitalized
$8.3 million of expenditures related to WCS’ permitting efforts.
|
We
purchased the following securities in market transactions during
2005:
|
·
|
shares
of TIMET common stock for $18.0
million;
|
|
·
|
shares
of Kronos common stock for $7.0 million;
|
|
·
|
shares
of CompX common stock for $3.6 million;
and
|
|
·
|
other
marketable securities for $29.4 million.
|
In
addition, during 2005 we:
|
·
|
sold
shares of Kronos common stock for $19.2
million;
|
|
·
|
sold
other marketable securities for $19.7
million;
|
|
·
|
collected
$80 million on our loan to Snake River Sugar
Company;
|
|
·
|
collected
$10 million on our loan to one of the Contran family trusts described
in
Note 1 to the Consolidated Financial
Statements;
|
|
·
|
collected
a net $4.9 million on our short-term loan to
Contran;
|
|
·
|
received
a net $18.1 million from the sale of our European Thomas Regout
operations
(which had approximately $4.0 million of cash at the date of
disposal);
|
|
·
|
received
$3.5 million from the sale of our Norwegian smelting
operation;
|
|
·
|
acquired
a performance marine components products company for approximately
$7.3
million; and
|
|
·
|
capitalized
$4.1 million of expenditures related to WCS’ permitting efforts.
|
We
purchased the following securities in market transactions during
2004:
|
·
|
shares
of Kronos common stock for $17.1 million;
and
|
|
·
|
shares
of Kronos’ majority-owned French subsidiary for
$575,000.
|
In
addition, during 2004 we:
|
·
|
sold
shares of Kronos common stock for $2.7
million;
|
|
·
|
collected
$4.0 million on our loan to one of the Contran family trusts described
in
Note 1 to our Consolidated Financial
Statements;
|
|
·
|
loaned
a net $4.9 million to Contran on a short-term basis Contran;
and
|
|
·
|
capitalized
$6.3 million of expenditures related to WCS’ permitting efforts.
|
Financing
Activities
-
In
April
2006, we issued euro 400 million aggregate principal amount of our 6.5% Senior
Secured Notes due 2013 ($498.5 million when issued), and used the proceeds
to
redeem our euro 375 million aggregate principal amount of 8.875% Senior Secured
Notes in May 2006 ($470.5 million when redeemed). In addition, during 2006
we
had the following debt transactions:
|
·
|
borrowed
and repaid $4.4 million under Kronos’ Canadian revolving credit
facility;
|
|
·
|
repaid
a net $5.1 million under Kronos’ U.S. bank credit facility;
and
|
|
·
|
repaid
$1.5 million of certain of CompX’s indebtedness.
|
During
2005, we:
|
·
|
repaid
an aggregate euro 10 million ($12.9 million when repaid) under
Kronos’
European revolving credit facility;
|
|
·
|
borrowed
a net $11.5 million under Kronos’ U.S. credit
facility;
|
|
·
|
entered
into additional capital lease arrangements for certain mining equipment
for the equivalent of $4.4 million;
and
|
|
·
|
borrowed
and repaid $5 million under Valhi’s revolving bank credit facility.
|
During
2004, we:
|
·
|
repaid
a net $7.3 million of Valhi’s short-term demand loans from
Contran;
|
|
·
|
repaid
a net $5 million under Valhi’s revolving bank credit
facility;
|
|
·
|
repaid
a net $26.0 million under CompX’s revolving bank credit
facility;
|
|
·
|
issued
euro 90 million principal amount of KII’s 8.875% Senior Secured Notes at
107% of par (equivalent to $130 million when issued);
and
|
|
·
|
borrowed
an aggregate of euro 90 million ($112 million when borrowed) under
Kronos’
European revolving bank credit facility, of which euro 80 million
($100
million) were subsequently repaid during the year.
|
We
paid
aggregate cash dividends on our common stock of $29.8 million in 2004 ($.06
per
share per quarter) and $48.8 million in 2005 and $48.0 million in 2006 ($.10
per
share per quarter). Distributions to minority interest in 2004, 2005 and
2006
are primarily comprised of Kronos cash dividends paid to shareholders other
than
us or NL, NL dividends paid to shareholders other than us and CompX dividends
paid to shareholders other than NL.
We
purchased approximately 3.5 million and 1.9 million shares of our common
stock
in 2005 and 2006, respectively, in market and other transactions for $62.1
million and $43.8 million, respectively. See Notes 14 and 17 to our Consolidated
Financial Statements. We funded these purchases with our available cash on
hand.
Other cash flows from financing activities in 2004, 2005 and 2006 relate
principally to shares of common stock issued by us and our subsidiaries upon
the
exercise of stock options.
Outstanding
Debt Obligations
At
December 31, 2006, our consolidated third-party indebtedness was comprised
of:
|
·
|
KII’s
euro 400 million aggregate principal amount 6.5% Senior Secured
Notes
($525.0 million at December 31, 2006, including the effect of the
unamortized original issue discount) due in 2013;
|
|
·
|
Our
$250 million loan from Snake River Sugar Company due in 2027;
|
· Kronos’
U.S. revolving bank credit facility ($6.5 million outstanding) due in 2008;
and
|
·
|
$5.1
million of other indebtedness.
|
We
are in
compliance with all of our debt covenants at December 31, 2006. See Note
9 to
our Consolidated Financial Statements. At December 31, 2006, only $1.2 million
of our indebtedness is due within the next twelve months, and therefore we
do
not currently expect we will be required to use a significant amount of our
available liquidity to repay indebtedness during the next twelve months.
Certain
of our credit agreements contain provisions which could result in the
acceleration of indebtedness prior to its stated maturity for reasons other
than
defaults for failure to comply with applicable covenants. For example, certain
credit agreements allow the lender to accelerate the maturity of the
indebtedness upon a change of control (as defined in the agreement) 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.
Future
Cash Requirements
Liquidity
-
Our
primary source of liquidity on an ongoing basis is our cash flows from operating
activities and borrowings under various lines of credit and notes. We generally
use these amounts 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 us by our
subsidiaries) or treasury stock purchases. From time-to-time we 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 our subsidiaries
and affiliates) or (iv) fund major capital expenditures or the acquisition
of
other assets outside the ordinary course of business. Occasionally we sell
assets outside the ordinary course of business, and we generally use the
proceeds to (i) repay existing indebtedness (including indebtedness which
may
have been collateralized by the assets sold), (ii) make investments in
marketable and other securities, (iii) fund major capital expenditures or
the
acquisition of other assets outside the ordinary course of business or (iv)
pay
dividends.
We
routinely compare our liquidity requirements and alternative uses of capital
against the estimated future cash flows we expect to receive from our
subsidiaries, and the estimated sales value of those units. As a result of
this
process, we have 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 our dividend policies, consider the sale of our
interests in our subsidiaries, affiliates, business units, marketable securities
or other assets, or take a combination of these and 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.
We
periodically evaluate acquisitions of interests in or combinations with
companies (including our affiliates) that may or may not be engaged in
businesses related to our current businesses. We intend to consider such
acquisition activities in the future and, in connection with this activity,
may
consider issuing additional equity securities and increasing indebtedness.
From
time to time, we also evaluate the restructuring of ownership interests among
our respective subsidiaries and related companies.
Based
upon our expectations of our operating performance, and the anticipated demands
on our cash resources, we expect to have sufficient liquidity to meet our
short-term obligations (defined as the twelve-month period ending December
31,
2007) and our long-term obligations (defined as the five-year period ending
December 31, 2011, our time period for long-term budgeting). If actual
developments differ from our expectations, our liquidity could be adversely
affected.
At
December 31, 2006, we had credit available under existing facilities of $306.3
million, which was comprised of:
|
·
|
$158.6
million under Kronos’ various U.S. and non-U.S. credit
facilities;
|
|
·
|
$98.3
million under Valhi’s revolving bank credit facility;
and
|
|
·
|
$50.0
million under CompX’s revolving credit facility.
|
At
December 31, 2006, TIMET had $228.6 million of borrowing availability under
its
various U.S. and European credit agreements.
At
December 31, 2006, we had an aggregate of $220.3 million of restricted and
unrestricted cash, cash equivalents and marketable securities. A detail by
entity is presented in the table below.
|
|
|
|
|
|
Amount
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
Valhi
Parent
|
|
$
|
68.0
|
|
Kronos
|
|
|
67.6
|
|
NL
Parent
|
|
|
40.4
|
|
CompX
|
|
|
29.7
|
|
Tremont
|
|
|
10.4
|
|
Waste
Control Specialists
|
|
|
4.2
|
|
|
|
|
|
|
Total
cash, cash equivalents, and marketable securities
|
|
$
|
220.3
|
|
Capital
Expenditures -
We
currently expect our aggregate capital expenditures for 2007 will be
approximately $79 million ($53
million for Kronos, $14 million for CompX and $12 million for WCS). We expect
our 2007 capital
expenditures will be financed primarily by cash flows from operating activities
or existing cash resources and credit facilities. Our capital
expenditures are primarily for improvements and upgrades to existing facilities.
TIMET
intends to invest a total of approximately $150 million to $200 million for
capital expenditures during 2007, primarily
for improvements and upgrades to existing facilities, including expansions
of
our sponge, melting and mill capacity, and other additions of plant machinery
and equipment. In May 2005, TIMET announced plans to expand its existing
titanium sponge facility in Nevada. Full commissioning and start-up of this
expansion will occur during early 2007, and this expansion will provide the
capacity to produce an additional 4,000 metric tons of sponge annually, an
increase of approximately 47% over the current sponge production capacity
levels
at its Nevada facility. In April 2006, TIMET announced plans for the expansion
of its electron beam cold hearth melt capacity in Pennsylvania. This expansion,
which we currently expect to complete by early 2008, will have, depending
on
product mix, the capacity to produce an additional 8,500 metric tons of melted
products, an increase of approximately 54% over the current production capacity
levels at its Pennsylvania facility. TIMET continues to evaluate additional
opportunities to expand its production capacity including capital projects,
acquisitions or other investments which, if consummated, any required funding
would be provided by borrowings under its U.S. or European credit
facilities.
Repurchases
of our Common Stock -
We
have
in the past, and may in the future, make repurchases of our common stock
in
market or privately-negotiated transactions. At December 31, 2006 we had
approximately 4.6 million shares available for repurchase of our common stock
under the authorizations described in Note 14 to our Consolidated Financial
Statements.
Dividends
-
Because
our operations are conducted primarily through subsidiaries and affiliates,
our
long-term ability to meet parent company level corporate obligations is largely
dependent on the receipt of dividends or other distributions from our
subsidiaries and affiliates. Based on the approximately 29.0 million shares
of
Kronos we held at December 31, 2006 and Kronos’ current quarterly dividend rate
of $.25 per share, we would receive aggregate annual dividends from Kronos
of
$29.0 million. NL’s current quarterly cash dividend is $.125 per share, although
in the past NL has paid a dividend in the form of Kronos common stock. If
NL
pays its regular quarterly dividends in cash, based on the 40.4 million shares
we held of NL common stock at December 31, 2006, we would receive aggregate
annual dividends from NL of $20.2 million. We do not expect to receive any
distributions from WCS or TIMET during 2007.
Our
subsidiaries have various credit agreements which contain customary limitations
on the payment of dividends, typically a percentage of net income or cash
flow;
however, these restrictions in the past have not significantly impacted their
ability to pay dividends.
Investment
in our Subsidiaries and Affiliates and other Acquisitions -
We
have
in the past, and may in the future, purchase the securities of our subsidiaries
and affiliates or third parties in market or privately-negotiated transactions.
We base our purchase decisions on a variety of factors, including an analysis
of
the optimal use of our capital, taking into account the market value of the
securities and the relative value of expected returns on alternative
investments. In connection with these activities, we may consider issuing
additional equity securities or increasing our indebtedness. We may also
evaluate the restructuring of ownership interests of our businesses among
our
subsidiaries and related companies.
We
generally do not guarantee any indebtedness or other obligations of our
subsidiaries or affiliates. Our subsidiaries are not required to pay us
dividends. If one or more of our subsidiaries were unable to maintain its
current level of dividends, either due to restrictions contained in a credit
agreement or to satisfy its liabilities or otherwise, our ability to service
our
liabilities or to pay dividends on our common stock might be adversely impacted.
If this were to occur, we might consider reducing or eliminating our dividends
or selling interests in subsidiaries or other assets. If we were required
to
liquidate assets to generate funds to satisfy our liabilities, we might be
required to sell at what we believe would be less than the actual value of
such
assets.
WCS
is
required to provide certain financial assurances to Texas governmental agencies
with respect to certain decommissioning obligations related to its facility
in
West Texas. The financial assurances may be provided by various means, including
a parent company guarantee assuming the parent meets specified financial
tests.
In March 2005, we agreed to guarantee certain of WCS’ specified decommissioning
obligations. WCS currently estimates these obligations at approximately $4.4
million. Such obligations would arise only upon a closure of the facility
and
WCS’ failure to perform such activities. We do not currently expect we will have
to perform under this guarantee for the foreseeable future.
WCS’
primary source of liquidity currently consists of intercompany borrowings
from
one of our wholly-owned subsidiaries under the terms of a revolving credit
facility. We eliminate these intercompany borrowings in our Consolidated
Financial Statements. During 2006, WCS borrowed a net $12.3 million from
our
subsidiary. WCS used these net borrowings primarily to fund its operating
loss
and capital expenditures. We contributed this net $12.3 million of borrowings
to
WCS’ equity at December 31, 2006. We expect that WCS will likely borrow
additional amounts from us during 2007 under the terms of the revolving credit
facility, and we may similarly contribute such borrowings to WCS capital.
At
December 31, 2006, WCS can borrow an additional $19 million under this facility,
which matures in March 2008.
Investment
in The Amalgamated Sugar Company LLC -
The
terms
of The Amalgamated Sugar Company LLC Company Agreement provide for an annual
"base level" of cash dividend distributions (sometimes referred to as
distributable cash) by the LLC of $26.7 million, from which we are entitled
to a
95% preferential share. Distributions from the LLC are dependent, in part,
upon
the operations of the LLC. We record dividend distributions from the LLC
as
income when they are declared by the LLC, which is generally the same month
in
which we receive the distributions, although distributions may in certain
cases
be paid on the first business day of the following month. To the extent the
LLC's distributable cash is below this base level in any given year, we are
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 2007, we expect
distributions received from the LLC in 2007 will exceed our debt service
requirements under our $250 million loans from Snake River Sugar Company
by
approximately $1.8 million.
We
may,
at our option, require the LLC to redeem our interest in the LLC beginning
in
2012, and the LLC has the right to redeem our interest in the LLC beginning
in
2027. The redemption price is generally $250 million plus the amount of certain
undistributed income allocable to us, if any. In the event we require the
LLC to
redeem our interest in the LLC, Snake River has the right to accelerate the
maturity of and call our $250 million loans from Snake River. Redemption
of our
interest in the LLC would result in us reporting income related to the
disposition of our LLC interest for income tax purposes, although we would
not
be expected to report a gain in earnings for financial reporting purposes
at the
time our LLC interest is redeemed. However, because of Snake River’s
ability to call our $250 million loans from Snake River upon redemption of
our
interest in the LLC, the net cash proceeds (after repayment of the debt)
generated by the redemption of our interest in the LLC could be less than
the
income taxes that we would be required to pay as a result of the
disposition.
Off-balance
Sheet Financing
We
do not
have any off-balance sheet financing agreements other than the operating
leases
discussed in Note 18 to our Consolidated Financial Statements.
Commitments
and Contingencies
We
are
subject to certain commitments and contingencies, as more fully described
in the
Notes to our Consolidated Financial Statements and in this Management’s
Discussion and Analysis of Financial Condition and Results of Operations,
including
|
·
|
certain
income tax examinations which are underway in various U.S. and
non-U.S.
jurisdictions,
|
|
·
|
certain
environmental remediation matters involving NL, Tremont, Valhi
and TIMET,
|
|
·
|
certain
litigation related to NL’s former involvement in the manufacture of lead
pigment and lead-based paint, and
|
|
·
|
certain
other litigation to which we are a
party.
|
In
addition to those legal proceedings described in Note 18 to our 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 (including
NL) with respect to asserted health concerns associated with the use of such
products and (ii) effectively overturn court decisions in which we 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 our consolidated financial position, results of operations
or
liquidity, enactment of such legislation could have such an effect.
As
more
fully described in the Notes to our Consolidated Financial Statements, we
are a
party to various debt, lease and other agreements which contractually and
unconditionally commit us to pay certain amounts in the future. See Notes
9 and
18 to our Consolidated Financial Statements. Our obligations related to the
long-term supply contract for the purchase of TiO2 feedstock is more
fully described in Note 18 to our Consolidated Financial Statements and above
in
“Business - Chemicals - Kronos Worldwide, Inc., - manufacturing process,
properties and raw materials.” The following table summarizes our contractual
commitments as of December 31, 2006 by the type and date of
payment.
|
|
Payment
due
date
|
|
Contractual
commitment
|
|
2007
|
|
2008/2009
|
|
2010/2011
|
|
2012
and
after
|
|
Total
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party
indebtedness:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
$
|
1.2
|
|
$
|
8.3
|
|
$
|
2.0
|
|
$
|
775.1
|
|
$
|
786.6
|
|
Interest
|
|
|
58.4
|
|
|
116.2
|
|
|
115.8
|
|
|
398.3
|
|
|
688.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
leases
|
|
|
7.9
|
|
|
10.4
|
|
|
4.7
|
|
|
20.2
|
|
|
43.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kronos’
long-term supply
contracts
for the
purchase of
TiO2
feedstock
|
|
|
216.0
|
|
|
415.0
|
|
|
145.0
|
|
|
-
|
|
|
776.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CompX
raw material and
other
purchase commitments
|
|
|
19.0
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
19.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
asset acquisitions
|
|
|
23.3
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
23.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
11.1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
11.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
336.9
|
|
$
|
549.9
|
|
$
|
267.5
|
|
$
|
1,193.6
|
|
$
|
2,347.9
|
|
The
timing and amount shown for our commitments related to indebtedness (principal
and interest), operating leases and fixed asset acquisitions are based upon
the
contractual payment amount and the contractual payment date for such
commitments. With respect to indebtedness involving revolving credit facilities,
the amount shown for indebtedness is based upon the actual amount outstanding
at
December 31, 2006, and the amount shown for interest for any outstanding
variable-rate indebtedness is based upon the December 31, 2006 interest rate
and
assumes that such variable-rate indebtedness remains outstanding until the
maturity of the facility. The amount shown for income taxes is the amount
of our
consolidated current income taxes payable at December 31, 2006, which is
assumed
to be paid during 2007. A significant portion of the amount shown for
indebtedness relates to KII’s 6.5% Senior Secured Notes ($525.0 million at
December 31, 2006), which is denominated in the euro. See Item 7A - “Quantitive
and Qualitative Disclosures About Market Risk” and Note 9 to our
Consolidated Financial Statements.
Our
contracts for the purchase of TiO2
feedstock contain fixed quantities that we are required to purchase, although
certain of these contracts allow for an upward or downward adjustment in
the
quantity purchased, generally no more than 10%, based on our feedstock
requirements. The pricing under these agreements is generally based on a
fixed
price with price escalation clauses primarily based on consumer price indices,
as defined in the respective contracts. The timing and amount shown for our
commitments related to the long-term supply contracts for TiO2
feedstock
is based upon our current estimate of the quantity of material that will
be
purchased in each time period shown, and the payment that would be due based
upon such estimated purchased quantity and an estimate of the effect of the
price escalation clause. The actual amount of material purchased, and the
actual
amount that would be payable by us, may vary from such estimated amounts.
The
above
table of contractual commitments does not include any amounts under our
obligation under the Louisiana Pigment Company, L.P. joint venture, as the
timing and amount of such purchases are unknown and dependent on, among other
things, the amount of TiO2
produced
by the joint venture in the future, and the joint venture’s future cost of
producing such TiO2.
However, the table of contractual commitments does include amounts related
to
our share of the joint venture’s ore requirements necessary for it to produce
TiO2
for
us.
See Notes 7 and 17 to our Consolidated Financial Statements and “Business -
Chemicals - Kronos Worldwide, Inc.”
In
addition, we are party to an agreement which could require us to pay certain
amounts to a third party based upon specified percentages of our qualifying
Waste Management revenues. We have not included any amounts for this conditional
commitment in the above table because we currently believe it is not probable
that the we will be required to pay any amounts pursuant to this agreement.
See
Note 18 to our Consolidated Financial Statements.
The
above
table does not reflect any amounts that we might pay to fund our defined
benefit
pension plans and OPEB plans, as the timing and amount of any such future
fundings are unknown and dependent on, among other things, the future
performance of defined benefit pension plan assets, interest rate assumptions
and actual future retiree medical costs. Such defined benefit pension plans
and
OPEB plans are discussed above in greater detail in Note 11 to the Consolidated
Financial Statements.
Recent
Accounting Pronouncements
See
Note
19 to the Consolidated Financial Statements
ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. We
are
exposed to market risk from changes in foreign currency exchange rates, interest
rates and equity security prices. We
periodically use currency forward contracts or interest rate swaps to manage
a
portion of these market risks.
We
have
not entered into these contracts for trading or speculative purposes in the
past, nor do we currently anticipate entering into such contracts for trading
or
speculative purposes in the future. Otherwise,
we generally do not enter into forward or option contracts to manage such
market
risks. Other
than the contracts discussed below, we were not a party to any forward or
derivative option contract related to foreign exchange rates, interest rates
or
equity security prices at December 31, 2005 and 2006. See
Notes
1 and 20 to our Consolidated Financial Statements for a discussion of the
assumptions we used to estimate the fair value of the financial instruments
to
which we are a party at December 31, 2005 and 2006.
Interest
rates.
We
are
exposed to market risk from changes in interest rates, primarily related
to our
indebtedness.
At
December 31, 2006, our aggregate indebtedness was split between 99% of
fixed-rate instruments and 1% of variable-rate borrowings (2005 - 98% of
fixed-rate instruments and 2% of variable rate borrowings). The large percentage
of fixed-rate debt instruments minimizes earnings volatility which would
result
from changes in interest rates. The following table presents principal amounts
and weighted average interest rates for our aggregate outstanding indebtedness
at December 31, 2006. Information shown below for such foreign currency
denominated indebtedness is presented in its U.S. dollar equivalent at December
31, 2006 using an exchange
rate of 1.32 U.S. dollars per euro.
|
|
Amount
|
|
|
|
|
|
Indebtedness*
|
|
Carrying
value
|
|
Fair
value
|
|
Interest
rate
|
|
Maturity
Date
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate
indebtedness:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro-denominated KII
6.5%
Senior Secured Notes
|
|
$
|
525.0
|
|
$
|
512.5
|
|
|
6.5
|
%
|
|
2013
|
|
Valhi loans from Snake River
|
|
|
250.0
|
|
|
250.0
|
|
|
9.4
|
%
|
|
2027
|
|
Other
|
|
|
.3
|
|
|
.3
|
|
|
8.0
|
%
|
|
Various
|
|
|
|
|
775.3
|
|
|
762.8
|
|
|
7.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable-rate indebtedness -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kronos U.S. revolver
|
|
|
6.5
|
|
|
6.5
|
|
|
8.3
|
%
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
781.8
|
|
$
|
769.3
|
|
|
7.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Denominated in U.S. dollars, except as otherwise indicated. Excludes capital
lease obligations.
At
December 31, 2005, our fixed rate indebtedness aggregated $701.3 million
(fair
value - $715.6 million) with a weighted-average interest rate of 9.1%; our
variable rate indebtedness aggregated $11.5 million, which approximates fair
value, with a weighted-average interest rate of 7.0%. Approximately 64% of
such
fixed
rate indebtedness was denominated in the euro, with the remainder denominated
in
the U.S. dollar. All
of the
outstanding variable rate borrowings were denominated in the U.S.
dollar.
Foreign
currency exchange rates. We
are
exposed to market risk arising from changes in foreign currency exchange
rates
as a result of manufacturing and selling our products worldwide. Our earnings
are primarily affected by fluctuations in the value of the U.S. dollar relative
to the euro, the Canadian dollar, the Norwegian kroner and the British pound
sterling.
As
described above, at December 31, 2006, we had the equivalent of $525.0
million of outstanding euro-denominated indebtedness (2005- the equivalent
of
$449.3 million of euro-denominated indebtedness). The
potential increase in the U.S. dollar equivalent of the principal amount
outstanding resulting from a hypothetical 10% adverse change in exchange
rates
at such date would be approximately $52.8 million at December 31, 2006 (2005
-
$44.4 million).
We
periodically use currency forward contracts to manage a portion of foreign
currency exchange rate market risk associated with trade receivables, or
similar
exchange rate risk associated with future sales, denominated in a currency
other
than the holder's functional currency. These contracts generally relate to
our
Chemicals and Component Products operations. We have not entered into these
contracts for trading or speculative purposes in the past, nor do we currently
anticipate entering into such contracts for trading or speculative purposes
in
the future. Some of the currency forward contracts we enter into meet the
criteria for hedge accounting under GAAP and are designated as cash flow
hedges.
For these currency forward contracts, gains and losses representing the
effective portion of our hedges are deferred as a component of accumulated
other
comprehensive income, and are subsequently recognized in earnings at the
time
the hedged item affects earnings. For the currency forward contracts we enter
into which do not meet the criteria for hedge accounting, we mark-to-market
the
estimated fair value of such contracts at each balance sheet date, with any
resulting gain or loss recognized in income currently as part of net currency
transactions. We had no forward contracts outstanding at December 31, 2006.
At
December 31, 2005, we held a series of contracts, which matured at various
dates
through March 31, 2006, to exchange an aggregate of U.S. $14.0 million for
an
equivalent value of Canadian dollars at exchange rates of Cdn. $1.19 per
U.S.
dollar. At December 31, 2005, the actual exchange rate was Cdn. $1.16 per
U.S.
dollar. The estimated fair value of such foreign currency forward contracts
at
December 31, 2005 was not material.
Marketable
equity and debt security prices. We
are
exposed to market risk due to changes in prices of the marketable securities
which we own. The fair value of such debt and equity securities at December
31,
2005 and 2006 was $270.5 million and $271.6 million, respectively. The potential
change in the aggregate fair value of these investments, assuming a 10% change
in prices, would be $27.1 million at December 31, 2005 and $27.2 million
at
December 31, 2006.
Other. We
believe there may be a certain amount of incompleteness in the sensitivity
analyses presented above. For example, the hypothetical effect of changes
in
interest rates discussed above ignores the potential effect on other variables
which affect our results of operations and cash flows, such as demand for
our
products, sales volumes and selling prices and operating expenses. Contrary
to
the above assumptions, changes in interest rates rarely result in simultaneous
comparable shifts along the yield curve. Also, our investment in The Amalgamated
Sugar Company LLC represents a significant portion of our total portfolio
of
marketable securities. That investment serves as collateral for our loans
from
Snake River Sugar Company, and a decrease in the fair value of that investment
would likely be mitigated by a decrease in the fair value of the related
indebtedness. Accordingly, the amounts we present above are not necessarily
an
accurate reflection of the potential losses we would incur assuming the
hypothetical changes in market prices were actually to occur.
The
above
discussion and estimated sensitivity analysis amounts include forward-looking
statements of market risk which assume hypothetical changes in market prices.
Actual future market conditions will likely differ materially from such
assumptions. Accordingly, such forward-looking statements should not be
considered to be projections by us of future events, gains or
losses.
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The
information called for by this Item is contained in a separate section of
this
Annual Report. See "Index of Financial Statements and Schedules" (page
F-1).
ITEM 9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS
AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures -
We
maintain 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 we file or submit to the SEC under the Securities
Exchange Act of 1934, as amended, 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 we are required to disclose
in
the reports we file or submit to the SEC under the Act is accumulated and
communicated to our management, including our principal executive officer
and
our 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, our President and Chief Executive Officer, and
Bobby
D. O’Brien, our Vice President and Chief Financial Officer, have evaluated the
design and operations effectiveness of our disclosure controls and procedures
as
of December 31, 2006. Based upon their evaluation, these executive officers
have
concluded that our disclosure controls and procedures were effective as of
December 31, 2006.
Scope
of Management Report on Internal Control Over Financial Reporting
-
We
also
maintain internal control over financial reporting. The term “internal control
over financial reporting,” as defined by SEC regulations, means a process
designed by, or under the supervision of, our principal executive and principal
financial officers, or persons performing similar functions, and effected
by our
board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with GAAP, and
includes those policies and procedures that:
|
·
|
pertain
to the maintenance of records that in reasonable detail accurately
and
fairly reflect our transactions and dispositions of our assets,
|
|
·
|
provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with GAAP, and
that our
receipts and expenditures are made only in accordance with authorizations
of our management and directors,
and
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that
could have
a material effect on our Condensed Consolidated Financial Statements.
|
Section
404 of the Sarbanes-Oxley Act of 2002 requires us to include a management
report
on internal control over financial reporting in this Annual Report on Form
10-K
for the year ended December 31, 2006. Our independent registered public
accounting firm is also required to audit the Company’s internal control over
financial reporting as of December 31, 2006.
As
permitted by the SEC, our assessment of internal control over financial
reporting excludes (i) internal control over financial reporting of our equity
method investees and (ii) internal control over the preparation of our financial
statement schedules required by Article 12 of Regulation S-X. However, our
assessment of internal control over financial reporting with respect to our
equity method investees did include our controls over the recording of amounts
related to our investment that are recorded in our Consolidated Financial
Statements, including controls over the selection of accounting methods for
our
investments, the recognition of equity method earnings and losses and the
determination, valuation and recording of our investment account
balances.
Management’s
Report on Internal Control Over Financial Reporting -
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rule
13a-15(f). Our evaluation of the effectiveness of our internal control over
financial reporting is based upon the framework established in Internal
Control - Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission (commonly
referred to as the “COSO” framework). Based on our evaluation under that
framework, our management has concluded that our internal control over financial
reporting was effective as of December 31, 2006. See “Scope of Management’s
Report on Internal Control Over Financial Reporting” above.
PricewaterhouseCoopers
LLP, the independent registered public accounting firm that has audited our
Consolidated Financial Statements included in this Annual Report on Form
10-K,
has audited our management assessment of the effectiveness of our internal
control over financial reporting as of December 31, 2006, as stated in their
report which is included in this Annual Report on Form 10-K.
Changes
in Internal Control Over Financial Reporting -
There
has
been no change to our internal control over financial reporting during the
quarter ended December 31, 2006 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Certifications
-
Our
chief
executive officer is required to annually file a certification with the New
York
Stock Exchange (“NYSE”), certifying our compliance with the corporate governance
listing standards of the NYSE. During 2006, our chief executive officer filed
such annual certification with the NYSE, indicating we were in compliance
with
such listing standards without qualification. Our chief executive officer
and
chief financial officer are also required to, among other things, quarterly
file
certifications with the SEC regarding the quality of our public disclosures,
as
required by Section 302 of the Sarbanes-Oxley Act of 2002. We have filed
the
certifications for the quarter ended December 31, 2006 as exhibits 31.1 and
31.2
to this Annual Report on Form 10-K.
ITEM 9B. OTHER
INFORMATION
Not
applicable.
PART
III
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
information required by this Item is incorporated by reference to our definitive
Proxy Statement we will file with the SEC pursuant to Regulation 14A within
120
days after the end of the fiscal year covered by this report (the "Valhi
Proxy
Statement").
ITEM 11. EXECUTIVE
COMPENSATION
The
information required by this Item is incorporated by reference to the Valhi
Proxy Statement.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND
RELATED STOCKHOLDER MATTERS
The
information required by this Item is incorporated by reference to the Valhi
Proxy Statement.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The
information required by this Item is incorporated by reference to the Valhi
Proxy Statement. See also Note 17 to the Consolidated Financial
Statements.
ITEM 14. PRINCIPAL
ACCOUNTING FEES AND SERVICES
The
information required by this Item is incorporated by reference to the Valhi
Proxy Statement.
PART
IV
ITEM
15. EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
(a)
and
(c) Financial
Statements and Schedules
The
Registrant
|
Our
Consolidated Financial Statements and schedules listed on the accompanying
Index of Financial Statements and Schedules (see page F-1) are filed
as part of this Annual Report.
|
50%-or-less
owned persons
|
TIMET’s
consolidated financial statements (35%-owned at December 31, 2006)
are
filed as Exhibit 99.1 of this Annual Report pursuant to Rule 3-09
of
Regulation S-X. TIMET’s Management’s Report on Internal Control Over
Financial Reporting is not included as part of Exhibit 99.1. We
are not
required to provide any other consolidated financial statements
pursuant
to Rule 3-09 of Regulation S-X.
|
(b) Exhibits
Included
as exhibits are the items listed in the Exhibit Index. We have retained a
signed
original of any of these exhibits that contain signatures, and we will provide
such exhibit to the Commission or its staff upon request. We will furnish
a copy
of any of the exhibits listed below upon request and payment of $4.00 per
exhibit to cover our costs of furnishing the exhibits. Such requests should
be
directed to the attention of our Corporate Secretary at our corporate offices
located at 5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240. Pursuant to
Item
601(b)(4)(iii) of Regulation S-K, we will furnish to the Commission upon
request
any instrument defining the rights of holders of long-term debt issues and
other
agreements related to indebtedness which do not exceed 10% of our consolidated
total assets as of December 31, 2006.
Item
No. Exhibit
Item
|
|
3.1
|
Restated
Articles of Incorporation of the Registrant - incorporated by reference
to
Appendix A to the definitive Prospectus/Joint Proxy Statement of The
Amalgamated Sugar Company and LLC Corporation (File No. 1-5467) dated
February 10, 1987.
|
|
|
3.2
|
By-Laws
of the Registrant as amended - incorporated by reference to Exhibit
3.1 of
our Quarterly Report on Form 10-Q (File No. 1-5467) for the quarter
ended
June 30, 2002.
|
|
|
4.1
|
Indenture
dated April 14, 2006 between Kronos International, Inc. and The
Bank of
New York, as Trustee, governing Kronos International's 6.5% Senior
Secured
Notes due 2013 - incorporated by reference to Exhibit 4.1 to Kronos
International, Inc.’s Current Report on Form 8-K (File No. 333-100047)
filed with the SEC on April 11, 2006.
|
|
|
9.1
|
Shareholders'
Agreement dated February 15, 1996 among TIMET, Tremont, IMI plc,
IMI
Kynoch Ltd. and IMI Americas, Inc. - incorporated by reference
to Exhibit
2.2 to Tremont's Current Report on Form 8-K (File No. 1-10126)
dated March
1, 1996.
|
|
|
9.2
|
Amendment
to the Shareholders' Agreement dated March 29, 1996 among TIMET,
Tremont,
IMI plc, IMI Kynosh Ltd. and IMI Americas, Inc. - incorporated
by
reference to Exhibit 10.30 to Tremont's Annual Report on Form 10-K
(File
No. 1-10126) for the year ended December 31, 1995.
|
|
|
10.1
|
Intercorporate
Services Agreement between the Registrant and Contran Corporation
effective as of January 1, 2004 - incorporated by reference to
Exhibit
10.1 to our Quarterly Report on Form 10-Q for the quarter ended
March 31,
2004.
|
|
|
10.2
|
Intercorporate
Services Agreement between Contran Corporation and NL effective
as of
January 1, 2004 - incorporated by reference to Exhibit 10.1 to
NL's
Quarterly Report on Form 10-Q (File No. 1-640) for the quarter ended
March 31, 2004.
|
|
|
10.3
|
Intercorporate
Services Agreement between Contran Corporation, Tremont LLC and
TIMET
effective as of January 1, 2004 - incorporated by reference to
Exhibit
10.14 to TIMET's Annual Report on Form 10-K (File No. 0-28538)
for the
year ended December 31, 2003.
|
|
|
10.4
|
Intercorporate
Services Agreement between Contran Corporation and CompX effective
January
1, 2004 - incorporated by reference to Exhibit 10.2 to CompX’s Annual
Report on Form 10-K (File No. 1-13905) for the year ended December
31,
2003.
|
|
|
10.5
|
Intercorporate
Services Agreement between Contran Corporation and Kronos Worldwide,
Inc.
effective January 1, 2004 - incorporated by reference to Exhibit
No. 10.1
to Kronos’ Quarterly Report on Form 10-Q (File No. 1-31763) for the
quarter ended March 31, 2004.
|
Item
No. Exhibit
Item
10.6
|
Stock
Purchase Agreement, dated April 1, 2005, between Valhi, Inc. and
Contran
Corporation - incorporated by reference to Exhibit 99.1 to our
Current
Report on Form 8-K (File No. 1-5467) dated April 1,
2005.
|
|
|
10.7
|
Stock
Purchase Agreement, dated November 1, 2006, between Valhi, Inc.
and Valhi
Holding Company - incorporated by reference to Exhibit 10.1 - to
our
Current Report on Form 8-K (File No. 1-5467) dated November 1,
2006.
|
|
|
10.8*
|
Valhi,
Inc. 1997 Long-Term Incentive Plan - incorporated by reference
to Exhibit
10.12 to the Registrant's Annual Report on Form 10-K (File No.
1-5467) for
the year ended December 31, 1996.
|
|
|
10.9*
|
CompX
International Inc. 1997 Long-Term Incentive Plan - incorporated
by
reference to Exhibit 10.2 to CompX's Registration Statement on
Form S-1
(File No. 333-42643).
|
|
|
10.10*
|
NL
Industries, Inc. 1998 Long-Term Incentive Plan - incorporated by
reference
to Appendix A to NL’s Proxy Statement on Schedule 14A (File No. 1-640) for
the annual meeting of shareholders held on May 9, 1998.
|
|
|
10.11*
|
Kronos
Worldwide, Inc. 2003 Long-Term Incentive Plan - incorporated by
reference
to Exhibit 10.4 to Kronos’ Registration Statement on Form 10 (File No.
001-31763).
|
|
|
10.12
|
Agreement
Regarding Shared Insurance dated as of October 30, 2003 by and
between
CompX International Inc., Contran Corporation, Keystone Consolidated
Industries, Inc., Kronos Worldwide, Inc., NL Industries, Inc.,
Titanium
Metals Corporation and Valhi, Inc. - incorporated by reference
to Exhibit
10.32 to Kronos’ Annual Report on Form 10-K (File No. 1-31763) for the
year ended December 31, 2003.
|
|
|
10.13
|
Formation
Agreement of The Amalgamated Sugar Company LLC dated January 3,
1997 (to
be effective December 31, 1996) between Snake River Sugar Company
and The
Amalgamated Sugar Company - incorporated by reference to Exhibit
10.19 to
the Registrant's Annual Report on Form 10-K (File No. 1-5467) for
the year
ended December 31, 1996.
|
|
|
10.14
|
Master
Agreement Regarding Amendments to The Amalgamated Sugar Company
Documents
dated October 19, 2000 - incorporated by reference to Exhibit 10.1
to the
Registrant's Quarterly Report on Form 10-Q (File No. 1-5467) for
the
quarter ended September 30, 2000.
|
|
|
10.15
|
Prerepayment
and Termination Agreement dated October 14, 2005 among Valhi, Inc.,
Snake
River Sugar Company and Wells Fargo Bank Northwest, N.A. - incorporated
by
reference to Exhibit No. 10.1 to the Registrant’s Amendment No. 1 to its
Current Report on Form 8-K (File No. 1-5467) dated October 18,
2005.
|
Item
No. Exhibit
Item
10.16
|
Company
Agreement of The Amalgamated Sugar Company LLC dated January 3,
1997 (to
be effective December 31, 1996) - incorporated by reference to
Exhibit
10.20 to the Registrant's Annual Report on Form 10-K (File No.
1-5467) for
the year ended December 31, 1996.
|
|
|
10.17
|
First
Amendment to the Company Agreement of The Amalgamated Sugar Company
LLC
dated May 14, 1997 - incorporated by reference to Exhibit 10.1
to the
Registrant's Quarterly Report on Form 10-Q (File No. 1-5467) for
the
quarter ended June 30, 1997.
|
|
|
10.18
|
Second
Amendment to the Company Agreement of The Amalgamated Sugar Company
LLC
dated November 30, 1998 - incorporated by reference to Exhibit
10.24 to
the Registrant's Annual Report on Form 10-K (File No. 1-5467) for
the year
ended December 31, 1998.
|
|
|
10.19
|
Third
Amendment to the Company Agreement of The Amalgamated Sugar Company
LLC
dated October 19, 2000 - incorporated by reference to Exhibit 10.2
to the
Registrant's Quarterly Report on Form 10-Q (File No. 1-5467) for
the
quarter ended September 30, 2000.
|
|
|
10.20
|
Amended
and Restated Company Agreement of The Amalgamated Sugar Company
LLC dated
October 14, 2005 among The Amalgamated Sugar Company LLC, Snake
River
Sugar Company and The Amalgamated Collateral Trust - incorporated
by
reference to Exhibit No. 10.7 to the Registrant’s Amendment No. 1 to its
Current Report on Form 8-K (File No. 1-5467) dated October 18,
2005.
|
|
|
10.21
|
Subordinated
Promissory Note in the principal amount of $37.5 million between
Valhi,
Inc. and Snake River Sugar Company, and the related Pledge Agreement,
both
dated January 3, 1997 - incorporated by reference to Exhibit 10.21
to the
Registrant's Annual Report on Form 10-K (File No. 1-5467) for the
year
ended December 31, 1996.
|
|
|
10.22
|
Limited
Recourse Promissory Note in the principal amount of $212.5 million
between
Valhi, Inc. and Snake River Sugar Company, and the related Limited
Recourse Pledge Agreement, both dated January 3, 1997 - incorporated
by
reference to Exhibit 10.22 to the Registrant's Annual Report on
Form 10-K
(File No. 1-5467) for the year ended December 31, 1996.
|
|
|
10.23
|
Subordinated
Loan Agreement between Snake River Sugar Company and Valhi, Inc.,
as
amended and restated effective May 14, 1997 - incorporated by reference
to
Exhibit 10.9 to the Registrant's Quarterly Report on Form 10-Q
(File No.
1-5467) for the quarter ended June 30, 1997.
|
|
|
10.24
|
Second
Amendment to the Subordinated Loan Agreement between Snake River
Sugar
Company and Valhi, Inc. dated November 30, 1998 - incorporated
by
reference to Exhibit 10.28 to the Registrant's Annual Report on
Form 10-K
(File No. 1-5467) for the year ended December 31, 1998.
|
|
|
10.25
|
Third
Amendment to the Subordinated Loan Agreement between Snake River
Sugar
Company and Valhi, Inc. dated October 19, 2000 - incorporated by
reference
to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q
(File
No. 1-5467) for the quarter ended September 30, 2000.
|
|
|
Item
No. Exhibit
Item
10.26
|
Fourth
Amendment to the Subordinated Loan Agreement between Snake River
Sugar
Company and Valhi, Inc. dated March 31, 2003 - incorporated by
reference
to Exhibit No. 10.1 to the Registrant's Quarterly Report on Form
10-Q
(file No. 1-5467) for the quarter ended March 31, 2003.
|
|
|
10.27
|
Contingent
Subordinate Pledge Agreement between Snake River Sugar Company
and Valhi,
Inc., as acknowledged by First Security Bank National Association
as
Collateral Agent, dated October 19, 2000 - incorporated by reference
to
Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q
(File No.
1-5467) for the quarter ended September 30, 2000.
|
|
|
10.28
|
Contingent
Subordinate Security Agreement between Snake River Sugar Company
and
Valhi, Inc., as acknowledged by First Security Bank National Association
as Collateral Agent, dated October 19, 2000 - incorporated by reference
to
Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q
(File No.
1-5467) for the quarter ended September 30, 2000.
|
|
|
10.29
|
Contingent
Subordinate Collateral Agency and Paying Agency Agreement among
Valhi,
Inc., Snake River Sugar Company and First Security Bank National
Association dated October 19, 2000 - incorporated by reference
to Exhibit
10.6 to the Registrant's Quarterly Report on Form 10-Q (File No.
1-5467)
for the quarter ended September 30, 2000.
|
|
|
10.30
|
Deposit
Trust Agreement related to the Amalgamated Collateral Trust among
ASC
Holdings, Inc. and Wilmington Trust Company dated May 14, 1997
-
incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q (File No. 1-5467) for the quarter ended June
30,
1997.
|
|
|
10.31
|
First
Amendment to Deposit Trust Agreement dated October 14, 2005 among
ASC
Holdings, Inc. and Wilmington Trust Company- incorporated by reference
to
Exhibit No. 10.2 to the Registrant’s Amendment No. 1 to its Current Report
on Form 8-K (File No. 1-5467) dated October 18, 2005.
|
|
|
10.32
|
Pledge
Agreement between the Amalgamated Collateral Trust and Snake River
Sugar
Company dated May 14, 1997 - incorporated by reference to Exhibit
10.3 to
the Registrant's Quarterly Report on Form 10-Q (File No. 1-5467)
for the
quarter ended June 30, 1997.
|
|
|
10.33
|
Second
Pledge Amendment (SPT) dated October 14, 2005 among The Amalgamated
Collateral Trust and Snake River Sugar Company - incorporated by
reference
to Exhibit No. 10.4 to the Registrant’s Amendment No. 1 to its Current
Report on Form 8-K (File No. 1-5467) dated October 18,
2005.
|
|
|
10.34
|
Guarantee
by the Amalgamated Collateral Trust in favor of Snake River Sugar
Company
dated May 14, 1997 - incorporated by reference to Exhibit 10.4
to the
Registrant's Quarterly Report on Form 10-Q (File No. 1-5467) for
the
quarter ended June 30, 1997.
|
|
|
10.35
|
Second
SPT Guaranty Amendment dated October 14, 2005 among The Amalgamated
Collateral Trust and Snake River Sugar Company - incorporated by
reference
to Exhibit No. 10.5 to the Registrant’s Amendment No. 1 to its Current
Report on Form 8-K (File No. 1-5467) dated October 18,
2005.
|
Item
No. Exhibit
Item
10.36
|
Amended
and Restated Pledge Agreement between ASC Holdings, Inc. and Snake
River
Sugar Company dated May 14, 1997 - incorporated by reference to
Exhibit
10.5 to the Registrant's Quarterly Report on Form 10-Q (File No.
1-5467)
for the quarter ended June 30, 1997.
|
|
|
10.37
|
Second
Amended and Restated Pledge Agreement dated October 14, 2005 among
ASC
Holdings, Inc. and Snake River Sugar Company - incorporated by
reference
to Exhibit No. 10.3 to the Registrant’s Amendment No. 1 to its Current
Report on Form 8-K (File No. 1-5467) dated October 18,
2005.
|
|
|
10.38
|
Collateral
Deposit Agreement among Snake River Sugar Company, Valhi, Inc.
and First
Security Bank, National Association dated May 14, 1997 - incorporated
by
reference to Exhibit 10.6 to the Registrant's Quarterly Report
on Form
10-Q (File No. 1-5467) for the quarter ended June 30,
1997.
|
|
|
10.39
|
Voting
Rights and Forbearance Agreement among the Amalgamated Collateral
Trust,
ASC Holdings, Inc. and First Security Bank, National Association
dated May
14, 1997 - incorporated by reference to Exhibit 10.7 to the Registrant's
Quarterly Report on Form 10-Q (File No. 1-5467) for the quarter
ended June
30, 1997.
|
|
|
10.40
|
First
Amendment to the Voting Rights and Forbearance Agreement among
the
Amalgamated Collateral Trust, ASC Holdings, Inc. and First Security
Bank
National Association dated October 19, 2000 - incorporated by reference
to
Exhibit 10.9 to the Registrant's Quarterly Report on Form 10-Q
(File No.
1-5467) for the quarter ended September 30, 2000.
|
|
|
10.41
|
Voting
Rights and Collateral Deposit Agreement among Snake River Sugar
Company,
Valhi, Inc., and First Security Bank, National Association dated
May 14,
1997 - incorporated by reference to Exhibit 10.8 to the Registrant's
Quarterly Report on Form 10-Q (File No. 1-5467) for the quarter
ended June
30, 1997.
|
|
|
10.42
|
Subordination
Agreement between Valhi, Inc. and Snake River Sugar Company dated
May 14,
1997 - incorporated by reference to Exhibit 10.10 to the Registrant's
Quarterly Report on Form 10-Q (File No. 1-5467) for the quarter
ended June
30, 1997.
|
|
|
10.43
|
First
Amendment to the Subordination Agreement between Valhi, Inc. and
Snake
River Sugar Company dated October 19, 2000 - incorporated by reference
to
Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q
(File No.
1-5467) for the quarter ended September 30, 2000.
|
|
|
10.44
|
Form
of Option Agreement among Snake River Sugar Company, Valhi, Inc.
and the
holders of Snake River Sugar Company’s 10.9% Senior Notes Due 2009 dated
May 14, 1997 - incorporated by reference to Exhibit 10.11 to the
Registrant's Quarterly Report on Form 10-Q (File No. 1-5467) for
the
quarter ended June 30, 1997.
|
|
|
10.45
|
Option
Agreement dated October 14, 2005 among Valhi, Inc., Snake River
Sugar
Company, Northwest Farm Credit Services, FLCA and U.S. Bank National
Association - incorporated by reference to Exhibit No. 10.6 to
the
Registrant’s Amendment No. 1 to its Current Report on Form 8-K (File No.
1-5467) dated October 18, 2005.
|
Item
No. Exhibit
Item
10.46
|
First
Amendment to Option Agreements among Snake River Sugar Company,
Valhi
Inc., and the holders of Snake River's 10.9% Senior Notes Due 2009
dated
October 19, 2000 - incorporated by reference to Exhibit 10.8 to
the
Registrant's Quarterly Report on Form 10-Q (File No. 1-5467) for
the
quarter ended September 30, 2000.
|
|
|
10.47
|
Formation
Agreement dated as of October 18, 1993 among Tioxide Americas Inc.,
Kronos
Louisiana, Inc. and Louisiana Pigment Company, L.P. - incorporated
by
reference to Exhibit 10.2 of NL's Quarterly Report on Form 10-Q
(File
No. 1-640) for the quarter ended September 30,
1993.
|
|
|
10.48
|
Joint
Venture Agreement dated as of October 18, 1993 between Tioxide
Americas
Inc. and Kronos Louisiana, Inc. - incorporated by reference to
Exhibit
10.3 of NL's Quarterly Report on Form 10-Q (File No. 1-640) for
the
quarter ended September 30, 1993.
|
|
|
10.49
|
Kronos
Offtake Agreement dated as of October 18, 1993 by and between Kronos
Louisiana, Inc. and Louisiana Pigment Company, L.P. - incorporated
by
reference to Exhibit 10.4 of NL's Quarterly Report on Form 10-Q
(File No.
1-640) for the quarter ended September 30, 1993.
|
|
|
10.50
|
Amendment
No. 1 to Kronos Offtake Agreement dated as of December 20, 1995
between
Kronos Louisiana, Inc. and Louisiana Pigment Company, L.P. - incorporated
by reference to Exhibit 10.22 of NL’s Annual Report on Form 10-K (File No.
1-640) for the year ended December 31 1995.
|
|
|
10.51
|
Allocation
Agreement dated as of October 18, 1993 between Tioxide Americas
Inc., ICI
American Holdings, Inc., Kronos, Inc. and Kronos Louisiana, Inc.
-
incorporated by reference to Exhibit 10.10 to NL's Quarterly Report
on
Form 10-Q (File No. 1-640) for the quarter ended September 30,
1993.
|
|
|
10.52
|
Lease
Contract dated June 21, 1952, between Farbenfabrieken Bayer
Aktiengesellschaft and Titangesellschaft mit beschrankter Haftung
(German
language version and English translation thereof) - incorporated
by
reference to Exhibit 10.14 of NL's Annual Report on Form 10-K (File
No.
1-640) for the year ended December 31, 1985.
|
|
|
10.53
|
Contract
on Supplies and Services among Bayer AG, Kronos Titan GmbH and
Kronos
International, Inc. dated June 30, 1995 (English translation from
German
language document) - incorporated by reference to Exhibit 10.1
of NL’s
Quarterly Report on Form 10-Q (File No. 1-640) for the quarter
ended
September 30, 1995.
|
|
|
10.54
|
Amendment
dated August 11, 2003 to the Contract on Supplies and Services
among Bayer
AG, Kronos Titan-GmbH & Co. OHG and Kronos International (English
translation of German language document) - incorporated by reference
to
Exhibit No. 10.32 to the Kronos Worldwide, Inc. Registration Statement
on
Form 10 (File No. 001-31763).
|
|
|
10.55
|
Form
of Lease Agreement, dated November 12, 2004, between The Prudential
Assurance Company Limited and TIMET UK Ltd. related to the premises
known
as TIMET Number 2 Plant, The Hub, Birmingham, England - incorporated
by
reference to Exhibit 10.1 to TIMET’s Current Report on Form 8-K (File No.
1 -10126) filed with the SEC on November 17,
2004.
|
Item
No. Exhibit
Item
10.56**
|
Richards
Bay Slag Sales Agreement dated May 1, 1995 between Richards Bay
Iron and
Titanium (Proprietary) Limited and Kronos, Inc.- incorporated by
reference
to Exhibit 10.17 to NL's Annual Report on Form 10-K (File No. 1-640)
for
the year ended December 31, 1995.
|
|
|
10.57
|
Purchase
and Sale Agreement (for titanium products) between The Boeing Company,
acting through its division, Boeing Commercial Airplanes, and Titanium
Metals Corporation (as amended and restated effective April 19,
2001) -
incorporated by reference to Exhibit No. 10.2 to Titanium Metals
Corporation's Quarterly Report on Form 10-Q (File No. 0-28538)
for the
quarter ended June 30, 2002.
|
|
|
10.58
|
Purchase
and Sale Agreement between Rolls Royce plc and Titanium Metals
Corporation
dated December 22, 1998 - incorporated by reference to Exhibit
No. 10.3 to
Titanium Metals Corporation's Quarterly Report on Form 10-Q (File
No.
0-28538) for the quarter ended June 30, 2002.
|
|
|
10.59**
|
First
Amendment to Purchase and Sale Agreement between Rolls-Royce plc
and TIMET
- incorporated by reference to Exhibit No. 10.1 to TIMET's Quarterly
Report on Form 10-Q (File No. 0-28538) for the quarter ended June
30,
2004.
|
|
|
10.60**
|
Second
Amendment to Purchase and Sale Agreement between Rolls-Royce plc
and TIMET
- incorporated by reference to Exhibit No. 10.2 to TIMET's Quarterly
Report on Form 10-Q (File No. 0-28538) for the quarter ended June
30,
2004.
|
|
|
10.61**
|
General
Terms Agreement between The Boeing Company and Titanium Metals
Corporation
- incorporated by reference to Exhibit No. 10.2 to TIMET’s Amendment No. 1
to its Current Report on Form 8-K (File No. 0-28538) dated August
2,
2005.
|
|
|
10.62**
|
Special
Business Provisions between The Boeing Company and Titanium Metals
Corporation - incorporated by reference to Exhibit No. 10.3 to
TIMET’s
Amendment No. 1 its Current Report on Form 8-K (File No. 0-28538)
dated
August 2, 2005.
|
|
|
10.63
|
Insurance
Sharing Agreement, effective January 1, 1990, by and between NL,
Tall
Pines Insurance Company, Ltd. and Baroid Corporation - incorporated
by
reference to Exhibit 10.20 to NL's Annual Report on Form 10-K (File
No.
1-640) for the year ended December 31, 1991.
|
|
|
10.64
|
Indemnification
Agreement between Baroid, Tremont and NL Insurance, Ltd. dated
September
26, 1990 - incorporated by reference to Exhibit 10.35 to Baroid's
Registration Statement on Form 10 (No. 1-10624) filed with the
Commission
on August 31, 1990.
|
|
|
10.65
|
Administrative
Settlement for Interim Remedial Measures, Site Investigation and
Feasibility Study dated July 7, 2000 between the Arkansas Department
of
Environmental Quality, Halliburton Energy Services, Inc., M I,
LLC and TRE
Management Company - incorporated by reference to Exhibit 10.1
to Tremont
Corporation's Quarterly Report on Form 10-Q (File No. 1-10126)
for the
quarter ended June 30, 2002.
|
|
|
10.66
|
Settlement
Agreement and Release of Claims dated April 19, 2001 between Titanium
Metals Corporation and the Boeing Company - incorporated by reference
to
Exhibit 10.1 to TIMET's Quarterly Report on Form 10-Q (File No.
0-28538)
for the quarter ended March 31, 2001.
|
|
|
Item
No. Exhibit
Item
10.67**
|
Access
and Security Agreement between TIMET and Haynes International,
Inc.
effective November 17, 2006 - incorporated by reference to Exhibit
10.21
to TIMET’s Annual Report on Form 10-K (File No. 0-28538( for the year
ended December 31, 2006.
|
|
|
10.68**
|
Conversion
Services Agreement between TIMET and Haynes International, Inc.
effective
November 17, 2006 - incorporated by reference to Exhibit 10.22
to TIMET’s
Annual Report on Form 10-K (File No. 0-28538( for the year ended
December
31, 2006.
|
|
|
21.1***
|
Subsidiaries
of the Registrant.
|
|
|
23.1***
|
Consent
of PricewaterhouseCoopers LLP with respect to Valhi’s Consolidated
Financial Statements
|
|
|
23.2***
|
Consent
of PricewaterhouseCoopers LLP with respect to TIMET’s Consolidated
Financial Statements
|
|
|
31.1***
|
Certification
|
|
|
31.2***
|
Certification
|
|
|
32.1***
|
Certification
|
|
|
99.1
|
Consolidated
financial statements of Titanium Metals Corporation - incorporated
by
reference to TIMET’s Annual Report on Form 10-K (File No. 0-28538) for the
year ended December 31, 2006.
|
|
|
*
Management contract, compensatory plan or agreement.
**
Portions of the exhibit have been omitted pursuant to a request for
confidential
treatment.
***
Filed
herewith.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
VALHI,
INC.
(Registrant)
|
|
|
|
By:
/s/ Steven L.
Watson
|
|
Steven
L. Watson, March 13, 2007
(President
and Chief Executive Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant and in
the
capacities and on the dates indicated:
/s/
Harold C.
Simmons
|
|
/s/
Steven L.
Watson
|
Harold
C. Simmons, March 13, 2007
(Chairman
of the Board)
|
|
Steven
L. Watson, March 13, 2007
(President,
Chief Executive Officer
and
Director)
|
|
|
|
/s/
Thomas E.
Barry
|
|
/s/
Glenn R.
Simmons
|
Thomas
E. Barry, March 13, 2007
(Director)
|
|
Glenn
R. Simmons, March 13, 2007
(Vice
Chairman of the Board)
|
|
|
|
/s/
Norman S.
Edelcup
|
|
/s/
Bobby D.
O’Brien
|
Norman
S. Edelcup, March 13, 2007
(Director)
|
|
Bobby
D. O’Brien, March 13, 2007
(Vice
President and Chief Financial Officer,
Principal
Financial Officer)
|
|
|
|
/s/
W. Hayden
McIlroy
|
|
/s/
Gregory M.
Swalwell
|
W.
Hayden McIlroy, March 13, 2007
(Director)
|
|
Gregory
M. Swalwell, March 13, 2007
(Vice
President and Controller,
Principal
Accounting Officer)
|
|
|
|
/s/
J. Walter Tucker,
Jr.
|
|
|
J.
Walter Tucker, Jr. March 13, 2007
(Director)
|
|
|
|
|
|
Annual
Report on Form 10-K
Items
8, 15(a) and 15(d)
Index
of Financial Statements and Schedules
Financial
Statements
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
Consolidated
Balance Sheets - December 31, 2005 (As Adjusted); December 31,
2006
|
F-4
|
|
|
Consolidated
Statements of Income -
Years
ended December 31, 2004 and 2005 (As Adjusted);
Year
ended December 31, 2006
|
F-6
|
|
|
Consolidated
Statements of Comprehensive Income (Loss) -
Years
ended December 31, 2004 and 2005 (As Adjusted);
Year
ended December 31, 2006
|
F-8
|
|
|
Consolidated
Statements of Stockholders’ Equity -
Years
ended December 31, 2004 and 2005 (As Adjusted);
Year
ended December 31, 2006
|
F-10
|
|
|
Consolidated
Statements of Cash Flows -
Years
ended December 31, 2004 and 2005 (As Adjusted);
Year
ended December 31, 2006
|
F-11
|
|
|
Notes
to Consolidated Financial Statements
|
F-14
|
|
|
Financial
Statement Schedules
|
|
|
|
Schedule
I - Condensed Financial Information of Registrant
|
S-1
|
|
|
We
omitted Schedules II, III and IV because they are not applicable
or the
required amounts are either not material or are presented in the
Notes to
the Consolidated Financial Statements.
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Stockholders and Board of Directors of Valhi, Inc.:
We
have
completed an integrated audit of Valhi, Inc.’s consolidated financial statements
and of its internal control over financial reporting as of December 31, 2006
in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are presented
below.
Consolidated
financial statements and financial statement schedule
In
our
opinion, the consolidated financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Valhi,
Inc.
and its subsidiaries at December 31, 2005 and 2006, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2006 in conformity with accounting principles generally accepted
in
the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These
financial statements and financial statement schedule are the responsibility
of
the Company’s management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We
conducted our audits of these statements in accordance with the standards of
the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
of
financial statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As
discussed in Note 19 to the consolidated financial statements, the Company
changed the manner in which it accounts for planned major maintenance
expense and the manner in which it accounts for pension and other postretirement
benefit obligations in 2006.
Internal
control over financial reporting
Also,
in
our opinion, management’s assessment, included in Management’s Report on
Internal Control Over Financial Reporting appearing under Item 9A, that the
Company maintained effective internal control over financial reporting as of
December 31, 2006 based on the criteria established in Internal
Control - Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission (“COSO), is
fairly stated, in all material respects, based on those criteria. Furthermore,
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal
Control - Integrated Framework issued
by
the COSO. The Company’s management is
responsible
for maintaining effective internal control over financial reporting and for
its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express opinions on management’s assessment and on
the effectiveness of the Company’s internal control over financial reporting
based on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management’s assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company,
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures
of
the company are being made only in accordance with authorizations of management
and directors of the company and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use,
or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
Dallas,
Texas
March
13,
2007
VALHI,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except per share data)
ASSETS
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
2005
|
|
2006
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
274,963
|
|
$
|
189,153
|
|
Restricted
cash equivalents
|
|
|
6,007
|
|
|
9,086
|
|
Marketable
securities
|
|
|
11,755
|
|
|
12,628
|
|
Accounts
and other receivables, net
|
|
|
218,766
|
|
|
228,268
|
|
Refundable
income taxes
|
|
|
1,489
|
|
|
1,848
|
|
Receivable
from affiliates
|
|
|
34
|
|
|
830
|
|
Inventories,
net
|
|
|
283,157
|
|
|
309,029
|
|
Prepaid
expenses
|
|
|
9,981
|
|
|
17,905
|
|
Deferred
income taxes
|
|
|
10,502
|
|
|
10,610
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
816,654
|
|
|
779,357
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
Marketable
securities
|
|
|
258,705
|
|
|
259,023
|
|
Investment
in affiliates
|
|
|
270,632
|
|
|
396,667
|
|
Unrecognized
net pension obligations
|
|
|
11,916
|
|
|
-
|
|
Pension
asset
|
|
|
3,529
|
|
|
40,108
|
|
Goodwill
|
|
|
361,783
|
|
|
385,190
|
|
Other
intangible assets
|
|
|
3,432
|
|
|
3,916
|
|
Deferred
income taxes
|
|
|
213,726
|
|
|
264,380
|
|
Other
assets
|
|
|
61,639
|
|
|
64,764
|
|
|
|
|
|
|
|
|
|
Total
other assets
|
|
|
1,185,362
|
|
|
1,414,048
|
|
|
|
|
|
|
|
|
|
Property
and equipment:
|
|
|
|
|
|
|
|
Land
|
|
|
37,876
|
|
|
42,073
|
|
Buildings
|
|
|
220,110
|
|
|
242,161
|
|
Equipment
|
|
|
827,690
|
|
|
928,427
|
|
Mining
properties
|
|
|
19,969
|
|
|
30,728
|
|
Construction
in progress
|
|
|
15,771
|
|
|
20,676
|
|
|
|
|
1,121,416
|
|
|
1,264,065
|
|
Less
accumulated depreciation
|
|
|
545,055
|
|
|
652,744
|
|
|
|
|
|
|
|
|
|
Net
property and equipment
|
|
|
576,361
|
|
|
611,321
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,578,377
|
|
$
|
2,804,726
|
|
|
|
|
|
|
|
|
|
VALHI,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (CONTINUED)
(In
thousands, except per share data)
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
2005
|
|
2006
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
1,615
|
|
$
|
1,242
|
|
Accounts
payable
|
|
|
105,650
|
|
|
101,753
|
|
Accrued
liabilities
|
|
|
125,531
|
|
|
119,731
|
|
Payable
to affiliates
|
|
|
13,754
|
|
|
17,231
|
|
Income
taxes
|
|
|
24,680
|
|
|
11,095
|
|
Deferred
income taxes
|
|
|
5,655
|
|
|
2,210
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
276,885
|
|
|
253,262
|
|
|
|
|
|
|
|
|
|
Noncurrent
liabilities:
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
715,820
|
|
|
785,346
|
|
Accrued
pension costs
|
|
|
140,742
|
|
|
188,669
|
|
Accrued
OPEB costs
|
|
|
32,279
|
|
|
33,647
|
|
Accrued
environmental costs
|
|
|
49,161
|
|
|
46,135
|
|
Deferred
income taxes
|
|
|
401,504
|
|
|
479,161
|
|
Other
|
|
|
39,328
|
|
|
28,031
|
|
|
|
|
|
|
|
|
|
Total
noncurrent liabilities
|
|
|
1,378,834
|
|
|
1,560,989
|
|
|
|
|
|
|
|
|
|
Minority
interest in net assets of subsidiaries
|
|
|
125,325
|
|
|
123,696
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value; 5,000 shares
authorized;
none issued
|
|
|
-
|
|
|
-
|
|
Common
stock, $.01 par value; 150,000 shares
authorized;
120,748 and 118,880 shares issued
|
|
|
1,207
|
|
|
1,189
|
|
Additional
paid-in capital
|
|
|
108,810
|
|
|
107,444
|
|
Retained
earnings
|
|
|
787,538
|
|
|
839,188
|
|
Accumulated
other comprehensive income (loss)
|
|
|
(62,280
|
)
|
|
(43,100
|
)
|
Treasury
stock, at cost - 3,984 and 3,984
shares
|
|
|
(37,942
|
)
|
|
(37,942
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
797,333
|
|
|
866,779
|
|
|
|
|
|
|
|
|
|
Total
liabilities, minority interest and
stockholders'
equity
|
|
$
|
2,578,377
|
|
$
|
2,804,726
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Notes 4, 9, 12, 17 and 18)
See
accompanying Notes to Consolidated Financial
Statements.
VALHI,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
and other income:
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,320,128
|
|
$
|
1,392,866
|
|
$
|
1,481,363
|
|
Other,
net
|
|
|
44,244
|
|
|
67,989
|
|
|
89,971
|
|
Equity
in earnings of:
|
|
|
|
|
|
|
|
|
|
|
Titanium
Metals Corporation ("TIMET")
|
|
|
22,669
|
|
|
64,889
|
|
|
101,157
|
|
Other
|
|
|
2,175
|
|
|
3,563
|
|
|
3,751
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue and other income
|
|
|
1,389,216
|
|
|
1,529,307
|
|
|
1,676,242
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
and expenses:
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,038,070
|
|
|
1,042,129
|
|
|
1,139,439
|
|
Selling,
general and administrative
|
|
|
208,101
|
|
|
219,641
|
|
|
229,417
|
|
Loss
on prepayment of debt
|
|
|
-
|
|
|
-
|
|
|
22,311
|
|
Interest
|
|
|
62,901
|
|
|
69,190
|
|
|
67,607
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses
|
|
|
1,309,072
|
|
|
1,330,960
|
|
|
1,458,774
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxes
|
|
|
80,144
|
|
|
198,347
|
|
|
217,468
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes (benefit)
|
|
|
(193,764
|
)
|
|
104,597
|
|
|
63,835
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in after-tax earnings
|
|
|
48,463
|
|
|
11,624
|
|
|
11,951
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
225,445
|
|
|
82,126
|
|
|
141,682
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations, net of tax
|
|
|
3,732
|
|
|
(272
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
229,177
|
|
$
|
81,854
|
|
$
|
141,682
|
|
|
|
|
|
|
|
|
|
|
|
|
VALHI,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME (CONTINUED)
(In
thousands, except per share data)
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.88
|
|
$
|
.69
|
|
$
|
1.22
|
|
Discontinued operations
|
|
|
.03
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.91
|
|
$
|
.69
|
|
$
|
1.22
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.87
|
|
$
|
.69
|
|
$
|
1.20
|
|
Discontinued operations
|
|
|
.03
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.90
|
|
$
|
.69
|
|
$
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per share
|
|
$
|
.24
|
|
$
|
.40
|
|
$
|
.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
120,197
|
|
|
118,155
|
|
|
116,110
|
|
Diluted
|
|
|
120,440
|
|
|
118,519
|
|
|
116,486
|
|
See
accompanying Notes to Consolidated Financial
Statements.
VALHI,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In
thousands)
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
229,177
|
|
$
|
81,854
|
|
$
|
141,682
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
Marketable
securities
|
|
|
3,243
|
|
|
(1,255
|
)
|
|
2,005
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
translation
|
|
|
40,297
|
|
|
(25,310
|
)
|
|
27,530
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
benefit pension plans
|
|
|
1,870
|
|
|
(24,185
|
)
|
|
5,581
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other comprehensive income (loss), net
|
|
|
45,410
|
|
|
(50,750
|
)
|
|
35,116
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
274,587
|
|
$
|
31,104
|
|
$
|
176,798
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Consolidated
Financial Statements.
VALHI,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (CONTINUED)
(In
thousands)
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
Marketable
securities:
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
2,206
|
|
$
|
5,449
|
|
$
|
4,194
|
|
Comprehensive income (loss), net of tax
|
|
|
3,243
|
|
|
(1,255
|
)
|
|
2,005
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
5,449
|
|
$
|
4,194
|
|
$
|
6,199
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation:
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year*
|
|
$
|
(3,360
|
)
|
$
|
36,937
|
|
$
|
11,627
|
|
Comprehensive income (loss), net of tax*
|
|
|
40,297
|
|
|
(25,310
|
)
|
|
27,530
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
36,937
|
|
$
|
11,627
|
|
$
|
39,157
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liabilities:
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
(55,786
|
)
|
$
|
(53,916
|
)
|
$
|
(78,101
|
)
|
Comprehensive income (loss), net of tax
|
|
|
1,870
|
|
|
(24,185
|
)
|
|
5,581
|
|
Adoption of SFAS No. 158
|
|
|
-
|
|
|
-
|
|
|
72,520
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
(53,916
|
)
|
$
|
(78,101
|
)
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Adoption of SFAS No. 158
|
|
|
-
|
|
|
-
|
|
|
(85,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(85,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
OPEB plans:
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Adoption of SFAS No. 158
|
|
|
-
|
|
|
-
|
|
|
(3,443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(3,443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive
income
(loss):
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year*
|
|
$
|
(56,940
|
)
|
$
|
(11,530
|
)
|
$
|
(62,280
|
)
|
Comprehensive income (loss), net of tax*
|
|
|
45,410
|
|
|
(50,750
|
)
|
|
35,116
|
|
Adoption of SFAS No. 158
|
|
|
-
|
|
|
-
|
|
|
(15,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
(11,530
|
)
|
$
|
(62,280
|
)
|
$
|
(43,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
*As
adjusted
See
accompanying Notes to Consolidated Financial
Statements.
VALHI,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
Years
ended December 31, 2004, 2005 and 2006
(In
thousands)
|
|
Common
stock
|
|
Additional
paid-in
capital
|
|
Retained
earnings
|
|
Accumulated
other
comprehensive
income
(loss)
|
|
Treasury
stock
|
|
Total
stockholders'
equity
|
|
|
|
|
|
|
|
(As
Adjusted)
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
previously reported
|
|
$
|
1,340
|
|
$
|
118,067
|
|
$
|
669,527
|
|
$
|
(57,372
|
)
|
$
|
(102,514
|
)
|
$
|
629,048
|
|
Change
in accounting
Principle
FSP No. AUG AIR-1
|
|
|
-
|
|
|
-
|
|
|
1,681
|
|
|
432
|
|
|
-
|
|
|
2,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2003*
|
|
|
1,340
|
|
|
118,067
|
|
|
671,208
|
|
|
(56,940
|
)
|
|
(102,514
|
)
|
|
631,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income*
|
|
|
-
|
|
|
-
|
|
|
229,177
|
|
|
-
|
|
|
-
|
|
|
229,177
|
|
Cash
dividends
|
|
|
-
|
|
|
-
|
|
|
(29,804
|
)
|
|
-
|
|
|
-
|
|
|
(29,804
|
)
|
Other
comprehensive income, net*
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
45,410
|
|
|
-
|
|
|
45,410
|
|
Retirement
of treasury stock
|
|
|
(99
|
)
|
|
(7,243
|
)
|
|
(57,230
|
)
|
|
-
|
|
|
64,572
|
|
|
-
|
|
Other,
net
|
|
|
1
|
|
|
154
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004*
|
|
|
1,242
|
|
|
110,978
|
|
|
813,351
|
|
|
(11,530
|
)
|
|
(37,942
|
)
|
|
876,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income *
|
|
|
-
|
|
|
-
|
|
|
81,854
|
|
|
-
|
|
|
-
|
|
|
81,854
|
|
Cash
dividends
|
|
|
-
|
|
|
-
|
|
|
(48,805
|
)
|
|
-
|
|
|
-
|
|
|
(48,805
|
)
|
Other
comprehensive loss, net *
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(50,750
|
)
|
|
-
|
|
|
(50,750
|
)
|
Treasury
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(62,060
|
)
|
|
(62,060
|
)
|
Retired
|
|
|
(35
|
)
|
|
(3,163
|
)
|
|
(58,862
|
)
|
|
-
|
|
|
62,060
|
|
|
-
|
|
Other,
net
|
|
|
-
|
|
|
995
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005*
|
|
|
1,207
|
|
|
108,810
|
|
|
787,538
|
|
|
(62,280
|
)
|
|
(37,942
|
)
|
|
797,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
141,682
|
|
|
-
|
|
|
-
|
|
|
141,682
|
|
Cash
dividends
|
|
|
-
|
|
|
-
|
|
|
(47,981
|
)
|
|
-
|
|
|
-
|
|
|
(47,981
|
)
|
Other
comprehensive loss, net
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
35,116
|
|
|
-
|
|
|
35,116
|
|
Adoption
of SFAS No. 158
|
|
|
|
|
|
|
|
|
|
|
|
(15,936
|
)
|
|
-
|
|
|
(15,936
|
)
|
Treasury
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
Acquired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(43,794
|
)
|
|
(43,794
|
)
|
Retired
|
|
|
(18
|
)
|
|
(1,725
|
)
|
|
(42,051
|
)
|
|
-
|
|
|
43,794
|
|
|
-
|
|
Other,
net
|
|
|
-
|
|
|
359
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
$
|
1,189
|
|
$
|
107,444
|
|
$
|
839,188
|
|
$
|
(43,100
|
)
|
$
|
(37,942
|
)
|
$
|
866,779
|
|
*As
adjusted.
See
accompanying Notes to Consolidated Financial
Statements.
VALHI,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
229,177
|
|
$
|
81,854
|
|
$
|
141,682
|
|
Depreciation
and amortization
|
|
|
78,352
|
|
|
74,527
|
|
|
72,513
|
|
Goodwill
impairment
|
|
|
6,500
|
|
|
-
|
|
|
-
|
|
Securities
transactions, net
|
|
|
(2,113
|
)
|
|
(20,259
|
)
|
|
(668
|
)
|
Write-off
of accrued interest receivable
|
|
|
-
|
|
|
21,638
|
|
|
-
|
|
Loss
on prepayment of debt
|
|
|
-
|
|
|
-
|
|
|
22,311
|
|
Call
premium paid on redemption of
Senior
Secured Notes
|
|
|
-
|
|
|
-
|
|
|
(20,898
|
)
|
Loss
(gain) on disposal of property and
Equipment
|
|
|
855
|
|
|
1,555
|
|
|
(35,335
|
)
|
Noncash
interest expense
|
|
|
2,543
|
|
|
3,037
|
|
|
1,999
|
|
Benefit
plan expense less than
cash
funding requirements:
|
|
|
|
|
|
|
|
|
|
|
Defined
benefit pension expense
|
|
|
(2,977
|
)
|
|
(6,365
|
)
|
|
(5,333
|
)
|
Other
postretirement benefit expense
|
|
|
(2,839
|
)
|
|
(2,963
|
)
|
|
(1,542
|
)
|
Deferred
income taxes:
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
(212,257
|
)
|
|
42,733
|
|
|
37,292
|
|
Discontinued
operations
|
|
|
(3,508
|
)
|
|
(696
|
)
|
|
-
|
|
Minority
interest:
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
48,463
|
|
|
11,624
|
|
|
11,951
|
|
Discontinued
operations
|
|
|
(4,124
|
)
|
|
(205
|
)
|
|
-
|
|
Equity
in:
|
|
|
|
|
|
|
|
|
|
|
TIMET
|
|
|
(22,669
|
)
|
|
(64,889
|
)
|
|
(101,157
|
)
|
Other
|
|
|
(2,175
|
)
|
|
(3,563
|
)
|
|
(3,751
|
)
|
Net
distributions from:
|
|
|
|
|
|
|
|
|
|
|
Ti02
manufacturing joint venture
|
|
|
8,600
|
|
|
4,850
|
|
|
2,250
|
|
Other
|
|
|
494
|
|
|
964
|
|
|
2,280
|
|
Other,
net
|
|
|
4,391
|
|
|
347
|
|
|
989
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
and other receivables, net
|
|
|
(25,148
|
)
|
|
(4,052
|
)
|
|
8,241
|
|
Inventories,
net
|
|
|
46,937
|
|
|
(48,858
|
)
|
|
(3,844
|
)
|
Accounts
payable and accrued liabilities
|
|
|
(8,996
|
)
|
|
698
|
|
|
(6,769
|
)
|
Income
taxes
|
|
|
30,759
|
|
|
16,082
|
|
|
(21,078
|
)
|
Accounts
with affiliates
|
|
|
(10,060
|
)
|
|
3,750
|
|
|
1,358
|
|
Other
noncurrent assets
|
|
|
(812
|
)
|
|
(4,562
|
)
|
|
5,969
|
|
Other
noncurrent liabilities
|
|
|
(17,764
|
)
|
|
(2,307
|
)
|
|
(13,757
|
)
|
Other,
net
|
|
|
500
|
|
|
(649
|
)
|
|
(8,408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
142,129
|
|
|
104,291
|
|
|
86,295
|
|
|
|
|
|
|
|
|
|
|
|
|
VALHI,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
(In
thousands)
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
(48,521
|
)
|
$
|
(62,778
|
)
|
$
|
(63,773
|
)
|
Purchases
of:
|
|
|
|
|
|
|
|
|
|
|
Kronos
common stock
|
|
|
(17,057
|
)
|
|
(7,039
|
)
|
|
(25,430
|
)
|
TIMET
common stock
|
|
|
-
|
|
|
(17,972
|
)
|
|
(18,699
|
)
|
CompX
common stock
|
|
|
-
|
|
|
(3,638
|
)
|
|
(2,318
|
)
|
NL
common stock
|
|
|
-
|
|
|
-
|
|
|
(364
|
)
|
Other
subsidiary
|
|
|
(575
|
)
|
|
-
|
|
|
-
|
|
Business
units
|
|
|
-
|
|
|
(7,342
|
)
|
|
(9,832
|
)
|
Marketable
securities
|
|
|
-
|
|
|
(29,449
|
)
|
|
(43,416
|
)
|
Capitalized
permit costs
|
|
|
(6,274
|
)
|
|
(4,105
|
)
|
|
(8,287
|
)
|
Proceeds
from disposal of:
|
|
|
|
|
|
|
|
|
|
|
Business
unit
|
|
|
-
|
|
|
18,094
|
|
|
-
|
|
Property
and equipment
|
|
|
2,964
|
|
|
553
|
|
|
39,420
|
|
Kronos
common stock
|
|
|
2,745
|
|
|
19,176
|
|
|
-
|
|
Marketable
securities
|
|
|
-
|
|
|
19,690
|
|
|
42,922
|
|
Interest
in Norwegian smelting operation
|
|
|
-
|
|
|
3,542
|
|
|
-
|
|
Change
in restricted cash equivalents, net
|
|
|
10,068
|
|
|
(1,759
|
)
|
|
(2,888
|
)
|
Collection
of loan to Snake River Sugar
Company
|
|
|
-
|
|
|
80,000
|
|
|
-
|
|
Cash
of disposed business unit
|
|
|
-
|
|
|
(4,006
|
)
|
|
-
|
|
Loans
to affiliates:
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
(12,929
|
)
|
|
(11,000
|
)
|
|
-
|
|
Collections
|
|
|
12,000
|
|
|
25,929
|
|
|
-
|
|
Other,
net
|
|
|
(508
|
)
|
|
2,474
|
|
|
3,151
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing
activities
|
|
|
(58,087
|
)
|
|
20,370
|
|
|
(89,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Indebtedness:
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
297,439
|
|
|
56,996
|
|
|
772,703
|
|
Principal
payments
|
|
|
(186,274
|
)
|
|
(54,210
|
)
|
|
(751,586
|
)
|
Deferred
financing costs paid
|
|
|
(2,017
|
)
|
|
(114
|
)
|
|
(9,000
|
)
|
Loans
from affiliates:
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
26,117
|
|
|
-
|
|
|
-
|
|
Repayments
|
|
|
(33,449
|
)
|
|
-
|
|
|
-
|
|
Valhi
dividends paid
|
|
|
(29,804
|
)
|
|
(48,805
|
)
|
|
(47,981
|
)
|
Distributions
to minority interest
|
|
|
(3,577
|
)
|
|
(12,007
|
)
|
|
(8,856
|
)
|
Treasury
stock acquired
|
|
|
-
|
|
|
(62,060
|
)
|
|
(43,794
|
)
|
NL
common stock issued
|
|
|
9,201
|
|
|
2,507
|
|
|
88
|
|
Valhi
common stock issued and other, net
|
|
|
802
|
|
|
1,931
|
|
|
873
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing
activities
|
|
|
78,438
|
|
|
(115,762
|
)
|
|
(87,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease)
|
|
$
|
162,480
|
|
$
|
8,899
|
|
$
|
(90,772
|
)
|
VALHI,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
(In
thousands)
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - net change from:
|
|
|
|
|
|
|
Operating,
investing and financing
activities
|
|
$
|
162,480
|
|
$
|
8,899
|
|
$
|
(90,772
|
)
|
Currency
translation
|
|
|
1,955
|
|
|
(1,765
|
)
|
|
4,962
|
|
Net
change for the year
|
|
|
164,435
|
|
|
7,134
|
|
|
(85,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
103,394
|
|
|
267,829
|
|
|
274,963
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
$
|
267,829
|
|
$
|
274,963
|
|
$
|
189,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures:
Cash
paid (received) for:
|
|
|
|
|
|
|
|
|
|
|
Interest,
net of amounts capitalized
|
|
$
|
59,446
|
|
$
|
64,964
|
|
$
|
57,923
|
|
Income
taxes, net
|
|
|
(20,583
|
)
|
|
54,131
|
|
|
42,876
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
investing activities:
Note
receivable received upon
disposal
of business unit
|
|
$
|
-
|
|
$
|
4,179
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
received as partial
consideration
for disposal of
interest
in Norwegian smelting
operation
|
|
|
-
|
|
|
1,897
|
|
|
-
|
|
See
accompanying Notes to Consolidated Financial
Statements.
VALHI,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2006
Note
1 - Summary
of significant accounting policies:
Nature
of our business. Valhi,
Inc. (NYSE: VHI) is primarily a holding company. We operate through our
wholly-owned and majority-owned subsidiaries, including NL Industries, Inc.,
Kronos Worldwide, Inc., CompX International Inc., Tremont LLC and Waste Control
Specialists LLC (“WCS”). We are also the largest shareholder of Titanium Metal
Corporation (“TIMET”), although we own less than a majority interest and
therefore we account for our investment by the equity method. See Note 23.
Kronos (NYSE: KRO), NL (NYSE: NL), CompX (NYSE: CIX) and TIMET (NYSE: TIE)
each
file periodic reports with the Securities and Exchange Commission
(“SEC”).
Organization.
We
are
majority owned by Contran Corporation, which directly or through its
subsidiaries owns approximately 92% of our outstanding common stock at December
31, 2006. 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 (for which Mr. Simmons is the sole trustee) or is held
directly by Mr. Simmons or other persons or related companies to Mr. Simmons.
Consequently, Mr. Simmons may be deemed to control Contran and us.
Unless
otherwise indicated, references in this report to “we,” “us” or “our” refer to
Valhi, Inc and its subsidiaries, taken as a whole.
Management’s
estimates. The
preparation of our Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States of America
(“GAAP”), requires us to make estimates and assumptions that affect the reported
amounts of our assets and liabilities and disclosures of contingent assets
and
liabilities at each balance sheet date and the reported amounts of our revenues
and expenses during each reporting period. Actual results may differ
significantly from previously-estimated amounts under different assumptions
or
conditions.
Principles
of consolidation. Our
consolidated financial statements include the financial position, results of
operations and cash flows of Valhi and our majority-owned and wholly-owned
subsidiaries. We eliminate all material intercompany accounts and balances.
We
account for increases in our ownership interest of our consolidated subsidiaries
and equity method investees, either through our purchase of additional shares
of
their common stock or through their purchase of their own shares of common
stock, by the purchase method (step acquisition). Unless otherwise noted, such
purchase accounting generally results in an adjustment to the carrying amount
of
goodwill for our consolidated subsidiaries. We account for decreases in our
ownership interest of our consolidated subsidiaries and equity method investees
through cash sale of their common stock to third parties (either by us or by
our
subsidiary) by recognizing a gain or loss in net income equal to the difference
between the proceeds from such sale and the carrying value of the shares sold.
The effect of other decreases in our ownership interest, which is usually the
result of employee stock options exercises is generally not
material.
Foreign
currency translation.
The
financial statements of our foreign subsidiaries are translated to U.S. dollars
in accordance with the provisions of Statement of Financial Accounting Standards
(“SFAS”) No. 52 “Foreign Currency Translation.” The functional currency of our
foreign subsidiaries is generally the local currency of the country.
Accordingly, we translate the assets and liabilities at year-end rates of
exchange, while we translate their revenues and expenses at average exchange
rates prevailing during the year. We accumulate the resulting translation
adjustments in stockholders' equity as part of accumulated other comprehensive
income, net of related deferred income taxes and minority interest. We recognize
currency transaction gains and losses in income.
Derivatives
and hedging activities. We
recognize derivatives as either an asset or liability measured at fair value
in
accordance with SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, as
amended and interpreted. We recognize the effect of changes in the fair value
of
derivatives either in net income or other comprehensive income, depending on
the
intended use of the derivative.
Cash
and cash equivalents.
We
classify bank time deposits and government and commercial notes and bills with
original maturities of three months or less as cash equivalents.
Restricted
cash equivalents and marketable debt securities. We
classify cash
equivalents and marketable debt securities that have been segregated or are
otherwise limited in use as restricted. To the extent the restricted amount
relates to a recognized liability, we classify the restricted amount as current
or noncurrent according to the corresponding liability. To the extent the
restricted amount does not relate to a recognized liability, we classify
restricted cash as a current asset and we classify the restricted debt security
as either a current or noncurrent asset depending upon the maturity date of
the
security. See Notes 4 and 7.
Marketable
securities; securities transactions. We
carry
marketable debt and equity securities at fair value based upon quoted market
prices or as otherwise disclosed. We recognize unrealized and realized gains
and
losses on trading securities in income. We accumulate unrealized gains and
losses on available-for-sale securities as part of accumulated other
comprehensive income, net of related deferred income taxes and minority
interest. Realized gains and losses are based on specific identification of
the
securities sold.
Accounts
receivable.
We
provide an allowance for doubtful accounts for known and estimated potential
losses arising from our sales to customers based on a periodic review of these
accounts.
Inventories
and cost of sales.
We state
inventories at the lower of cost or market, net of allowance for obsolete and
slow-moving inventories. We generally base inventory costs on average cost
or
the first-in, first-out method. Our cost
of
sales includes costs for materials, packing and finishing, utilities, salary
and
benefits, maintenance and depreciation.
Investment
in affiliates and joint ventures.
We
account for investments in more than 20%-owned but less than majority-owned
companies by the equity method. See Note 7. We allocate any differences between
the cost of each investment and our pro rata share of the entity's
separately-reported net assets among the assets and liabilities of the entity
based upon estimated relative fair values. We had a $19 million credit
difference at December 31, 2006 principally due to our investment in TIMET.
We
amortize these differences to income as the entities depreciate, amortize or
dispose of the related net assets.
Goodwill
and other intangible assets; amortization expense.
We
account for goodwill and other intangible assets in accordance with SFAS No.
142, Goodwill
and Other Intangible Assets.
Goodwill represents the excess of cost over fair value of individual net assets
acquired in business combinations accounted for by the purchase method. Goodwill
is not subject to periodic amortization. We amortize other intangible assets
by
the straight-line method over their estimated lives and state them net of
accumulated amortization. We evaluate goodwill for impairment, annually, or
when
circumstances indicate the carrying value may not be recoverable. See Note
8.
We
amortize identifiable intangible assets by the straight-line method over their
estimated useful lives as follows:
Asset
|
|
Useful
lives
|
|
|
|
Patents
|
|
Straight-line
method over 15 years
|
Customer
lists
|
|
Straight-line
method over 7 to 8 years
|
Capitalized
operating permits.
Our
Waste Management Segment capitalizes direct costs for the acquisition or renewal
of operating permits and amortizes these costs by the straight-line method
over
the term of the applicable permit. Amortization of capitalized operating permit
costs was $623,000 in 2004, $126,000 in 2005 and $148,000 in 2006. At December
31, 2006, net capitalized operating permit costs include (i) $400,000 in costs
to renew certain permits for which the renewal application is pending with
the
applicable regulatory agency and (ii) $18.8 million in costs to apply for
certain new permits which have not yet been issued by the applicable regulatory
authority. We currently expect renewal of the permits for which the application
is still pending will occur in the ordinary course of business, and we have
been
amortizing costs related to these renewals from the date the prior permit
expired. For costs related to new permits which have not yet been issued, we
will either (i) amortize such costs from the date the permit is issued or (ii)
write off such costs to expense at the earlier of (a) the date the applicable
regulatory authority rejects the permit application or (b) the date we determine
issuance of the permit is not probable. All operating permits are generally
subject to renewal at the option of the issuing governmental agency.
Property
and equipment; depreciation expense.
We state
property and equipment at acquisition cost plus capitalized interest on
borrowings during the actual construction period of major capital projects.
We
did not capitalize any material interest costs in 2004, 2005 or 2006.
We
compute depreciation of property and equipment for financial reporting purposes
(including mining properties) principally
by the straight-line method over the estimated useful lives of the assets as
follows:
Asset
|
|
Useful
lives
|
|
|
|
Buildings
and improvements
|
|
10
to 40 years
|
Machinery
and equipment
|
|
3
to 20 years
|
We
expense expenditures for maintenance, repairs and minor renewals as incurred
which do not improve or extend the life of the assets, including planned major
maintenance. See Note 19.
We
have
a
governmental concession with an unlimited term to operate an ilmenite mine
in
Norway. Mining properties consist of buildings and equipment used in our
Norwegian ilmenite mining operations. While we own the land and ilmenite
reserves associated with the mine, such land and reserves were acquired for
nominal value and we have no material asset recognized for the land and
reserves related to such mining operations.
We
perform impairment tests when events or changes in circumstances indicate the
carrying value may not be recoverable. We perform the impairment test by
comparing the estimated future undiscounted cash flows associated with the
asset
to the asset's net carrying value to determine if an impairment exists. We
assess impairment of property and equipment in accordance with SFAS No. 144,
Accounting
for the Impairment or Disposal of Long-Lived Assets.
Long-term
debt.
We state
long-term debt net of any unamortized original issue premium or discount. We
classify amortization
of deferred financing costs and any premium or discount associated with the
issuance of indebtedness in interest expense, and compute amortization by the
interest method over the term of the applicable issue.
Employee
benefit plans.
Accounting and funding policies for our retirement plans are described in Notes
11 and 19.
Income
taxes.
We and
our qualifying subsidiaries are members of Contran's consolidated U.S federal
income tax group (the "Contran Tax Group"). We and certain of our qualifying
subsidiaries also file consolidated income tax returns with Contran in various
U.S. state jurisdictions. As
a
member of the Contran Tax Group, we are jointly and severally liable for the
federal income tax liability of Contran and the other companies included in
the
Contran Tax Group for all periods in which we are included in the Contran Tax
Group. See Note 18. Contran’s
policy for intercompany allocation of income taxes provides that subsidiaries
included in the Contran Tax Group compute their provision for income taxes
on a
separate company basis. Generally, subsidiaries make payments to or receive
payments from Contran in the amounts they would have paid to or received from
the Internal Revenue Service or the applicable state tax authority had they
not
been members of the Contran Tax Group. The separate company provisions and
payments are computed using the tax elections made by Contran. We made no net
cash payments to Contran in 2004 for income taxes and made cash payments of
$.5
million in 2005 and $1.2 million in 2006.
We
recognize deferred income tax assets and liabilities for the expected future
tax
consequences of temporary differences between amounts recorded in the
Consolidated Financial Statements and the tax basis of our assets and
liabilities, including investments in our subsidiaries and affiliates who are
not members of the Contran Tax Group and undistributed earnings of foreign
subsidiaries which are not permanently reinvested. In addition, we recognize
deferred income taxes with respect to the excess of the financial reporting
carrying amount over the income tax basis of our direct investment in Kronos
common stock because the exemption under GAAP to avoid recognition of such
deferred income taxes is not available to us. The earnings of our foreign
subsidiaries subject to permanent reinvestment plans aggregated $745 million
at
December 31, 2006 (2005 - $713 million). It is not practical for us to determine
the amount of the unrecognized deferred income tax liability related to these
earnings due to the complexities associated with the U.S. taxation on earnings
of foreign subsidiaries repatriated to the U.S. We periodically
evaluate our deferred income tax assets and recognize a valuation allowance
based on the estimate of the amount of such deferred tax assets which we believe
does not meet the more-likely-than-not recognition criteria.
NL,
Kronos, Tremont and WCS are members of the Contran Tax Group. CompX, previously
a separate U.S. federal income taxpayer, became a member of the Contran Tax
Group for federal income tax purposes in October 2004 with the formation of
CompX Group, Inc. See Note 3. NL, Kronos and CompX are each a party to a tax
sharing agreement with us and Contran pursuant to which they generally compute
their provision for income taxes on a separate-company basis, and make payments
to or receive payments from us in amounts that they would have paid to or
received from the U.S. Internal Revenue Service or the applicable state tax
authority had they not been a member of the Contran Tax Group.
Environmental
remediation costs.
We
record liabilities related to environmental remediation obligations when
estimated future expenditures are probable and reasonably estimable. We adjust
our accruals as further information becomes available to us or as circumstances
change. We generally do not discount estimated future expenditures to their
present value due to the uncertainty of the timing of the ultimate payout.
We
recognize any recoveries of remediation costs from other parties when we deem
their receipt to be probable. We had no such receivables at December 31, 2005
and 2006.
Net
sales.
We
record sales when products are shipped and title and other risks and rewards
of
ownership have passed to the customer, or when we perform services.
Our
Chemicals and Component Products Segments sales are generally F.O.B. shipping
point, although in some instances shipping terms are F.O.B. destination point.
We include amounts charged to customers for shipping and handling costs in
net
sales. We state sales net of price, early payment and distributor discounts
and
volume rebates. We report taxes assessed by a governmental authority such as
sales, use, value added and excise taxes on a net basis.
Selling,
general and administrative expenses; shipping and handling costs; advertising
costs; research and development costs.
Selling,
general and administrative expenses include costs related to marketing, sales,
distribution, shipping and handling, research and development, legal,
environmental remediation and administrative functions such as accounting,
treasury and finance, and includes costs for salaries and benefits, travel
and
entertainment, promotional materials and professional fees. Shipping and
handling costs of our Chemicals Segment were approximately $70 million in 2004,
$76 million in 2005 and $81 million in 2006. Shipping and handling costs of
our
Component Products and Waste Management Segments are not material. We expense
advertising and research, development and sales technical support costs as
incurred. Advertising costs were approximately $2 million in each of 2004,
2005
and 2006. Research, development and certain sales technical support costs were
approximately $8 million in 2004, $9 million in 2005 and $11 million in
2006.
Note
2 - Business
and geographic segments:
Business
segment
|
|
Entity
|
|
%
owned at
December
31, 2006
|
|
|
|
|
|
Chemicals
|
|
Kronos
|
|
95%
|
Component
products
|
|
CompX
|
|
70%
|
Waste
management
|
|
WCS
|
|
100%
|
Titanium
metals
|
|
TIMET
|
|
35%
|
Our
ownership of Kronos includes 59% we hold directly and 36% held directly by
NL.
We own 83% of NL.
Our
ownership of CompX is primarily through CompX Group, Inc, a majority-owned
subsidiary of NL. NL owns 82.4% of CompX Group, and TIMET owns the remaining
17.6% of CompX Group. CompX Group’s sole asset is 83% of the outstanding common
stock of CompX. NL also owns an additional 2% of CompX directly. See Note
3.
We
own
31% of TIMET through a wholly-owned subsidiary, and we directly own an
additional 4% of TIMET. See Notes 11 and 23. TIMET owns an additional 3% of
CompX, .5% of NL and less than .1% of Kronos. Because we do not consolidate
TIMET, the shares of CompX Group, CompX, NL and Kronos held by TIMET are not
considered as owned by us for financial reporting purposes.
We
are
organized based upon our operating subsidiaries. Our operating segments are
defined as components of our consolidated operations about which separate
financial information is available that is regularly evaluated by our chief
operating decision maker in determining how to allocate resources and in
assessing performance. Each operating segment is separately managed, and each
operating segment represents a strategic business unit offering different
products.
We
have
three consolidated reportable operating segments:
|
·
|
Chemicals
-
Our Chemicals Segment is operated through our majority ownership
of
Kronos. Kronos is a leading global producer and marketer of value-added
titanium dioxide pigments (“TiO2”).
TiO2
is
used for a variety of manufacturing applications, including plastics,
paints, paper and other industrial products. Kronos has production
facilities located throughout North America and Europe. Kronos also
owns a
one-half interest in a TiO2
production facility located in Louisiana. See Note
7.
|
|
·
|
Component
Products
-
We operate in the component products industry through our majority
ownership of CompX. CompX is a leading manufacturer of precision
ball
bearing slides, security products and ergonomic computer support
systems
used in office furniture, transportation, tool storage and a variety
of
other industries. CompX has recently entered the performance marine
components industry through the acquisition of two performance marine
manufacturers. CompX has production facilities in North America and
Asia.
|
|
·
|
Waste
Management
-
WCS is our wholly-owned subsidiary which owns and operates a West
Texas
facility for the processing, treatment, storage and disposal of hazardous,
toxic and certain types of low level radioactive waste. WCS is in
the
process of obtaining regulatory authorization to expand its low-level
and
mixed low-level radioactive waste handling
capabilities.
|
We
account for our less than majority interest in TIMET by the equity method.
See
Note 23. TIMET is a leading global producer of titanium sponge, melted products
and mill products. Titanium is used for a variety of commercial, aerospace,
military, medical and other emerging markets. TIMET is also the only titanium
producer with major production facilities in both of the world’s principal
titanium markets: the U.S. and Europe.
We
evaluate segment performance based on segment operating income, which we define
as income before income taxes and interest expense, exclusive of certain
non-recurring items (such as gains or losses on disposition of business units
and other long-lived assets outside the ordinary course of business and certain
legal settlements) and certain general corporate income and expense items
(including securities transactions gains and losses and interest and dividend
income) which are not attributable to the operations of the reportable operating
segments. The accounting policies of our reportable operating segments are
the
same as those described in Note 1. Segment results we report may differ from
amounts separately reported by our various subsidiaries and affiliates due
to
purchase accounting adjustments and related amortization or differences in
how
we define operating income. Intersegment sales are not material.
Interest
income included in the calculation of segment operating income is not material
in 2004, 2005 or 2006. Capital expenditures include additions to property and
equipment but exclude amounts we paid for business units acquired in business
combinations. See Note 3. Depreciation and amortization related to each
reportable operating segment includes amortization of any intangible assets
attributable to the segment. Amortization of deferred financing costs and any
premium or discount associated with the issuance of indebtedness is included
in
interest expense.
Segment
assets are comprised of all assets attributable to each reportable operating
segment, including goodwill and other intangible assets. Our investment in
the
TiO2
manufacturing joint venture (see Note 7) is included in the Chemicals Segment
assets. Corporate assets are not attributable to any operating segment and
consist principally of cash and cash equivalents, restricted cash equivalents,
marketable securities and loans to third parties. At December 31, 2006,
approximately 18% of corporate assets were held by NL (2005 - 17%), with
substantially all of the remainder held directly by us.
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
Chemicals
|
|
$
|
1,128.6
|
|
$
|
1,196.7
|
|
$
|
1,279.5
|
|
Component
products
|
|
|
182.6
|
|
|
186.3
|
|
|
190.1
|
|
Waste
management
|
|
|
8.9
|
|
|
9.8
|
|
|
11.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales
|
|
|
1,320.1
|
|
|
1,392.8
|
|
$
|
1,481.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales:
|
|
|
|
|
|
|
|
|
|
|
Chemicals
|
|
$
|
882.0
|
|
$
|
884.1
|
|
$
|
980.8
|
|
Component
products
|
|
|
142.8
|
|
|
142.6
|
|
|
143.6
|
|
Waste
management
|
|
|
13.3
|
|
|
15.4
|
|
|
15.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cost of sales
|
|
$
|
1,038.1
|
|
$
|
1,042.1
|
|
$
|
1,139.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin:
|
|
|
|
|
|
|
|
|
|
|
Chemicals
|
|
$
|
246.6
|
|
$
|
312.6
|
|
$
|
298.7
|
|
Component
products
|
|
|
39.8
|
|
|
43.7
|
|
|
46.5
|
|
Waste
management
|
|
|
(4.4
|
)
|
|
(5.6
|
)
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
gross margin
|
|
$
|
282.0
|
|
$
|
350.7
|
|
$
|
342.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income:
|
|
|
|
|
|
|
|
|
|
|
Chemicals
|
|
$
|
102.4
|
|
$
|
165.6
|
|
$
|
138.1
|
|
Component
products
|
|
|
16.2
|
|
|
19.3
|
|
|
20.6
|
|
Waste
management
|
|
|
(10.2
|
)
|
|
(12.1
|
)
|
|
(9.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating income
|
|
|
108.4
|
|
|
172.8
|
|
|
149.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in:
|
|
|
|
|
|
|
|
|
|
|
TIMET
|
|
|
22.7
|
|
|
64.9
|
|
|
101.1
|
|
Other
|
|
|
2.2
|
|
|
3.6
|
|
|
3.8
|
|
General
corporate items:
|
|
|
|
|
|
|
|
|
|
|
Interest
and dividend income
|
|
|
34.6
|
|
|
57.8
|
|
|
41.6
|
|
Securities
transaction gains, net
|
|
|
2.1
|
|
|
20.2
|
|
|
.7
|
|
Write-off
of accrued interest
|
|
|
-
|
|
|
(21.6
|
)
|
|
-
|
|
Gain
on disposal of fixed assets
|
|
|
.6
|
|
|
-
|
|
|
36.4
|
|
Insurance
recoveries
|
|
|
.5
|
|
|
3.0
|
|
|
7.6
|
|
General
expenses, net
|
|
|
(28.0
|
)
|
|
(33.2
|
)
|
|
(33.0
|
)
|
Loss
on prepayment of debt
|
|
|
-
|
|
|
-
|
|
|
(22.3
|
)
|
Interest
expense
|
|
|
(62.9
|
)
|
|
(69.2
|
)
|
|
(67.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
$
|
80.2
|
|
$
|
198.3
|
|
$
|
217.5
|
|
|
|
Years ended December
31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
|
|
Chemicals
|
|
$
|
60.2
|
|
$
|
60.1
|
|
$
|
57.4
|
|
Component
products
|
|
|
14.2
|
|
|
10.9
|
|
|
11.8
|
|
Waste
management
|
|
|
3.3
|
|
|
2.8
|
|
|
2.7
|
|
Corporate
|
|
|
.7
|
|
|
.7
|
|
|
.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
78.4
|
|
$
|
74.5
|
|
$
|
72.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
|
|
Chemicals
|
|
$
|
39.3
|
|
$
|
43.4
|
|
$
|
50.9
|
|
Component
products
|
|
|
5.4
|
|
|
10.5
|
|
|
12.1
|
|
Waste
management
|
|
|
3.7
|
|
|
7.0
|
|
|
.5
|
|
Corporate
|
|
|
.1
|
|
|
1.9
|
|
|
.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
48.5
|
|
$
|
62.8
|
|
$
|
63.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets:
|
|
|
|
|
|
|
|
|
|
|
Operating
segments:
|
|
|
|
|
|
|
|
|
|
|
Chemicals
|
|
$
|
1,773.5
|
|
$
|
1,694.1
|
|
$
|
1,826.8
|
|
Component
products
|
|
|
170.2
|
|
|
155.2
|
|
|
169.2
|
|
Waste
management
|
|
|
36.4
|
|
|
49.6
|
|
|
53.4
|
|
Investment
in:
|
|
|
|
|
|
|
|
|
|
|
TIMET
common stock
|
|
|
55.4
|
|
|
138.7
|
|
|
264.1
|
|
TIMET
preferred stock
|
|
|
.2
|
|
|
.2
|
|
|
.2
|
|
Other
joint ventures
|
|
|
13.9
|
|
|
16.5
|
|
|
18.8
|
|
Corporate
and eliminations
|
|
|
640.9
|
|
|
524.1
|
|
|
472.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,690.5
|
|
$
|
2,578.4
|
|
$
|
2,804.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic
information.
We
attribute net sales to the place of manufacture (point-of-origin) and the
location of the customer (point-of-destination); we attribute property and
equipment to their physical location. At December 31, 2006, the net assets
of
our non-U.S. subsidiaries included in consolidated net assets approximated
$642
million (2005 - $559 million).
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales - point of origin:
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
558.1
|
|
$
|
618.8
|
|
$
|
667.1
|
|
Germany
|
|
|
576.1
|
|
|
613.1
|
|
|
672.0
|
|
Canada
|
|
|
244.4
|
|
|
266.0
|
|
|
265.2
|
|
Belgium
|
|
|
186.4
|
|
|
186.9
|
|
|
192.9
|
|
Norway
|
|
|
144.5
|
|
|
160.5
|
|
|
173.5
|
|
Taiwan
|
|
|
15.8
|
|
|
14.2
|
|
|
15.9
|
|
Eliminations
|
|
|
(405.2
|
)
|
|
(466.7
|
)
|
|
(505.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,320.1
|
|
$
|
1,392.8
|
|
$
|
1,481.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales - point of destination:
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
543.7
|
|
$
|
589.2
|
|
$
|
916.3
|
|
Europe
|
|
|
671.8
|
|
|
693.6
|
|
|
426.5
|
|
Asia
and other
|
|
|
104.6
|
|
|
110.0
|
|
|
138.6
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,320.1
|
|
$
|
1,392.8
|
|
$
|
1,481.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
property and equipment:
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
69.8
|
|
$
|
75.2
|
|
$
|
78.2
|
|
Germany
|
|
|
331.3
|
|
|
278.9
|
|
|
301.4
|
|
Canada
|
|
|
91.4
|
|
|
87.9
|
|
|
80.6
|
|
Norway
|
|
|
72.5
|
|
|
64.4
|
|
|
76.2
|
|
Belgium
|
|
|
73.8
|
|
|
61.7
|
|
|
67.2
|
|
Taiwan
|
|
|
5.7
|
|
|
8.3
|
|
|
7.7
|
|
Netherlands
|
|
|
8.3
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
652.8
|
|
$
|
576.4
|
|
$
|
611.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
3 - Business combinations and related transactions:
NL
Industries, Inc. At
the
beginning of 2004, we held an aggregate of 84% of NL's outstanding
common stock. Our aggregate ownership of NL was reduced to 83% at December
31,
2006 due to the stock option exercises by NL employees offset in part by our
purchase of 36,600 shares of NL in market transactions during 2006 for an
aggregate of $364,000.
Kronos
Worldwide, Inc. At
the
beginning of 2004, we held an aggregate of 93% of Kronos’ outstanding common
stock. During 2004 and the first quarter of 2005, NL paid five quarterly
dividends in shares of Kronos common stock, in which an aggregate of
approximately 1.5 million shares of Kronos common stock (3.0% of Kronos'
outstanding shares) were distributed to NL shareholders (including us) in the
form of pro-rata dividends. We received an aggregate of approximately 1.2
million Kronos shares from these distributions.
The
quarterly distributions of Kronos shares as well NL’s December 2003 distribution
of Kronos shares are taxable to NL. NL recognized a taxable gain equal to the
difference between the fair market value of the Kronos shares distributed on
the
various dates of distribution and NL's adjusted tax basis in the shares at
the
dates of distribution. The amount of the tax liability related to the Kronos
shares distributed to NL shareholders, other than us, was approximately $2.5
million in 2004 and $664,000 in 2005, and we recognized these amounts as a
component of our consolidated provision for income taxes in those years. Other
than our recognition of these NL tax liabilities, the completion of the 2004
and
2005 quarterly distributions of Kronos common stock had no other impact on
our
consolidated financial position, results of operations or cash
flows.
The
amount of NL's separate tax liability with respect to
the shares of Kronos distributed to us, while recognized by NL at its
separate company level, is not recognized in our
Consolidated Financial Statements because the separate tax
liability is eliminated at the Valhi level because we and NL are both members
of
the Contran Tax Group. With respect to such shares of Kronos
distributed to us, effective December 1, 2003, we and NL amended the
terms of our tax sharing agreement to not require NL to pay up to us the
separate tax liability generated from the distribution
of such Kronos shares to us. On November 30, 2004 we agreed to
further amend the terms of our tax sharing agreement with NL to provide that
NL
would now pay us the separate tax liability generated from the distribution
of
shares of Kronos common stock to us, including the tax related to the shares
distributed to us in December 2003 and the tax related to the shares distributed
to us during all of 2004. In determining to amend the terms of the tax
sharing agreement we considered, among other things, our changed expectation
for
the generation of taxable income at the NL level as a result of the inclusion
of
CompX in NL’s consolidated taxable income effective in the fourth quarter of
2004, as discussed in Note 1. We further agreed that in lieu of a cash
income tax payment, such separate tax liability could be paid by NL in the
form
of Kronos common stock held by NL. The tax liability related to the Kronos
shares distributed to us in December 2003 and all of 2004, including the tax
liability resulting from the use of Kronos common stock to settle this
liability, was approximately $227 million. Accordingly, in the fourth
quarter of 2004 NL transferred approximately 5.5 million shares of Kronos common
stock to us to satisfy this liability. In agreeing to settle such tax
liability with such 5.5 million shares of Kronos common stock, the Kronos shares
were valued at an agreed-upon price of $41 per share. Kronos'
average closing market prices during the months of
November and December 2004 were $41.53 and
$41.77, respectively. In agreeing to the share price, NL also
considered the fact that Kronos common stock held by non-affiliates is very
thinly traded, and consequently an average price over a period of days mitigates
the effect of the thinly-traded nature of Kronos’ common stock. The
transfer of the 5.5 million shares of Kronos common stock, which in accordance
with GAAP we accounted for as a transfer of net assets among entities under
common control at carryover basis, had no effect on our Consolidated Financial
Statements. The tax liability related to the Kronos shares distributed to
us in the first quarter of 2005 aggregated $3.3 million, and NL paid this tax
liability to us in cash. To date we have not paid the $230 million tax
liability to Contran because Contran has not paid the liability to the
applicable tax authority. The income tax liability will become payable to
Contran, and by Contran to the applicable tax authority, when the shares of
Kronos transferred or distributed by NL to us are sold or otherwise transferred
outside the Contran Tax Group or in the event of certain restructuring
transactions involving us. We have recognized deferred income taxes for
our investment in Kronos common stock, and, in accordance with GAAP, the amount
of the deferred income taxes we have recognized ($200 million at December 31,
2006) is limited to this $230 million tax liability.
During
2004, 2005 and 2006, we purchased an aggregate of 1.8 million shares of Kronos
common stock in market transactions for $49.5 million. During 2004 and 2005,
we
sold an aggregate of 534,000 shares of Kronos common stock in market
transactions for proceeds of $21.9 million.
We
recognized pre-tax gains related to the reduction of our ownership interest
in
Kronos related to these sales ($2.2 million in 2004 and $14.7 million in 2005).
See Note 15.
During
2004, we acquired additional shares of Kronos’ majority-owned subsidiary in
France for approximately $575,000. See Note 13.
TIMET. At
the
beginning of 2004, we owned 41% of TIMET’s outstanding common stock directly and
through a wholly-owned subsidiary. Our ownership of TIMET was reduced to 35%
by
December 31, 2006 due to stock option exercises by TIMET employees and the
conversion of shares of TIMET’s convertible preferred stock into TIMET common
stock, offset in part by our purchase of an aggregate of 6.0 million shares
of
TIMET common stock (as adjusted for certain TIMET stock splits discussed in
Note
7) in market transactions during 2005 and 2006 for an aggregate of $36.7
million. During 2004, we exchanged certain TIMET convertible debt securities
we
had previously purchased into TIMET preferred stock. See Notes 7 and
23.
CompX
International Inc. At
the
beginning of 2004, we owned 69% of CompX’s common stock. Prior to September
2004, our ownership interest in CompX was reduced to 68% due to stock option
exercises by CompX employees. On September 24, 2004, NL completed the
acquisition of our CompX shares at a purchase price of $16.25 per share, or
an
aggregate of $168.6 million. NL paid the purchase price by transferring to
us an
equivalent portion of Kronos’ $200 million long-term note receivable held by NL
(this long-term note was eliminated in the preparation of our Consolidated
Financial Statements). The acquisition was approved by a special committee
of
NL’s board of directors comprised of its independent directors. The special
committee retained their own legal and financial advisors who rendered an
opinion to the special committee that the purchase price was fair, from a
financial point of view, to NL. In accordance with GAAP, we accounted for NL’s
acquisition of our CompX shares as a transfer of net assets among entities
under
common control at carryover basis, and therefore the transaction had no effect
on our Consolidated Financial Statements.
Effective
October 1, 2004, NL and TIMET contributed shares of CompX common stock
representing 68% and 15%, respectively, of CompX’s outstanding common stock to
newly-formed CompX Group in return for their 82.4% and 17.6%, respectively,
ownership interests in CompX Group. CompX Group became the owner of the 83%
of
CompX that NL and TIMET had previously owned in the aggregate. These CompX
shares are the sole asset of CompX Group. CompX Group recorded the shares of
CompX it received from NL at NL’s carryover basis. The CompX shares contributed
by TIMET are excluded from our consolidated investment in CompX because we
do
not consolidate TIMET. See Note 2. During 2005 and 2006, NL purchased an
aggregate of 381,000 shares of CompX common stock in market transactions for
approximately $6.0 million, increasing our ownership of CompX to 70% at December
31, 2006.
In
August
2005, CompX completed the acquisition of a marine components products business
for cash consideration of $7.3 million, net of cash acquired, and in
April
2006 CompX completed the acquisition of another marine component products
business for cash consideration of $9.8 million, net of cash acquired. We
completed these acquisitions to expand the marine component products business
unit of CompX. We have included the results of operations and cash flows of
the
acquired businesses in our Component Products Segment of the Consolidated
Financial Statements from the respective dates of acquisition. The purchase
prices have been allocated among the tangible and intangible net assets acquired
based upon an estimate of the fair value of such net assets. The pro forma
effect to us, assuming these acquisitions had been completed as of January
1,
2005, is not material.
Waste
Control Specialists LLC. In
1995,
we acquired a 50% interest in newly-formed Waste Control Specialists LLC. Our
ownership of WCS is held through a wholly-owned subsidiary. We contributed
$25
million to WCS at various dates through early 1997 for our 50% interest. From
1997 through 2000 we contributed an additional aggregate $50 million to WCS’s
equity, thereby increasing our membership interest from 50% to 90%. A
substantial portion of the equity contributions was used by WCS to reduce the
then-outstanding balance of its revolving intercompany borrowings from us.
At
formation in 1995, the other owner of WCS, KNB Holdings, Ltd., contributed
certain assets, primarily land and certain operating permits for the facility
site and WCS also assumed certain indebtedness of KNB Holdings. In 1995, the
KNB
Holdings liabilities assumed by WCS exceeded the carrying value of the assets
they contributed. Accordingly, all of WCS’s cumulative net losses to date have
accrued to us for financial reporting purposes. See Note 13.
We
previously loaned approximately $1.5 million to an individual who controlled
KNB
Holdings, which was collateralized by KNB Holdings’ subordinated 10% membership
interest in WCS. During 2004, we entered into an agreement with KNB Holdings
in
which, among other things, we acquired the remaining 10% ownership interest
in
WCS and the outstanding balance of the loan ($2.5 million, including accrued
and
unpaid interest), was cancelled. As a result, WCS became our wholly owned
subsidiary.
Note
4 - Marketable
securities:
|
|
December
31,
|
|
|
|
2005
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Current
assets (available-for-sale):
|
|
|
|
|
|
|
|
Restricted
debt securities
|
|
$
|
9,265
|
|
$
|
9,989
|
|
Other
debt securities
|
|
|
2,490
|
|
|
2,639
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,755
|
|
$
|
12,628
|
|
|
|
|
|
|
|
|
|
Noncurrent
assets (available-for-sale):
|
|
|
|
|
|
|
|
The
Amalgamated Sugar Company LLC
|
|
$
|
250,000
|
|
$
|
250,000
|
|
Restricted
debt securities
|
|
|
2,572
|
|
|
2,814
|
|
Other
debt securities and common stocks
|
|
|
6,133
|
|
|
6,209
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
258,705
|
|
$
|
259,023
|
|
Amalgamated
Sugar. Prior
to
2004, we transferred control of the refined sugar operations previously
conducted by our 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, we contributed substantially all of the net assets of our refined
sugar operations to 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 we transferred
to the LLC was approximately $34 million. When we transferred control of our
operations to Snake River in return of our interest in the LLC, we recognized
a
gain in earnings equal to the difference between $250 million (the fair value
of
our investment in the LLC as evidenced by its $250 million redemption price,
as
discussed below) and the $34 million cost basis of the net assets we contributed
to the LLC, net of applicable deferred income taxes. Therefore, the cost basis
of our investment in the LLC is $250 million. As part of this transaction,
Snake
River made certain loans to us aggregating $250 million. These loans are
collateralized by our interest in the LLC. Snake River's sources of funds for
its loans to us, as well as its $14 million contribution to the LLC in exchange
for its voting interest in the LLC, included cash contributions by the grower
members of Snake River and $180 million in debt financing we provided. We
collected $100 million of the $180 million prior to 2004 when Snake River
obtained an equal amount of third-party financing, and collected the remaining
$80 million during 2005 when Snake River obtained new third-party financing.
See
Notes 9 and 15.
We
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
us.
To the extent the LLC's distributions are below this base level in any given
year, we are entitled to an additional 95% preferential share of any future
annual LLC distributions in excess of the base level until the shortfall is
recovered. Under certain conditions, we are entitled to receive additional
cash
distributions from the LLC. At our option, we may require the LLC to redeem
our
interest in the LLC beginning in 2012, and the LLC has the right to redeem,
at
their option, our interest in the LLC beginning in 2027. The redemption price
is
generally $250 million plus the amount of certain undistributed income allocable
to us. If we redeem our interest in the LLC, Snake River has the right to
accelerate the maturity of and call our $250 million loans from Snake River.
See
Note 9.
The
LLC
Company Agreement contains certain restrictive covenants intended to protect
our
interest in the LLC, including limitations on capital expenditures and
additional indebtedness of the LLC. We also have the ability to temporarily
take
control of the LLC if our cumulative distributions from the LLC fall below
specified levels, subject to satisfaction of certain conditions imposed by
Snake
River’s current third-party senior lenders.
Prior
to
2004, Snake River agreed that the annual amount of (i) the distributions paid
by
the LLC to us plus (ii) the debt service payments paid by Snake River to us
on
our prior $80 million loan to Snake River would at least equal the annual amount
of interest payments we owe to Snake River on our $250 million loan. In 2005,
and following the complete repayment of our $80 million loan to Snake River,
Snake River agreed that the annual amount of distributions we receive from
the
LLC would exceed the annual amount of interest payments we owe to Snake River
on
our $250 million in loans from Snake River by at least $1.8 million. If we
receive less than the required minimum amount, certain agreements we previously
made with Snake River and the LLC, including a reduction in the amount of
cumulative distributions which we must receive from the LLC in order to prevent
us from becoming able to temporarily take control of the LLC, would
retroactively become null and void and we would be able to temporarily take
control of the LLC if we so desired. Through December 31, 2006, Snake River
and
the LLC maintained the applicable minimum required levels of cash flows to
us.
We
report
the cash distributions received from the LLC as dividend income. We recognize
distributions when they are declared by the LLC, which is generally the same
month we receive them, although in certain cases distributions may be paid
on
the first business day of the following month. See Note 15. The amount of such
future distributions we will receive from the LLC is dependent upon, among
other
things, the future performance of the LLC’s operations. Because we receive
preferential distributions from the LLC and we have the right to require the
LLC
to redeem our interest for a fixed and determinable amount beginning at a fixed
and determinable date, we account for our investment in the LLC as an
available-for-sale marketable security carried at estimated fair value. The
fair
value is the $250 million redemption price of our investment in the LLC. We
also
provide certain services to the LLC, as discussed in Note 17. We do not
expect to report a gain on the redemption at the time our LLC interest is
redeemed, as the redemption price of $250 million is expected to equal the
carrying value of our investment in the LLC at the time of
redemption.
Other. The
aggregate cost of the restricted and unrestricted debt securities and other
available-for-sale marketable securities approximates their net carrying value
at December 31, 2005 and 2006. During
2005 and 2006, we purchased other available-for-sale marketable securities
(primarily common stocks and debt securities) for an aggregate of $29.4 million
and $43.4 million, respectively, and subsequently sold a portion of such
securities for an aggregate of $19.7 million and $42.9 million, respectively,
which generated a net securities transaction gains of approximately $200,000
in
2005 and $700,000 in 2006. See
Note
15.
Note
5 - Accounts
and other receivables, net:
|
|
December
31,
|
|
|
|
2005
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
211,156
|
|
$
|
228,005
|
|
Notes
receivable
|
|
|
4,267
|
|
|
3,144
|
|
Accrued
interest and dividends receivable
|
|
|
6,158
|
|
|
91
|
|
Allowance
for doubtful accounts
|
|
|
(2,815
|
)
|
|
(2,972
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
218,766
|
|
$
|
228,268
|
|
Accrued
interest and dividends receivable at December 31, 2005 includes $6.0 million
of
distributions from the Amalgamated Sugar Company LLC declared in December 2005
but not paid to us until January 3, 2006. See Note 4.
Note
6 - Inventories,
net:
|
|
December
31,
|
|
|
|
2005
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Raw
materials:
|
|
|
|
|
|
|
|
Chemicals
|
|
$
|
52,343
|
|
$
|
46,087
|
|
Component
products
|
|
|
6,725
|
|
|
5,827
|
|
|
|
|
|
|
|
|
|
Total
raw materials
|
|
|
59,068
|
|
|
51,914
|
|
|
|
|
|
|
|
|
|
In-process
products:
|
|
|
|
|
|
|
|
Chemicals
|
|
|
17,959
|
|
|
25,650
|
|
Component
products
|
|
|
9,116
|
|
|
8,744
|
|
|
|
|
|
|
|
|
|
Total
in-process products
|
|
|
27,075
|
|
|
34,394
|
|
|
|
|
|
|
|
|
|
Finished
products:
|
|
|
|
|
|
|
|
Chemicals
|
|
|
150,675
|
|
|
168,438
|
|
Component
products
|
|
|
6,621
|
|
|
7,097
|
|
|
|
|
|
|
|
|
|
Total
finished products
|
|
|
157,296
|
|
|
175,535
|
|
|
|
|
|
|
|
|
|
Supplies
(primarily chemicals)
|
|
|
39,718
|
|
|
47,186
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
283,157
|
|
$
|
309,029
|
|
Note
7 - Other
assets:
|
|
December 31,
|
|
|
|
2005
|
|
2006
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Investment
in affiliates:
|
|
|
|
|
|
|
|
TIMET:
|
|
|
|
|
|
|
|
Common stock
|
|
$
|
138,677
|
|
$
|
264,119
|
|
Preferred stock
|
|
|
183
|
|
|
183
|
|
|
|
|
|
|
|
|
|
Total investment in TIMET
|
|
|
138,860
|
|
|
264,302
|
|
|
|
|
|
|
|
|
|
Ti02 manufacturing joint venture
|
|
|
115,308
|
|
|
113,613
|
|
Basic Management and Landwell
|
|
|
16,464
|
|
|
18,752
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
270,632
|
|
$
|
396,667
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
Waste disposal site operating permits, net
|
|
$
|
14,133
|
|
$
|
22,838
|
|
IBNR receivables
|
|
|
16,735
|
|
|
6,584
|
|
Deferred financing costs
|
|
|
8,278
|
|
|
9,173
|
|
Loans and other receivables
|
|
|
2,502
|
|
|
3,217
|
|
Restricted cash equivalents
|
|
|
382
|
|
|
409
|
|
Other
|
|
|
19,609
|
|
|
22,543
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
61,639
|
|
$
|
64,764
|
|
Investment
in TIMET. On
February 28, 2007 our Board of Directors declared a special dividend of all
of
the TIMET common stock we own. See Note 23. At December 31, 2006, we held an
aggregate of 56.6 million shares of TIMET with a quoted market price of $29.51
per share, or a market value of $1.7 billion (2005 - 56.0 million shares with
a
market value of $885.5 million). Our TIMET shares reflect the effects of a
five-for-one stock split TIMET implemented in 2004 and three separate
two-for-one splits TIMET implemented during 2005 and 2006.
Certain
selected financial information of TIMET is summarized below:
|
|
December
31,
|
|
|
|
2005
|
|
2006
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
550.3
|
|
$
|
757.6
|
|
Property and equipment
|
|
|
253.0
|
|
|
329.8
|
|
Marketable securities
|
|
|
46.5
|
|
|
56.8
|
|
Investment in joint ventures
|
|
|
26.0
|
|
|
.7
|
|
Other noncurrent assets
|
|
|
31.5
|
|
|
72.0
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
907.3
|
|
$
|
1,216.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
166.9
|
|
$
|
211.1
|
|
Accrued pension and postretirement benefits
|
|
|
74.0
|
|
|
80.2
|
|
Long-term debt
|
|
|
51.4
|
|
|
-
|
|
Other noncurrent liabilities
|
|
|
39.3
|
|
|
25.4
|
|
Minority interest
|
|
|
13.5
|
|
|
21.3
|
|
Stockholders’ equity
|
|
|
562.2
|
|
|
878.9
|
|
|
|
|
|
|
|
|
|
Total liabilities, minority interest and
stockholders’ equity
|
|
$
|
907.3
|
|
$
|
1,216.9
|
|
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
501.8
|
|
$
|
749.8
|
|
$
|
1,183.2
|
|
Cost
of sales
|
|
|
438.1
|
|
|
550.4
|
|
|
747.1
|
|
Operating
income
|
|
|
43.0
|
|
|
171.1
|
|
|
382.8
|
|
Net
income attributable to common stockholders
|
|
|
43.3
|
|
|
143.7
|
|
|
274.5
|
|
We
also
own 14,700 shares of TIMET Series A convertible preferred stock. Dividends
on
the Series A shares accumulate at the rate of 6 3/4% of their liquidation value
of $50 per share. The Series A shares are convertible into shares of TIMET
common stock at the rate of thirteen and one-third of a share of TIMET common
stock per Series A share. The Series A shares are not mandatorily redeemable,
but are redeemable at the option of TIMET in certain circumstances. At December
31, 2006, Mr. Simmons’ spouse held an additional 54% of such Series A
shares.
Investment
in TiO2
manufacturing joint venture. Our
Chemicals Segment and another Ti02
producer, Tioxide America, Inc. (”Tioxide”), are equal owners of a manufacturing
joint venture (Louisiana Pigment Company, L.P., or “LPC”) that owns and operates
a TiO2
plant in
Louisiana. Tioxide is a wholly-owned subsidiary of Huntsman Holdings
LLC.
We
and
Tioxide are both required to purchase one-half of the TiO2
produced
by LPC. LPC operates on a break-even basis, and consequently we have no
significant equity in earnings of LPC. Each owner's transfer price for its
share
of the TiO2
produced
is equal to its share of the joint venture's production costs and interest
expense, if any. Our share of the joint venture’s production costs are reported
as cost of sales as the related Ti02
acquired
from LPC is sold. We include the distributions from LPC, which generally relate
to excess cash from non-cash production costs, and contributions to LPC, which
generally relate to cash required by LPC when it builds working capital, in
cash
flows from operating activities in our Consolidated Statements of Cash Flows.
We
report distributions net of any contributions we made during the periods. Our
net distributions of $8.6 million in 2004, $4.9 million in 2005 and $2.3 million
in 2006 are stated net of contributions of $15.6 million in 2004, $10.1 million
in 2005 and $11.9 million in 2006.
Certain
selected financial information of LPC is summarized below:
|
|
December
31,
|
|
|
|
2005
|
|
2006
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
62.9
|
|
$
|
56.2
|
|
Property and equipment
|
|
|
200.4
|
|
|
192.6
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
263.3
|
|
$
|
248.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities, primarily current
|
|
$
|
29.9
|
|
$
|
18.8
|
|
Partners’ equity
|
|
|
233.4
|
|
|
230.0
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners’ equity
|
|
$
|
263.3
|
|
$
|
248.8
|
|
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
Kronos
|
|
$
|
104.8
|
|
$
|
109.4
|
|
$
|
124.1
|
|
Tioxide
|
|
|
105.5
|
|
|
110.4
|
|
|
125.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
210.0
|
|
|
219.6
|
|
|
249.3
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
On
September 22, 2005, LPC’s facility temporarily halted production due to
Hurricane Rita. Although storm damage to core processing facilities was not
extensive, a variety of factors, including loss of utilities, limited access
and
availability of employees and raw materials, prevented the resumption of partial
operations until October 9, 2005 and full operations until late 2005. The
majority of LPC’s property damage and unabsorbed fixed costs, for periods in
which normal production levels were not achieved, were covered by insurance,
and
insurance covered our lost profits (subject to applicable deductibles) resulting
from our share of the lost production at LPC. Both we and LPC filed claims
with
our insurers. We recognized income of $1.8 million related to our business
interruption claim in the fourth quarter of 2006, which is included in other
income on our Consolidated Statement of Income.
Investment
in Basic Management and Landwell. We
also
own a 32% interest in Basic Management, Inc., which, provides utility services
in the industrial park where one of TIMET's plants is located, among other
things. We also have 12% interest in The Landwell Company, which is actively
engaged in efforts to develop certain real estate. Basic Management owns an
additional 50% interest in Landwell. For federal income tax purposes Landwell
is
treated as a partnership, and accordingly the combined results of operations
of
Basic Management and Landwell include a provision for income taxes on Landwell's
earnings only to the extent that such earnings accrue to Basic Management.
We
record our equity in earnings of Basic Management and Landwell on a one-quarter
lag because their financial statements are generally not available to us on
a
timely basis. Certain selected combined financial information of Basic
Management and Landwell is summarized below.
|
|
September
30,
|
|
|
|
2005
|
|
2006
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
36.9
|
|
$
|
45.7
|
|
Property and equipment
|
|
|
12.7
|
|
|
11.7
|
|
Prepaid costs and expenses
|
|
|
5.4
|
|
|
5.0
|
|
Land and development costs
|
|
|
18.7
|
|
|
15.6
|
|
Notes and other receivables
|
|
|
3.7
|
|
|
2.8
|
|
Investment in undeveloped land and water rights
|
|
|
41.4
|
|
|
41.4
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
118.8
|
|
$
|
122.2
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
20.9
|
|
$
|
17.6
|
|
Long-term debt
|
|
|
22.7
|
|
|
20.3
|
|
Deferred income taxes
|
|
|
6.3
|
|
|
6.1
|
|
Other noncurrent liabilities
|
|
|
.8
|
|
|
1.3
|
|
Equity
|
|
|
68.1
|
|
|
76.9
|
|
|
|
|
|
|
|
|
|
Total liabilities, minority interest
and equity
|
|
$
|
118.8
|
|
$
|
122.2
|
|
|
|
Twelve
months ended September 30,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
27.5
|
|
$
|
30.4
|
|
$
|
31.4
|
|
Income
before income taxes
|
|
|
8.9
|
|
|
14.9
|
|
|
16.6
|
|
Net
income
|
|
|
3.3
|
|
|
12.8
|
|
|
13.5
|
|
Other.
We have
certain related party transactions with some of these affiliates, as more fully
described in Note 17.
The
IBNR
receivables relate to certain insurance liabilities, the risk of which we have
reinsured with certain third party insurance carriers. We report the insurance
liabilities which have been reinsured as part of noncurrent accrued insurance
claims and expenses. See Notes 10 and 17.
Note
8 - Goodwill and other intangible assets:
Goodwill.
Changes
in the carrying amount of goodwill during the past three years by operating
segment is presented in the table below.
|
|
Operating
segment
|
|
|
|
|
|
Chemicals
|
|
Component
Products
|
|
Total
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2003
|
|
$
|
331.3
|
|
$
|
46.3
|
|
$
|
377.6
|
|
Goodwill
acquired
|
|
|
8.4
|
|
|
-
|
|
|
8.4
|
|
Elimination
of deferred income taxes
|
|
|
-
|
|
|
(26.9
|
)
|
|
(26.9
|
)
|
Impairment
charge
|
|
|
-
|
|
|
(6.5
|
)
|
|
(6.5
|
)
|
Changes
in foreign exchange rates
|
|
|
-
|
|
|
1.5
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
|
|
339.7
|
|
|
14.4
|
|
|
354.1
|
|
Goodwill
acquired
|
|
|
1.3
|
|
|
8.0
|
|
|
9.3
|
|
Assets
sold
|
|
|
-
|
|
|
(1.4
|
)
|
|
(1.4
|
)
|
Changes
in foreign exchange rates
|
|
|
-
|
|
|
(.2
|
)
|
|
(.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
341.0
|
|
|
20.8
|
|
|
361.8
|
|
Goodwill
acquired during the year
|
|
|
17.6
|
|
|
5.6
|
|
|
23.2
|
|
Changes
in foreign exchange rates
|
|
|
-
|
|
|
.2
|
|
|
.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
$
|
358.6
|
|
$
|
26.6
|
|
$
|
385.2
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
is assigned to four of our reporting units. Substantially all of our goodwill
related to our Chemicals Segment was generated from our various step
acquisitions of NL and Kronos. Substantially all of the goodwill related to
the
Component Products Segment was generated from CompX's acquisitions of certain
business units. The Component Products Segment goodwill is assigned to the
three
reporting units within that operating segment: security products, furniture,
and
marine components. In accordance with SFAS No. 142 we test for goodwill
impairment at the reporting unit level. We use discounted cash flows to estimate
the fair value of the three Component Product Segment units. In determining
the
estimated fair value of our Chemicals Segment, we consider the quoted market
prices for Kronos’ common stock.
In
accordance with the requirements of SFAS No. 142, we review goodwill for each
of
our four reporting units for impairment during the third quarter of each year
or
when circumstances arise that indicate an impairment might be present. If the
fair value of an evaluated asset is less than its book value, the asset is
written down to fair value. Our 2004, 2005 and 2006 annual impairment reviews
of
goodwill indicated no impairments. However, we recognized a $6.5 million
goodwill impairment in 2004 in connection with CompX’s sale of its European
Operations. See Note 16.
Prior
to
October 2004 CompX was not a member of the Contran Tax Group, and we provided
deferred income taxes on our investment in CompX. When CompX became a member
of
the Contran Tax Group in October 2004, we were no longer required to recognize
such deferred income taxes, therefore, we eliminated a net $26.9 million
deferred tax liability that we had previously recorded through a reduction
in
goodwill at December 31, 2004.
Other
intangible assets.
|
|
December
31,
|
|
|
|
2005
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived
customer list intangible asset
|
|
$
|
1,298
|
|
$
|
1,343
|
|
Patents
and other intangible assets
|
|
|
2,134
|
|
|
2,562
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,432
|
|
$
|
3,916
|
|
Accumulated
amortization expense was $3.5 million and $4.2 million at December 31, 2005
and
2006, respectively. Estimated aggregate intangible asset amortization
expense for the next five years is as follows:
|
|
|
2007
|
|
$800,000
|
2008
|
|
800,000
|
2009
|
|
450,000
|
2010
|
|
450,000
|
2011
|
|
450,000
|
|
|
|
Note
9 - Long-term
debt:
|
|
December
31,
|
|
|
|
2005
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Valhi
- Snake River Sugar Company
|
|
$
|
250,000
|
|
$
|
250,000
|
|
|
|
|
|
|
|
|
|
Subsidiary
debt:
|
|
|
|
|
|
|
|
Kronos International:
|
|
|
|
|
|
|
|
6.5% Senior Secured Notes
|
|
|
-
|
|
|
525,003
|
|
8.875% Senior Secured Notes
|
|
|
449,298
|
|
|
-
|
|
Kronos U.S. bank credit facility
|
|
|
11,500
|
|
|
6,450
|
|
Other
|
|
|
6,637
|
|
|
5,135
|
|
|
|
|
|
|
|
|
|
Total subsidiary debt
|
|
|
467,435
|
|
|
536,588
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
717,435
|
|
|
786,588
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
1,615
|
|
|
1,242
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
715,820
|
|
$
|
785,346
|
|
Valhi.
Our $250
million in loans from Snake River Sugar Company are collateralized by our
interest in The Amalgamated Sugar Company LLC. The loans bear interest at a
weighted average fixed interest rate of 9.4% and are due in January 2027. At
December 31, 2006, $37.5 million of the loans are recourse to us and the
remaining $212.5 million is nonrecourse to us. Under certain conditions, Snake
River has the ability to accelerate the maturity of these loans. See Note
4.
We
have a
$100 million revolving bank credit facility which matures in October 2007,
generally bears interest at LIBOR plus 1.5% (for LIBOR-based borrowings) or
prime (for prime-based borrowings), and is collateralized by 15 million shares
of Kronos common stock we own. The agreement limits our ability to pay dividends
and incur additional indebtedness and contains other provisions customary in
lending transactions of this type. In the event of a change of control, as
defined in the agreement, the lenders have the right to accelerate the maturity
of the facility. The maximum amount we may borrow under the facility is limited
to one-third of the market value of the Kronos common stock we have pledged
as
collateral. Based on Kronos’ December 31, 2006 closing market price of $32.56
per share, the Kronos common stock pledged under the facility provides
sufficient collateral for the full amount of the facility. The market value
of
Kronos common stock would have to fall below $20 per share before the borrowing
capacity under the facility would be reduced. At December 31, 2006, there were
no borrowings outstanding under the facility and $1.7 million of letters of
credit outstanding under the facility. At December 31, 2006 $98.3 million was
available for borrowings under the facility.
Kronos
and its subsidiaries. In
April
2006, we issued euro 400 million principal amount of 6.5% Senior Secured Notes
due 2013 at 99.306% of the principal amount ($498.5 million when issued). We
collateralized the 6.5% Notes with a pledge of 65% of the common stock or other
ownership interests of certain of our first-tier European operating
subsidiaries: Kronos Titan GmbH, Kronos Denmark ApS, Kronos Limited and Societe
Industrielle Du Titane, S.A. We issued the 6.5% Notes pursuant to an indenture
which contains a number of covenants and restrictions which, among other things,
restricts our ability to incur additional debt, incur liens, pay dividends
or
merge or consolidate with, or sell or transfer all or substantially all of
Kronos’ European assets to, another entity. At our option, we may redeem the
6.5% notes on or after October 15, 2009 at redemption prices ranging from
103.25% of the principal amount, declining to 100% on or after October 15,
2012.
In addition, on or before April 15, 2009, KII may redeem up to 35% of the Notes
with the net proceeds of a qualified public equity offering at 106.5% of the
principal amount. In the event of a change of control of KII, as defined in
the
agreement, KII would be required to make an offer to purchase its Notes at
101%
of the principal amount. KII would also be required to make an offer t purchase
a specified portion of its Notes at par value in the event KII generates a
certain amount of net proceeds form the sale of assets outside the ordinary
course of business, and such net proceeds are not otherwise used for specified
purposes within a specified time period. At December 31, 2006, the estimated
market price of the 6.5% Notes was approximately euro 970 per euro 1,000
principal amount, and the carrying amount of the 6.5% Notes includes euro 2.5
million ($3.4 million) of unamortized original issue discount.
In
May
2006, we used the net proceeds from the 6.5% Notes to redeem our existing 8.875%
Senior Secured Notes at 104.437%% of the aggregate principal amount of euro
375
million for an aggregate of $491.4 million, including the $20.9 million call
premium. We recognized a $22.3 million pre-tax interest charge in 2006 related
to the prepayment of the 8.875% Notes, consisting of the call premium on the
8.875% Notes and the write-off of deferred financing costs and unamortized
premium related to the notes.
Our
Chemicals Segment’s operating subsidiaries in Germany, Belgium, Norway and
Denmark have a euro 80 million secured revolving bank credit facility that
matures in June 2008. We may denominate borrowings in euros, Norwegian kroners
or U.S. dollars. Outstanding borrowings bear interest at the applicable
interbank market rate plus 1.125%. We may also issue up to euro 5 million
letters of credit. The facility is collateralized by the accounts receivable
and
inventories of the borrowers, plus a limited pledge of all of the other assets
of the Belgian borrower. This facility contains certain restrictive covenants
that, among other things, restricts our ability to incur additional debt, incur
liens, pay dividends or merge or consolidate with, or sell or transfer all
or
substantially all of the assets of the borrowers to, another entity. At December
31, 2006, there were no outstanding borrowings and the equivalent of $105.6
million was available for borrowings under the facility.
Our
Chemicals Segment has a $50 million U.S. revolving credit facility that matures
in September 2008. This facility is collateralized by our U.S. accounts
receivable, inventories and certain fixed assets. We are limited to borrowing
the lesser of $45 million or a formula-determined amount based upon the accounts
receivable and inventories that have been pledged. Borrowings bear interest
at
either the prime rate or rates based upon the eurodollar rate (8.25% at December
31, 2006). The facility contains certain restrictive covenants which, among
other things, restrict our ability to incur debt, incur liens, pay dividends
in
certain circumstances, sell assets or enter into mergers. At December 31, 2006,
$6.5 million was outstanding and $38.5 million was available for borrowings
under the facility.
Our
Chemicals Segment also has a Cdn. $30 million Canadian revolving credit facility
that matures in January 2009. This facility is collateralized by our Canadian
accounts receivable and inventories. We are limited to borrowing the lesser
of
Cdn. $26 million or a formula-determined amount based upon the accounts
receivable and inventories that have been pledged. Borrowings bear interest
at
rates based upon either the Canadian prime rate, the U.S. prime rate or LIBOR
(6.75% at December 31, 2006). The facility contains certain restrictive
covenants that, among other things, restrict our ability to incur additional
debt, incur liens, pay dividends in certain circumstances, sell assets or enter
into mergers. At December 31, 2006, no amounts were outstanding and the
equivalent of $16.1 million was available for borrowings under the facility.
Under
the
cross-default provisions of the 6.5% Notes, the 6.5% Notes may be accelerated
prior to their stated maturity if Kronos’ European subsidiaries default under
any other indebtedness in excess of $20 million due to a failure to pay the
other indebtedness at its due date (including any due date that arises prior
to
the stated maturity as a result of a default under the other indebtedness).
Under the cross-default provisions of the European revolving credit facility,
any outstanding borrowings under the facility may be accelerated prior to their
stated maturity if the borrowers or their parent company default under any
other
indebtedness in excess of euro 5 million due to a failure to pay the other
indebtedness at its due date (including any due date that arises prior to the
stated maturity as a result of a default under the other indebtedness). Under
the cross-default provisions of the U.S. revolving credit facility, any
outstanding borrowing under the facility may be accelerated prior to their
stated maturity in the event of the bankruptcy of Kronos. The Canadian revolving
credit facility contains no cross-default provisions. The European, U.S. and
Canadian revolving credit facilities each contain provisions that allow the
lender to accelerate the maturity of the applicable facility in the event of
a
change of control, as defined in the agreement, of the applicable borrower.
In
the event any of these cross-default or change-of-control provisions become
applicable, and the indebtedness is accelerated, we would be required to repay
the indebtedness prior to their stated maturity.
CompX. At
December 31, 2006, our Component Products Segment had a $50.0 million secured
revolving bank credit facility that matures in January 2009 and bears interest,
at our option, at rates based either on the prime rate or LIBOR. The facility
is
collateralized of 65% of the ownership interests in CompX’s first-tier foreign
subsidiaries. The facility contains certain covenants and restrictions customary
in lending transactions of this type which, among other things, restricts our
ability to incur additional debt, incur liens, pay dividends or merge or
consolidate with, or transfer all or substantially all of CompX’s assets, to
another entity. The facility also requires maintenance of specified levels
of
net worth (as defined in the agreement). The facility also requires CompX
maintain specified levels of net worth (as defined in the agreement). In the
event of a change of control of CompX, as defined in the agreement, the lenders
have the right to accelerate the maturity of the facility. At December 31,
2006,
we had no outstanding borrowings and the full $50 million was available for
borrowings under the facility.
Aggregate
maturities of long-term debt at December 31, 2006
Years
ending December 31,
|
|
Amount
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
2007
|
|
$
|
1,242
|
|
2008
|
|
|
7,383
|
|
2009
|
|
|
954
|
|
2010
|
|
|
986
|
|
2011
|
|
|
1,020
|
|
2012
and thereafter
|
|
|
775,003
|
|
|
|
|
|
|
Total
|
|
$
|
786,588
|
|
|
|
|
|
|
Restrictions. Certain
of the credit facilities described above require the borrower to maintain
minimum levels of equity, require the maintenance of certain financial ratios,
limit dividends and additional indebtedness and contain other provisions and
restrictive covenants customary in lending transactions of this type. At
December 31, 2006, none of the net assets of Valhi’s consolidated subsidiaries
were restricted.
At
December 31, 2006, amounts available for the payment of Valhi dividends pursuant
to the terms of our Valhi’s revolving bank credit facility aggregated $.10 per
Valhi share outstanding per quarter, plus an additional $164.1 million. Any
purchases of treasury stock after December 31, 2006 would reduce this
amount.
Note
10 - Accrued liabilities:
|
|
December
31,
|
|
|
|
2005
|
|
2006
|
|
|
|
(As
adjusted)
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
Employee
benefits
|
|
$
|
48,341
|
|
$
|
37,391
|
|
Environmental
costs
|
|
|
16,565
|
|
|
13,585
|
|
Deferred
income
|
|
|
5,101
|
|
|
4,908
|
|
Interest
|
|
|
1,067
|
|
|
7,621
|
|
Other
|
|
|
54,457
|
|
|
56,226
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
125,531
|
|
$
|
119,731
|
|
|
|
|
|
|
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
Insurance
claims and expenses
|
|
$
|
24,257
|
|
$
|
13,929
|
|
Employee
benefits
|
|
|
4,998
|
|
|
7,147
|
|
Deferred
income
|
|
|
573
|
|
|
452
|
|
Other
|
|
|
9,500
|
|
|
6,503
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
39,328
|
|
$
|
28,031
|
|
The
risks
associated with certain of our accrued insurance claims and expenses have been
reinsured, and the related IBNR receivables are recognized as noncurrent assets
to the extent the related liability is classified as a noncurrent liability.
See
Note 7.
Note
11 - Employee benefit plans:
Defined
contribution plans. We maintain
various defined contribution pension plans for our employees worldwide. Defined
contribution plan expense approximated $2 million in 2004
and
$3 million in each of 2005 and 2006.
Defined
benefit plans. Kronos,
NL and one of our former business units sponsor various defined benefit pension
plans worldwide. Kronos
and NL use a September 30th
measurement date for their defined benefit pension plans, and the former
business unit uses a December 31st
measurement date. The benefits under our defined benefit plans are based upon
years of service and employee compensation. Our funding policy is to contribute
annually the minimum amount required under ERISA (or equivalent foreign)
regulations plus additional amounts as we deem appropriate.
We
expect
to contribute the equivalent of $22.4 million to all of our defined benefit
pension plans during 2007. Benefit payments to plan participants out of plan
assets are expected to be the equivalent of:
|
|
|
2007
|
|
$ 26.3
million
|
2008
|
|
26.3 million
|
2009
|
|
23.6
million
|
2010
|
|
24.1
million
|
2011
|
|
24.7 million
|
Next
5 years
|
|
138.1 million
|
The
funded status of our defined benefit pension plans is presented in the table
below.
|
|
Years
ended December 31,
|
|
|
|
2005
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Change
in projected benefit obligations ("PBO"):
|
|
|
|
|
|
|
|
Balance
at beginning of the year
|
|
$
|
454,911
|
|
$
|
520,534
|
|
Service cost
|
|
|
7,373
|
|
|
7,759
|
|
Interest cost
|
|
|
22,589
|
|
|
23,794
|
|
Participants’ contributions
|
|
|
1,538
|
|
|
1,515
|
|
Actuarial losses (gains)
|
|
|
101,416
|
|
|
(19,845
|
)
|
Change in foreign currency exchange rates
|
|
|
(42,292
|
)
|
|
40,354
|
|
Benefits paid
|
|
|
(25,001
|
)
|
|
(26,221
|
)
|
|
|
|
|
|
|
|
|
Balance
at end of the year
|
|
$
|
520,534
|
|
$
|
547,890
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
Fair value
at beginning of the year
|
|
$
|
311,898
|
|
$
|
338,149
|
|
Actual return on plan assets
|
|
|
54,083
|
|
|
36,697
|
|
Employer contributions
|
|
|
19,244
|
|
|
28,118
|
|
Participants’ contributions
|
|
|
1,538
|
|
|
1,515
|
|
Change in foreign currency exchange rates
|
|
|
(23,613
|
)
|
|
20,776
|
|
Benefits paid
|
|
|
(25,001
|
)
|
|
(26,221
|
)
|
|
|
|
|
|
|
|
|
Fair value
at end of year
|
|
$
|
338,149
|
|
$
|
399,034
|
|
|
|
|
|
|
|
|
|
Accumulated
benefit obligations (“ABO”)
|
|
$
|
481,964
|
|
$
|
488,039
|
|
|
|
|
|
|
|
|
|
Funded status:
|
|
|
|
|
|
|
|
Plan assets under
projected benefit
obligations
|
|
$
|
(182,385
|
)
|
$
|
(148,856
|
)
|
Unrecognized:
|
|
|
|
|
|
|
|
Actuarial losses
|
|
|
194,783
|
|
|
169,535
|
|
Prior service cost
|
|
|
7,441
|
|
|
7,415
|
|
Net transition obligations
|
|
|
4,603
|
|
|
4,311
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,442
|
|
$
|
32,405
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the Consolidated
Balance Sheets:
|
|
|
|
|
|
|
|
Unrecognized net pension obligations
|
|
$
|
11,916
|
|
$
|
-
|
|
Pension asset
|
|
|
3,529
|
|
|
40,108
|
|
Accrued pension costs:
|
|
|
|
|
|
|
|
Current
|
|
|
(12,756
|
)
|
|
(295
|
)
|
Noncurrent
|
|
|
(140,742
|
)
|
|
(188,669
|
)
|
Accumulated other comprehensive loss
|
|
|
162,495
|
|
|
181,261
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,442
|
|
$
|
32,405
|
|
The
amounts shown in the table above for unrecognized actuarial losses, prior
service cost and net transition obligations at December 31, 2005 and 2006 have
not been recognized as components of our periodic defined benefit pension cost
as of those dates. These amounts will be recognized as components of our
periodic defined benefit cost in future years. In accordance with SFAS No.
158, these amounts, net of deferred income taxes and minority interest, are
now
recognized in our accumulated other comprehensive income (loss) at December
31,
2006. We expect approximately $7.9 million, $600,000 and $500,000 of the
unrecognized actuarial losses, prior service cost and net transition
obligations, respectively, will be recognized as components of our periodic
defined benefit pension cost in 2007. See Note 19.
The
components of our net periodic defined benefit pension cost are presented in
the
tables below.
|
|
Years ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic pension cost:
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
6,758
|
|
$
|
7,373
|
|
$
|
7,759
|
|
Interest cost
|
|
|
22,219
|
|
|
22,589
|
|
|
23,794
|
|
Expected return on plan assets
|
|
|
(20,975
|
)
|
|
(22,223
|
)
|
|
(25,653
|
)
|
Amortization of prior service cost
|
|
|
502
|
|
|
597
|
|
|
603
|
|
Amortization of net transition obligations
|
|
|
657
|
|
|
350
|
|
|
364
|
|
Recognized actuarial losses
|
|
|
4,361
|
|
|
4,450
|
|
|
9,087
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,522
|
|
$
|
13,136
|
|
$
|
15,954
|
|
Certain
information concerning our defined benefit pension plans is presented in the
table below.
|
|
December
31,
|
|
|
|
2005
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Projected
benefit obligation at end of the year:
|
|
|
|
|
|
|
|
U.S.
plans
|
|
$
|
97,964
|
|
$
|
92,361
|
|
Foreign
plans
|
|
|
422,570
|
|
|
455,529
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
520,534
|
|
$
|
547,890
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at end of the year:
|
|
|
|
|
|
|
|
U.S.
plans
|
|
$
|
112,176
|
|
$
|
130,366
|
|
Foreign
plans
|
|
|
225,973
|
|
|
268,668
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
338,149
|
|
$
|
399,034
|
|
|
|
|
|
|
|
|
|
Plans
for which the accumulated benefit obligation
exceeds
plan assets:
|
|
|
|
|
|
|
|
Projected
benefit obligation
|
|
$
|
414,523
|
|
$
|
428,031
|
|
Accumulated
benefit obligation
|
|
|
376,967
|
|
|
372,662
|
|
Fair
value of plan assets
|
|
|
220,356
|
|
|
236,417
|
|
|
|
|
|
|
|
|
|
A
summary
of our key actual assumptions used to determine benefit obligations asset as
of
December 31, 2005 and 2006 was:
|
December
31,
|
Rate
|
2005
|
2006
|
|
|
|
Discount
rate
|
4.5%
|
4.8%
|
Increase
in future compensation levels
|
2.3%
|
2.5%
|
A
summary
of our key actuarial assumptions used to determine net periodic benefit cost
for
2004, 2005 and 2006 are as follows:
|
|
Years
ended December 31,
|
|
Rate
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
5.6
|
%
|
|
5.3
|
%
|
|
4.5
|
%
|
Increase
in future compensation levels
|
|
|
2.2
|
%
|
|
2.3
|
%
|
|
2.3
|
%
|
Long-term
return on plan assets
|
|
|
7.8
|
%
|
|
7.2
|
%
|
|
7.3
|
%
|
Variances
from actuarially assumed rates will result in increases or decreases in
accumulated pension obligations, pension expense and funding requirements in
future periods.
At
December 31, 2005 and 2006, substantially all of the projected benefit
obligations and plan assets attributable to our non-U.S. plans relate to plans
maintained by our Chemicals Segment, and all of the plans for which the ABO
exceeds the fair value of plan assets relate to our Chemicals Segment’s foreign
plans.
At
December 31, 2005 and 2006, substantially all of the assets attributable to
our
U.S. plans were invested in the Combined Master Retirement Trust (“CMRT”), a
collective investment trust sponsored by Contran to permit the collective
investment by certain master trusts which fund certain employee benefits plans
sponsored by Contran and certain of its affiliates.
The
CMRT’s long-term investment objective is to provide a rate of return exceeding a
composite of broad market equity and fixed income indices (including the S&P
500 and certain Russell indicies) while utilizing both third-party investment
managers as well as investments directed by Mr. Simmons. Mr. Simmons is the
sole
trustee of the CMRT. The trustee of the CMRT, along with the CMRT's investment
committee, of which Mr. Simmons is a member, actively manage the investments
of
the CMRT. The trustee and investment committee periodically change the asset
mix
of the CMRT based upon, among other things, advice they receive from third-party
advisors and their expectations as to what asset mix will generate the greatest
overall return. For the years ended December 31, 2004, 2005 and 2006, the
assumed long-term rate of return for plan assets invested in the CMRT was 10%.
In determining the appropriateness of the long-rate of return assumption, we
considered, among other things, the historical rates of return for the CMRT,
the
current and projected asset mix of the CMRT and the investment objectives of
the
CMRT's managers. During the history of the CMRT from its inception in 1987
through December 31, 2006, the average annual rate of return has been
approximately 14% (including a 36% return for 2005 and a 17% return in 2006).
At
December 31, 2006, the CMRT owned 10% of TIMET’s outstanding common stock and
.1% of our outstanding common stock. These shares are not reflected in our
Consolidated Financial Statements because we do not consolidate the
CMRT.
At
December 31, 2005 and 2006, plan assets attributable to our Chemicals Segment’s
foreign plans related primarily to Germany, Canada and Norway. In determining
the expected long-term rate of return on plan asset assumptions for our foreign
plans, we consider the long-term asset mix (e.g. equity vs. fixed income) for
the assets for each of our plans and the expected long-term rates of return
for
the asset components. In addition, we receive advice about appropriate long-term
rates of return from our third-party actuaries. The assumed asset mixes are
summarized below:
|
·
|
Germany
- the composition of our plan assets is established to satisfy the
requirements of the German insurance commissioner.
|
|
·
|
Canada
- we currently have a plan asset target allocation of 65% to equity
managers and 35% to fixed income managers. We expect the long term
rate of
return for such investments to average approximately 125 basis points
above the applicable equity or fixed income index.
|
|
·
|
Norway
- we currently have a plan asset target allocation of 14% to equity
managers and 65% to fixed income managers and the remainder to liquid
investments such as money markets. The expected long-term rate of
return
for such investments is approximately 8%, 4.5% to 5% and 4%, respectively.
|
Our
pension plan weighted average asset allocation by asset category were as
follows:
|
|
December
31,
2006
|
|
|
|
CMRT
|
|
Germany
|
|
Canada
|
|
Norway
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities and limited
partnerships
|
|
|
93
|
%
|
|
23
|
%
|
|
64
|
%
|
|
16
|
%
|
Fixed
income securities
|
|
|
3
|
|
|
48
|
|
|
32
|
|
|
62
|
|
Real
estate
|
|
|
-
|
|
|
29
|
|
|
-
|
|
|
|
|
Cash,
cash equivalents and other
|
|
|
4
|
|
|
-
|
|
|
4
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
December
31,
2006
|
|
|
|
CMRT
|
|
Germany
|
|
Canada
|
|
Norway
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities and limited
partnerships
|
|
|
97
|
%
|
|
23
|
%
|
|
66
|
%
|
|
13
|
%
|
Fixed
income securities
|
|
|
2
|
|
|
48
|
|
|
32
|
|
|
64
|
|
Real
estate
|
|
|
1
|
|
|
14
|
|
|
-
|
|
|
-
|
|
Cash,
cash equivalents and
Other
|
|
|
-
|
|
|
15
|
|
|
2
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
We
regularly review our actual asset allocation for each of our plans, and
periodically rebalance the investments in each plan to more accurately reflect
the targeted allocation when we consider it appropriate.
Postretirement
benefits other than pensions (“OPEB”). NL,
Kronos and Tremont provide certain health care and life insurance benefits
for
their eligible retired employees. Kronos,
NL and Tremont each use a December 31st
measurement date for their OPEB plans. We
have
no OPEB plan assets, rather, we fund benefit payments as they are paid.
At
December 31, 2006, we expect to contribute the equivalent of approximately
$3.9
million to all of our OPEB plans during 2007. Benefit payments to OPEB plan
participants are expected to be the equivalent of:
|
|
|
2007
|
|
$
3.9 million
|
2008
|
|
3.7 million
|
2009
|
|
3.6
million
|
2010
|
|
3.5
million
|
2011
|
|
3.4 million
|
Next
5 years
|
|
14.7 million
|
A
summary
of our key actuarial assumptions used to determine the net benefit obligation
as
of December 31, 2005 and 2006 follows:
|
2005
|
2006
|
|
|
|
Healthcare
inflation:
|
|
|
Initial
rate
|
8%
- 9%
|
7%
- 7.5%
|
Ultimate
rate
|
4%
- 5.5%
|
4%
- 5.5%
|
Year
of ultimate rate achievement
|
2010
|
2009
- 2010
|
Discount
rate
|
5.5%
|
5.8%
|
Assumed
health care cost trend rates have a significant effect on the amounts we report
for health care plans. A one percent change in assumed health care trend rates
would have the following effects:
|
|
1%
Increase
|
|
1%
Decrease
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Effect
on net OPEB cost during 2006
|
|
$
|
304
|
|
$
|
(193
|
)
|
Effect
at December 31, 2006 on
postretirement
obligation
|
|
|
3,111
|
|
|
(2,622
|
)
|
The
components of our periodic OPEB cost is presented in the table
below.
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic OPEB cost:
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
232
|
|
$
|
222
|
|
$
|
288
|
|
Interest cost
|
|
|
2,418
|
|
|
2,010
|
|
|
2,095
|
|
Amortization of prior service credit
|
|
|
(859
|
)
|
|
(925
|
)
|
|
(197
|
)
|
Recognized actuarial losses (gains)
|
|
|
192
|
|
|
(135
|
)
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,983
|
|
$
|
1,172
|
|
$
|
2,301
|
|
The
weighted average discount rate used in determining the net periodic OPEB cost
for 2006 was 5.5% (2005 - 5.7%; 2004 - 5.9%). The weighted average rate was
determined using the projected benefit obligations as of the beginning of each
year.
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
funded status of our OPEB plans is presented in the table below.
|
|
Years
ended December 31,
|
|
|
|
2005
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Actuarial
present value of accumulated OPEB
obligations:
|
|
|
|
|
|
|
|
Balance
at beginning of the year
|
|
$
|
36,603
|
|
$
|
35,996
|
|
Service cost
|
|
|
222
|
|
|
288
|
|
Interest cost
|
|
|
2,010
|
|
|
2,095
|
|
Actuarial losses
|
|
|
1,901
|
|
|
3,410
|
|
Change in foreign currency exchange rates
|
|
|
286
|
|
|
(3
|
)
|
Benefits paid from
employer contributions
|
|
|
(5,026
|
)
|
|
(4,355
|
)
|
|
|
|
|
|
|
|
|
Balance at end of the year
|
|
$
|
35,996
|
|
$
|
37,431
|
|
|
|
|
|
|
|
|
|
Funded status:
|
|
|
|
|
|
|
|
Projected
benefit obligations
|
|
$
|
(35,996
|
)
|
$
|
(37,431
|
)
|
Unrecognized:
|
|
|
|
|
|
|
|
Net actuarial losses
|
|
|
1,531
|
|
|
4,724
|
|
Prior service credit
|
|
|
(1,893
|
)
|
|
(1,581
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(36,358
|
)
|
$
|
(34,288
|
)
|
|
|
|
|
|
|
|
|
Accrued OPEB costs recognized in the Consolidated
Balance Sheets:
|
|
|
|
|
|
|
|
Current
|
|
$
|
(4,079
|
)
|
$
|
(3,783
|
)
|
Noncurrent
|
|
|
(32,279
|
)
|
|
(33,647
|
)
|
Accumulated
other comprehensive loss
|
|
|
-
|
|
|
3,142
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(36,358
|
)
|
$
|
(34,288
|
)
|
The
amounts shown in the table above for unrecognized actuarial losses and prior
service credit at December 31, 2005 and 2006 have not been recognized as
components of our periodic OPEB cost as of those dates. These amounts will
be
recognized as components of our periodic OPEB cost in future years. In
accordance with SFAS No. 158, these amounts, net of deferred income taxes and
minority interest, are now recognized in our accumulated other comprehensive
income (loss) at December 31, 2006. We expect to recognize approximately
$100,000 of the unrecognized actuarial losses and $185,000 of prior service
credit as components of our periodic OPEB cost in 2007. See Note 19.
The
Medicare Prescription Drug, Improvement and Modernization Act of 2003 provides
a
federal subsidy to sponsors of retiree health care benefit plans that provide
a
prescription drug benefit that is at least actuarially equivalent to Medicare
Part D. During 2004, we determined we were eligible for the federal subsidy.
We
account for the effect of this subsidy prospectively from the date we determined
actuarial equivalence. The subsidy did not have a material impact on the
applicable accumulated postretirement benefit obligation, and will not have
a
material impact on the net periodic OPEB cost going forward.
New
accounting standard.
We
account for our defined benefit pension plans using SFAS No. 87, Employer’s
Accounting for Pensions,
as
amended, and we account for our OPEB plans under SFAS No. 106, Employers
Accounting for Postretirement Benefits other than Pensions,
as
amended. As discussed in Note 19, we adopted SFAS No. 158 effective with
this filing. The adoption of SFAS No. 158, which further amended SFAS Nos.
87
and 106, had the following effects on our Consolidated Financial Statements
as
of December 31, 2006:
|
|
Before
application
of
SFAS
No.
158
|
|
Adjustments
|
|
After
application of SFAS
No.
158
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Current
deferred income tax asset
|
|
$
|
13,627
|
|
$
|
(3,017
|
)
|
$
|
10,610
|
|
Total
current assets
|
|
|
782,374
|
|
|
(3,017
|
)
|
|
779,357
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in affiliates
|
|
|
399,434
|
|
|
(2,767
|
)
|
|
396,667
|
|
Unrecognized
net pension
obligations
|
|
|
9,752
|
|
|
(9,752
|
)
|
|
-
|
|
Pension
asset
|
|
|
11,042
|
|
|
29,066
|
|
|
40,108
|
|
Noncurrent
deferred income
tax
asset
|
|
|
247,104
|
|
|
17,276
|
|
|
264,380
|
|
Total
other assets
|
|
|
1,380,225
|
|
|
33,823
|
|
|
1,414,048
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
2,773,920
|
|
|
30,806
|
|
|
2,804,726
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Current
accrued liabilities
|
|
|
131,321
|
|
|
(11,590
|
)
|
|
119,731
|
|
Current
deferred income taxes
|
|
|
674
|
|
|
1,536
|
|
|
2,210
|
|
Total
current liabilities
|
|
|
263,316
|
|
|
(10,054
|
)
|
|
253,262
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
accrued pension costs
|
|
|
123,635
|
|
|
65,034
|
|
|
188,669
|
|
Noncurrent
accrued OPEB costs
|
|
|
30,504
|
|
|
3,143
|
|
|
33,647
|
|
Noncurrent
deferred income taxes
|
|
|
487,762
|
|
|
(8,601
|
)
|
|
479,161
|
|
Total
noncurrent liabilities
|
|
|
1,501,413
|
|
|
59,576
|
|
|
1,560,989
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in net assets
of
subsidiaries
|
|
|
126,476
|
|
|
(2,780
|
)
|
|
123,696
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive
income
(loss):
|
|
|
|
|
|
|
|
|
|
|
Minimum
pension liability
|
|
|
(72,520
|
)
|
|
72,520
|
|
|
-
|
|
Defined
benefit pension plans
|
|
|
-
|
|
|
(85,013
|
)
|
|
(85,013
|
)
|
OPEB
plans
|
|
|
-
|
|
|
(3,443
|
)
|
|
(3,443
|
)
|
Total accumulated other
comprehensive income
|
|
|
(27,164
|
)
|
|
(15,936
|
)
|
|
(43,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
882,715
|
|
|
(15,936
|
)
|
|
866,779
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities, minority interest
and
stockholders’ equity
|
|
|
2,773,920
|
|
|
30,806
|
|
|
2,804,726
|
|
Note
12 - Income taxes:
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Components
of pre-tax income from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
85.0
|
|
$
|
80.1
|
|
$
|
151.4
|
|
Non-U.S. subsidiaries
|
|
|
(4.9
|
)
|
|
118.2
|
|
|
66.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
80.1
|
|
$
|
198.3
|
|
$
|
217.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected tax expense, at U.S.
federal statutory income tax rate of 35%
|
|
$
|
28.0
|
|
$
|
69.4
|
|
$
|
76.1
|
|
Non-U.S. tax rates
|
|
|
(.3
|
)
|
|
(.1
|
)
|
|
(2.1
|
)
|
Incremental U.S. tax and rate differences
on equity in earnings
|
|
|
92.9
|
|
|
23.6
|
|
|
18.4
|
|
Excess of book basis over tax basis of
shares of Kronos common stock sold
|
|
|
.2
|
|
|
1.9
|
|
|
-
|
|
Change
in German income tax attributes
|
|
|
-
|
|
|
17.5
|
|
|
(21.7
|
)
|
Income tax related
to distribution
of shares of Kronos
|
|
|
2.5
|
|
|
.7
|
|
|
-
|
|
Change in deferred income tax valuation
allowance, net
|
|
|
(311.8
|
)
|
|
-
|
|
|
|
|
Assessment (refund) of prior year income
taxes, net
|
|
|
(2.5
|
)
|
|
2.3
|
|
|
(1.4
|
)
|
U.S. state income taxes, net
|
|
|
1.0
|
|
|
4.3
|
|
|
2.9
|
|
Tax contingency reserve adjustment, net
|
|
|
(16.5
|
)
|
|
(19.1
|
)
|
|
(10.4
|
)
|
Nondeductible expenses
|
|
|
5.1
|
|
|
5.2
|
|
|
4.9
|
|
Canadian
tax rate change
|
|
|
-
|
|
|
-
|
|
|
(1.3
|
)
|
Other, net
|
|
|
7.6
|
|
|
(1.1
|
)
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
(benefit)
|
|
$
|
(193.8
|
)
|
$
|
104.6
|
|
$
|
63.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
Currently payable:
|
|
|
|
|
|
|
|
|
|
|
U.S. federal and state
|
|
$
|
.9
|
|
$
|
25.9
|
|
$
|
2.1
|
|
Non-U.S.
|
|
|
17.6
|
|
|
35.9
|
|
|
24.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
18.5
|
|
|
61.8
|
|
|
26.5
|
|
Deferred income taxes (benefit):
|
|
|
|
|
|
|
|
|
|
|
U.S. federal and state
|
|
|
69.3
|
|
|
20.8
|
|
|
71.3
|
|
Non-U.S.
|
|
|
(281.6
|
)
|
|
22.0
|
|
|
(34.0
|
)
|
Total
|
|
|
(212.3
|
)
|
|
42.8
|
|
|
37.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
(193.8
|
)
|
$
|
104.6
|
|
$
|
63.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive provision for
income taxes (benefit) allocable to:
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
(193.8
|
)
|
$
|
104.6
|
|
$
|
63.8
|
|
Discontinued operations
|
|
|
(4.6
|
)
|
|
(.4
|
)
|
|
-
|
|
Additional paid-in capital
|
|
|
-
|
|
|
.2
|
|
|
-
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
2.1
|
|
|
-
|
|
|
3.3
|
|
Currency translation
|
|
|
(8.2
|
)
|
|
(8.6
|
)
|
|
9.6
|
|
Defined
benefit pension plans
|
|
|
(6.9
|
)
|
|
(38.7
|
)
|
|
9.2
|
|
Adoption
of SFAS No. 158:
|
|
|
|
|
|
|
|
|
|
|
Defined
benefit pension plans
|
|
|
-
|
|
|
-
|
|
|
(19.6
|
)
|
OPEB
plans
|
|
|
-
|
|
|
-
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(211.4
|
)
|
$
|
57.1
|
|
$
|
64.6
|
|
The
components of the net deferred tax liability at December 31, 2005 and 2006,
and
changes in the deferred income tax valuation allowance during the past three
years, are summarized in the following tables.
|
|
December
31,
|
|
|
|
2005
|
|
2006
|
|
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
|
|
|
(As
adjusted)
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect of temporary differences
related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
3.0
|
|
$
|
(3.6
|
)
|
$
|
3.3
|
|
$
|
(2.6
|
)
|
Marketable securities
|
|
|
-
|
|
|
(106.9
|
)
|
|
-
|
|
|
(129.0
|
)
|
Property and equipment
|
|
|
26.4
|
|
|
(87.8
|
)
|
|
20.1
|
|
|
(81.3
|
)
|
Accrued OPEB costs
|
|
|
12.7
|
|
|
-
|
|
|
12.3
|
|
|
-
|
|
Pension
asset
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(49.7
|
)
|
Accrued
pension
|
|
|
55.5
|
|
|
(37.5
|
)
|
|
69.5
|
|
|
-
|
|
Accrued environmental liabilities and
other deductible differences
|
|
|
54.3
|
|
|
-
|
|
|
51.0
|
|
|
-
|
|
Other taxable differences
|
|
|
-
|
|
|
(88.4
|
)
|
|
-
|
|
|
(77.6
|
)
|
Investments in subsidiaries and
affiliates
|
|
|
-
|
|
|
(210.0
|
)
|
|
-
|
|
|
(268.1
|
)
|
Tax loss and tax credit carryforwards
|
|
|
199.4
|
|
|
-
|
|
|
245.7
|
|
|
-
|
|
Adjusted gross deferred tax assets
(liabilities)
|
|
|
351.3
|
|
|
(534.2
|
)
|
|
401.9
|
|
|
(608.3
|
)
|
Netting of items by tax jurisdiction
|
|
|
(127.1
|
)
|
|
127.1
|
|
|
(126.9
|
)
|
|
126.9
|
|
|
|
|
224.2
|
|
|
(407.1
|
)
|
|
275.0
|
|
|
(481.4
|
)
|
Less net current deferred tax asset
(liability)
|
|
|
10.5
|
|
|
(5.6
|
)
|
|
10.6
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net noncurrent deferred tax asset
(liability)
|
|
$
|
213.7
|
|
$
|
(401.5
|
)
|
$
|
264.4
|
|
$
|
(479.2
|
)
|
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in valuation allowance:
|
|
|
|
|
|
|
|
|
|
|
Recognition of certain deductible tax
attributes for which the benefit had not
previously been recognized under the
“more-likely-than-not” recognition criteria
|
|
$
|
(311.8
|
)
|
$
|
-
|
|
$
|
-
|
|
Foreign currency translation
|
|
|
(3.0
|
)
|
|
-
|
|
|
-
|
|
Offset to the change in gross deferred
income tax assets due principally to
redeterminations of certain tax attributes
and implementation of certain tax
planning strategies
|
|
|
121.0
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in
valuation
allowance
|
|
$
|
(193.8
|
)
|
$
|
-
|
|
$
|
-
|
|
In
June
2006, Canada enacted a 2% reduction in the Canadian federal income tax rate
and
the elimination of the federal surtax. The 2% reduction will be phased in from
2008 to 2010, and the federal surtax will be eliminated in 2008. As a result,
during 2006 we recognized a $1.3 million income tax benefit related to the
effect of such reduction on our previously-recorded net deferred income tax
liability with respect to Kronos’ and CompX’s operations in
Canada.
Due
to
the resolution of certain income tax audits in Germany, we also recognized
a
$21.7 million income tax benefit in 2006 primarily related to an increase in
the
amount of our German trade tax net operating loss carryforward. The
increase resulted from a reallocation of expenses between our German units
related to periods in which such units did not file on a consolidated basis
for
German trade tax purposes, with the net result that the amount of our German
trade tax carryforward recognized by the German tax authorities has
increased.
Principally
as a result of the withdrawal of tax assessments previously made by Belgian
and
Norwegian tax authorities and the resolution of our ongoing income tax audits
in
Germany, we recognized a $10.4 million income tax benefit in 2006 related to
the
total reduction in our income tax contingency reserve.
Due
to
the favorable resolution of certain income tax audits related to our German
and
Belgian operations during 2006, we recognized a net $1.4 million income tax
benefit related to adjustments of prior year income taxes.
During
2005, we reached an agreement in principle with the German tax authorities
regarding their objection to the value assigned to certain intellectual property
rights held by Kronos’ operating subsidiary in Germany. Under the agreement, the
value assigned to such intellectual property for German income tax purposes
was
reduced retroactively, resulting in a reduction in the amount of Kronos’ net
operating loss carryforwards in Germany as well as a future reduction in the
amount of amortization expense attributable to such intellectual property.
As a
result, we recognized a $17.5 million non-cash deferred income tax expense
in
2005 related to this agreement. The $19.1 million non-cash tax contingency
adjustment income tax benefit in 2005 relates primarily to the withdrawal or
reduction of tax assessments previously made by Belgian and Canadian tax
authorities, as well as favorable developments with respect to certain U.S.
income tax items.
Tax
authorities are continuing to examine certain of our foreign tax returns and
have or may propose tax deficiencies, including penalties and interest. We
cannot guarantee that these tax matters will be resolved in our favor due to
the
inherent uncertainties involved in settlement initiatives and court and tax
proceedings. We believe we have adequate accruals for additional taxes and
related interest expense which could ultimately result from tax examinations.
We
believe the ultimate disposition of tax examinations should not have a material
adverse effect on our consolidated financial position, results of operations
or
liquidity.
We
are
required to recognize a deferred income tax liability with respect to the
incremental U.S. taxes (federal and state) and foreign withholding taxes that
we
would incur when the undistributed earnings of our foreign subsidiaries are
subsequently repatriated, unless we have determined that those undistributed
earnings are permanently reinvested for the foreseeable future. We are also
required to reassess the permanent reinvestment conclusion on an ongoing basis
to determine if our intentions have changed. Prior to the third quarter of
2005,
we had not recognized a deferred tax liability related to such incremental
income taxes on the undistributed earnings of CompX’s foreign operations, as
those earnings were subject to specific permanent reinvestment plans. As of
September 30, 2005, and based primarily upon changes in CompX management’s
strategic plans for certain of their foreign operations, we determined that
the
undistributed earnings of these subsidiaries could no longer be considered
to be
permanently reinvested, except for the pre-2005 earnings of our Taiwanese
subsidiary. Accordingly, we recognized an aggregate $9.0 million provision
for
deferred income taxes on the aggregate undistributed earnings of these foreign
subsidiaries in 2005 when our reinvestment plans changed.
At
December 31, 2003, we had a significant amount of net operating loss
carryforwards for German corporate and trade tax purposes. These carryforwards
have no expiration date. Kronos generated these carryforwards principally during
the 1990’s when we had a significantly higher level of outstanding debt than we
currently have. At December 31, 2003, we had not recognized the benefit of
these
carryforwards for financial reporting purposes because we concluded they did
not
meet the more-likely-than-not recognition criteria. Therefore, we recognized
a
deferred income tax asset valuation allowance to completely offset the benefit
of these carryforwards and Kronos’ other tax attributes in Germany. During 2004,
and based on all available evidence, we concluded that the benefit of these
carryforwards and other German tax attributes now met the more-likely-than-not
recognition criteria and that reversal of the deferred income tax asset
valuation allowance related to Germany was appropriate. The aggregate amount
of
the valuation allowance related to Germany that we reversed during 2004 was
$280.7
million.
During
2004, we reached an agreement with the IRS concerning the settlement of a tax
assessment related to a restructuring transaction involving NL and EMS that
we
had previously undertaken. Under the agreement, we paid approximately $21
million, including interest, up front as a partial payment of the settlement
amount during 2005, and we are required to recognize the remaining settlement
amount in our taxable income over the 15-year period beginning in 2004. We
had
previously provided accruals to cover the estimated additional tax liability
and
related interest concerning this matter, and these accruals were higher than
the
amount of the settlement. As a result, we recognized a $17.4 million income
tax
benefit in 2004 as a result of the settlement. In addition, during 2004 we
recognized a $31.1 million tax benefit related to the reversal of a deferred
income tax asset valuation allowance related to certain tax attributes of EMS
which as a result of the settlement we concluded now met the
more-likely-than-not recognition criteria.
At
December 31, 2006, (i) Kronos had the equivalent of $701 million and $247
million of the net operating loss carryforwards for German corporate and trade
tax purposes, respectively, all of which have no expiration date, (ii) CompX
had
$1.2 million of U.S. net operating loss carryforwards expiring in 2007 through
2017 and
(iii)
Valhi had $57 million of U.S. net operating loss carryforwards expiring in
2021
through 2026.
At
December 31, 2006, the U.S. net operating loss carryforwards of CompX
are
limited in utilization to approximately $400,000 per year. In addition,
approximately $6 million of Valhi’s net operating loss carryforwards may only be
used to offset taxable income of NL and are not available to offset future
taxable income of other members of the Contran Tax Group.
Note
13 - Minority interest:
|
|
December
31,
|
|
|
|
2005
|
|
2006
|
|
|
|
(As
adjusted)
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Minority
interest in net assets:
|
|
|
|
|
|
|
|
NL
Industries
|
|
$
|
51,273
|
|
$
|
55,954
|
|
Kronos
Worldwide
|
|
|
28,347
|
|
|
22,285
|
|
CompX
International
|
|
|
45,630
|
|
|
45,416
|
|
Subsidiary
of Kronos
|
|
|
75
|
|
|
41
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
125,325
|
|
$
|
123,696
|
|
|
|
Years ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(As
adjusted)
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in net earnings -
continuing
operations:
|
|
|
|
|
|
|
|
|
|
|
NL
Industries
|
|
$
|
24,959
|
|
$
|
6,350
|
|
$
|
4,416
|
|
Kronos
Worldwide
|
|
|
19,711
|
|
|
4,911
|
|
|
4,058
|
|
CompX
International
|
|
|
2,993
|
|
|
290
|
|
|
3,468
|
|
Subsidiary
of NL
|
|
|
747
|
|
|
61
|
|
|
-
|
|
Subsidiary
of Kronos
|
|
|
53
|
|
|
12
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
48,463
|
|
$
|
11,624
|
|
$
|
11,951
|
|
Subsidiary
of NL. Minority
interest in NL's subsidiary related to NL's majority-owned environmental
management subsidiary, NL Environmental Management Services, Inc. ("EMS").
EMS
was established in 1998, at which time EMS contractually assumed certain of
NL's
environmental liabilities. EMS' earnings were based, in part, upon its ability
to favorably resolve these liabilities on an aggregate basis. NL continues
to
consolidate EMS and provides accruals for the reasonably estimable costs for
the
settlement of EMS' environmental liabilities, as discussed in Note 18.
In
June
2005, we received notices from the three minority shareholders of EMS indicating
they were each exercising their right, which became exercisable on June 1,
2005,
to require EMS to purchase their shares in EMS as of June 30, 2005 for a
formula-determined amount as provided in EMS’ certificate of incorporation. In
accordance with the certificate of incorporation, we made a determination in
good faith of the amount payable to the three former minority shareholders
to
purchase their shares of EMS stock. This amount may be subject to review by
a
third party. In June 2005, EMS set aside funds as payment for the shares of
EMS,
but as of December 31, 2006, the former minority shareholders have not tendered
their shares. Therefore, the liability owed to these former minority
shareholders has not been extinguished for financial reporting purposes as
of
December 31, 2006 and remains recognized as a current liability in our
Consolidated Financial Statements. We have similarly classified the funds which
have been set aside as a current asset.
Subsidiary
of Kronos.
Minority
interest in Kronos’ subsidiary relates to Kronos’ majority-owned subsidiary in
France, which conducts Kronos’ sales and marketing activities in that
country.
Note
14 - Stockholders' equity:
|
|
Shares
of common stock
|
|
|
|
Issued
|
|
Treasury
|
|
Outstanding
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2003
|
|
|
134,027
|
|
|
(13,841
|
)
|
|
120,186
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
25
|
|
|
-
|
|
|
25
|
|
Retired
|
|
|
(9,857
|
)
|
|
9,857
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
|
|
124,195
|
|
|
(3,984
|
)
|
|
120,211
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
65
|
|
|
-
|
|
|
65
|
|
Acquired
|
|
|
-
|
|
|
(3,512
|
)
|
|
(3,512
|
)
|
Retired
|
|
|
(3,512
|
)
|
|
3,512
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
120,748
|
|
|
(3,984
|
)
|
|
116,764
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
31
|
|
|
-
|
|
|
31
|
|
Acquired
|
|
|
-
|
|
|
(1,899
|
)
|
|
(1,899
|
)
|
Retired
|
|
|
(1,899
|
)
|
|
1,899
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
118,880
|
|
|
(3,984
|
)
|
|
114,896
|
|
The
shares of Valhi common stock issued during the past three years consist of
employee stock options exercises and stock awards issued annually to members
of
our board of directors.
Valhi
share repurchases and cancellations.
In 2005,
our board of directors authorized the repurchase of up to 5.0 million shares
of
our common stock in open market transactions, including block purchases, or
in
privately negotiated transactions, which may include transactions with our
affiliates or subsidiaries. In 2006, our board of directors authorized the
repurchase of an additional 5.0 million shares. We may purchase the stock 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, we may terminate the program prior to
completion. We will use cash on hand to acquire the shares. Repurchased shares
could be retired and cancelled or may be added to our treasury stock and used
for employee benefit plans, future acquisitions or other corporate purposes.
During 2005 and 2006, we purchased approximately 3.5 million and 1.9 million
shares, respectively, of our common stock pursuant to this repurchase program
in
market or other transactions for an aggregate of $62.1 million and $43.8
million, respectively. See Note 17.
During
2004, 2005 and 2006, we cancelled 9.9 million, 3.5 million and 1.9 million
of
our treasury shares, respectively, and
allocated their cost to common stock at par value, additional paid-in capital
and retained earnings.
These
cancellations had no impact on our net shares outstanding for financial
reporting purposes. Of the 9.9 million shares we cancelled in 2004, we held
8.9
million shares in treasury directly and one of our wholly-owned subsidiaries
held the remaining 1 million shares. During 2004, our subsidiary distributed
those 1 million shares to us prior to their cancellation. The 4.0 million shares
of treasury stock we report for financial reporting purposes at December 31,
2005 and 2006 represents our proportional interest in 4.7 million Valhi shares
held by NL. Under Delaware Corporation Law, 100% (and not the proportionate
interest) of a parent company's shares held by a majority-owned subsidiary
of
the parent is considered to be treasury stock. As a result, our common shares
outstanding for financial reporting purposes differ from those outstanding
for
legal purposes.
Valhi stock
options and restricted stock. We
have
an incentive stock option plan that provides for the discretionary grant of,
among other things, qualified incentive stock options, nonqualified stock
options, restricted common stock, stock awards and stock appreciation rights.
We
may issue up to 5 million shares of our common stock pursuant to this plan.
We
grant options at the fair market value on the date of grant. The options
generally vest ratably over a five-year period beginning one year from the
date
of grant and expire 10 years from the date of grant. If we grant restricted
stock, it is generally forfeitable unless certain periods of employment are
completed.
Our
outstanding options at December 31, 2006 represent less than 1% of our
outstanding shares and expire at various dates through 2013, with a
weighted-average remaining term of 2.2 years. At December 31, 2006, all of
our
outstanding options to purchase 637,000 shares were exercisable
at prices lower than the market price of our common stock at December 31, 2006
($25.98 per share).
At
December 31, 2006, these options have an aggregate amount payable upon exercise
of $6.8 million and an aggregate intrinsic value (defined as the excess of
the
market price of our common stock over the exercise price) of $9.7 million.
At
December 31, 2006, an additional 4.0
million shares were available for grant under the plan.
The
following table sets forth changes in outstanding options during the past three
years under all of our option plans in effect during such periods.
|
|
|
|
Amount
payable
upon
|
|
Exercise
price
per
|
|
Weighted
average
exercise
|
|
|
|
Shares
|
|
exercise
|
|
share
|
|
price
|
|
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2003
|
|
|
1,093
|
|
$
|
10,116
|
|
$
|
5.48-$12.45
|
|
$
|
9.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(20
|
)
|
|
(177
|
)
|
|
5.72-
12.00
|
|
|
8.85
|
|
Canceled
|
|
|
(198
|
)
|
|
(1,231
|
)
|
|
5.48-
12.45
|
|
|
6.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2004
|
|
|
875
|
|
|
8,708
|
|
|
6.38-
12.45
|
|
|
9.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(61
|
)
|
|
(648
|
)
|
|
6.38-
12.00
|
|
|
10.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2005
|
|
|
814
|
|
|
8,060
|
|
|
6.38-
12.45
|
|
|
9.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(29
|
)
|
|
(311
|
)
|
|
6.38-
12.06
|
|
|
10.61
|
|
Canceled
|
|
|
(148
|
)
|
|
(942
|
)
|
|
6.38
|
|
|
6.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
637
|
|
$
|
6,807
|
|
$
|
9.50-$12.45
|
|
$
|
10.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
intrinsic value of Valhi options exercised at the various dates of exercise
aggregated approximately $135,000 in 2004, $535,000 in 2005 and $413,000 in
2006, and the related income tax benefit from such exercises was approximately
$50,000 in 2004, $190,000 in 2005 and $145,000 in 2006.
Stock
option plans of subsidiaries and affiliate. Certain
of our subsidiaries and affiliates maintain plans which provide for the grant
of
options to purchase their common stocks. Provisions of these plans vary by
company. Outstanding options to purchase common stock of our subsidiaries and
affiliate at December 31, 2006 are summarized below. There are no outstanding
options to purchase Kronos common stock at December 31, 2006.
|
|
Shares
|
|
Exercise
price
per
share
|
|
Amount
payable
upon
exercise
|
|
|
|
(In
thousands, except
per
share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
NL
Industries
|
|
|
106
|
|
$
|
2.66
-$11.49
|
|
$
|
1,027
|
|
CompX
|
|
|
437
|
|
|
10.00
- 20.00
|
|
|
8,170
|
|
TIMET
|
|
|
326
|
|
|
.97
- 7.33
|
|
|
1,381
|
|
Other. Prior
to
and within six months of Contran’s 2005 sale to us of the 2.0 million shares of
our common stock described in Note 17, Contran purchased shares of our common
stock in market transactions. In settlement of any alleged short-swing profit
derived from these transactions as calculated pursuant to Section 16(b) of
the
Securities Exchange Act of 1934, as amended, Contran remitted approximately
$645,000 to us in 2005. We recorded this amount, net of $226,000 of related
income taxes, as a capital contribution, increasing our additional paid-in
capital.
Note
15 - Other
income, net:
|
|
Years ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
earnings:
|
|
|
|
|
|
|
|
|
|
|
Dividends
and interest
|
|
$
|
34,576
|
|
$
|
57,843
|
|
$
|
41,609
|
|
Securities
transactions, net
|
|
|
2,113
|
|
|
20,259
|
|
|
668
|
|
Write-off
of accrued interest
|
|
|
-
|
|
|
(21,638
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
36,689
|
|
|
56,464
|
|
|
42,277
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
dispute settlement
|
|
|
6,289
|
|
|
-
|
|
|
-
|
|
Insurance
recoveries
|
|
|
552
|
|
|
2,970
|
|
|
7,656
|
|
Currency
transactions, net
|
|
|
(3,764
|
)
|
|
5,163
|
|
|
(3,505
|
)
|
Disposal
of property and equipment, net
|
|
|
(855
|
)
|
|
(1,555
|
)
|
|
35,335
|
|
Other,
net
|
|
|
5,333
|
|
|
4,947
|
|
|
8,208
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
44,244
|
|
$
|
67,989
|
|
$
|
89,971
|
|
Dividends
and interest income includes distributions from The Amalgamated Sugar Company
LLC of $23.8 million in 2004, $45.0 million in 2005 and $31.1 million in 2006,
and interest income of $5.2 million in 2004 and $3.9 million in 2005 related
to
our loan to Snake River Sugar Company that was prepaid in October 2005. The
$21.6 million write-off of accrued interest receivable in 2005 relates to
accrued
interest on the prior loan that we forgave and cancelled when Snake River agreed
to prepay the loan in October 2005. Dividends
and interest income also includes interest of $1.5 million in 2004 of interest
on certain intercompany receivables of CompX related to its operations in The
Netherlands. The related interest expense on such intercompany indebtedness
is
included as a component of discontinued operations. See Note 16.
Net
securities transaction gains in 2005 relate primarily to (i) a $14.7 million
pre-tax gain from NL’s sale of approximately 470,000 shares of Kronos common
stock in market transactions for aggregate proceeds of $19.2 million and (ii)
a
$5.4 million pre-tax gain from Kronos’ sale of our passive interest in a
Norwegian smelting operation, which had a nominal carrying value for financial
reporting purposes, for aggregate consideration of approximately $5.4 million
consisting of cash of $3.5 million and inventories with a value of $1.9 million.
Net
securities transactions gains in 2004 includes a $2.2 million gain related
to
NL’s sale of shares of Kronos common stock in market transactions.
The
contract dispute settlement relates to Kronos’ settlement
with a customer. As part of the settlement, the customer agreed to make payments
to us through 2007 aggregating $7.3 million. The $6.3 million gain represents
the present value of the future payments to be paid by the customer to Kronos.
Of
such
$7.3 million, $1.5 million was paid to Kronos in 2004 and $1.75 million was
paid
in each of 2005 and 2006, with the remaining $2.25 million is due in 2007.
At
December 31, 2006, the present value of the remaining amount due to be paid
aggregated approximately $2.25 million and is included in current notes
receivable.
Insurance
recoveries in 2004, 2005 and 2006 relate to amounts NL has received from certain
of its former insurance carriers, and relate principally to recovery of prior
lead pigment litigation defense costs incurred by NL. We have an agreement
with a former insurance carrier in which the carrier will reimburse us for
a
portion of our past and future lead pigment litigation defense costs, and the
insurance recoveries in 2005 and 2006 include amounts we received from this
carrier. We are not able to determine how much we will ultimately recover
from the carrier for past defense costs incurred because the carrier has certain
discretion regarding which past defense costs qualify for reimbursement.
Insurance recoveries in 2004, 2005 and 2006 also include amounts we received
for
prior legal defense and indemnity coverage for certain environmental
expenditures. We do not expect to receive any further material insurance
settlements relating to environmental remediation matters. We recognize
insurance recoveries in income only when receipt of the recovery is probable
and
we are able to reasonably estimate the amount of the recovery.
In
2006
we sold certain land we own in Henderson, Nevada for net proceeds of $37.9
million. We recognized a $36.4 million gain on the sale. The land was not used
in any of our operations.
Note
16 - Discontinued operations:
Prior
to
December 2004, our Thomas Regout component products operations in Europe were
classified as held for use. In December 2004, the CompX board of directors
adopted a formal disposal plan which resulted in the reclassification of these
operations to held for sale. We have classified the results of operations of
Thomas Regout for all periods prior to the disposal as discontinued operations.
We have not reclassified our Consolidated Statements of Cash Flows to separately
present the cash flows of the assets disposed. When we adopted a formal disposal
plan, we determined that the goodwill associated with the assets held for sale
was partially impaired, based upon the estimated realizable value (or fair
value
less costs to sell) of the net assets disposed. In determining the estimated
realizable value of the Thomas Regout operations as of December 31, 2004, we
used the sales price inherent in the definitive agreement reached with the
purchaser in January 2005 and our estimate of the related transaction costs
(or
costs to sell). Accordingly, in the fourth quarter of 2004 we recognized a
$6.5
million goodwill impairment charge to write-down our investment in the assets
held for sale to their estimated net realizable value.
In
January 2005, we 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. The net proceeds from the January 2005 sale
of
European Thomas Regout operations were approximately $864,000 less than we
have
previously estimated, primarily due to higher expenses associated with the
sale.
These additional expenses reflect a refinement of our previous estimate of
the
net realizable value of the assets sold and accordingly we recognized a further
impairment of goodwill. As a result, discontinued operations in 2005 include
a
charge for the additional expenses ($272,000, net of income tax and minority
interest).
In
2004,
the Thomas Regout operations reported net sales of $41.7 million, an operating
loss (including the $6.5 million goodwill impairment) of $3.5 million, interest
expense of $1.5 million, an income tax benefit of $4.6 million and net income
(net of minority interest in losses of $4.1 million) of $3.7 million. The
interest expense represents interest on certain intercompany indebtedness with
CompX, which indebtedness arose at the time of CompX’s acquisition of such
operations prior to 2004 and corresponded to certain third-party indebtedness
CompX incurred at the time such operations were acquired. The income tax benefit
includes a $4.2 million income tax benefit associated with the U.S. capital
loss
realized in the first quarter of 2005 upon completion of the sale of the Thomas
Regout operations. Recognition of the benefit of such capital loss by us is
appropriate under GAAP in the fourth quarter of 2004 at the time such operations
were classified as held for sale.
Note
17 - Related party transactions:
We
may be
deemed to be controlled by Mr. Harold C. Simmons. See Note 1. We and other
entities that may be deemed to be controlled by or affiliated with Mr. Simmons
sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account,
and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties, and (b) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units. These
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. We continuously
consider, review and evaluate, and understand that Contran and related entities
consider, review and evaluate such transactions. Depending upon the business,
tax and other objectives then relevant, it is possible we might be a party
to
one or more such transactions in the future.
From
time
to time, we will have loans
and
advances outstanding between us and various related parties, including Contran,
pursuant to term and demand notes. We generally enter into these loans and
advances for cash management purposes. When we loan funds to related parties,
we
are generally able to earn a higher rate of return on the loan than we would
earn if we invested the funds in other instruments. While
certain of these loans may be of a lesser credit quality than cash equivalent
instruments otherwise available to us, we believe we have evaluated the credit
risks involved and appropriately reflect those credit risks in the terms of
the
applicable loans. When
we
borrow from related parties, we are generally able to pay a lower rate of
interest than we would pay if we borrowed from unrelated parties.
Prior
to
2004, EMS entered into a $25 million revolving credit facility with one of
the
family trusts discussed in Note 1. During 2005, the family trust completely
repaid the outstanding balance under this loan, and the facility was terminated.
During
2004, we borrowed varying amounts from Contran, and during 2004 and 2005 we
loaned varying amounts to Contran at a rate of prime less .5%. Interest income
on all loans to related parties, including EMS’ loan to one of the Contran
family trusts, was $645,000
in 2004, $572,000 in 2005. There was no such interest income in 2006. Interest
expense on all loans from related
parties (consisting solely of our loans from Contran) was $131,000 in 2004.
There was no such interest expense in 2005 and 2006. Our loans to Contran were
unsecured.
Under
the
terms of various intercorporate services agreements ("ISAs") we enter into
with
Contran, employees of Contran provide us certain management, tax planning,
financial and administrative services on a fee basis. Such charges are based
upon estimates of the time devoted by the Contran employees to our affairs,
and
the compensation and other expenses associated with those persons. Because
of
the large number of companies affiliated with Contran, we believe we benefit
from cost savings and economies of scale gained by not having certain
management, financial and administrative staffs duplicated at all of our
subsidiaries, thus allowing certain Contran employees to provide services to
multiple companies but only be compensated by Contran. The
net
ISA fees charged to us by Contran aggregated approximately $17.3 million in
2004, $20.0 million in 2005 and $23.7 million in 2006.
Tall
Pines Insurance Company and EWI RE, Inc. provide for or broker certain insurance
policies for Contran and certain of its subsidiaries and affiliates, including
us. Tall Pines and EWI are our subsidiaries. Consistent with insurance industry
practices, Tall Pines and EWI receive commissions from the insurance and
reinsurance underwriters and/or assess fees for the policies that they provide
or broker to us. Tall
Pines purchases reinsurance for substantially all of the risks it underwrites.
We expect
these relationships with Tall Pines and EWI will continue in 2007.
Contran
and certain of its subsidiaries and affiliates, including us, purchase certain
insurance policies as a group, with the costs of the jointly-owned policies
apportioned among the participating companies. With respect to some of these
policies, it is possible that unusually large losses incurred by one or more
insureds during a given policy period could leave the other participating
companies without adequate coverage under that policy for the balance of the
policy period. As a result, we and Contran have entered into a loss sharing
agreement under which any uninsured loss is shared by those entities who have
submitted claims under the relevant policy. We believe the benefits in the
form
of reduced premiums and broader coverage associated with the group coverage
for
such policies justifies the risk associated with the potential of any uninsured
loss.
Basic
Management, Inc., among other things, provides utility services (primarily
water
distribution, maintenance of a common electrical facility and sewage disposal
monitoring) to TIMET and other manufacturers within an industrial complex
located in Nevada. The other owners of BMI are generally the other manufacturers
located within the complex. BMI provides power transmission and sewer services
on a cost reimbursement basis, similar to a cooperative, while water delivery
is
currently provided at the same rates as are charged by BMI to an unrelated
third
party. Amounts paid by TIMET to BMI for these utility services were $1.3 million
in 2004, $1.4 million in 2005 and $2.3 million in 2006. TIMET also paid BMI
an
electrical facilities upgrade fee of $1.3 million in 2004, $800,000 in 2005
and
2006. This $800,000 annual fee is scheduled to terminate after January
2010.
In
2005,
we purchased 2.0 million shares of our 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, and in 2006 we purchased 1.0 million shares
of
our common stock, also at a discount to the then-current market price, from
a
subsidiary of Contran for $23.50 per share or an aggregate purchase price of
$23.5 million. The independent members of our board of directors approved both
of these purchases. During 2005, we also purchased 175,000 shares of our common
stock for an aggregate of $3.1 million from The Simmons Family Foundation,
a
charitable organization of which Mr. Simmons is a trustee, based on the market
price of Valhi common stock on the date of purchase. All of these shares were
purchased under our stock repurchase program described in Note 14.
COAM
Company is a partnership which has a sponsored research agreement with the
University of Texas Southwestern Medical Center at Dallas to develop and
commercially market patents and technology resulting from a cancer research
program (the "Cancer Research Agreement"). At December 31, 2006, we are a
partner of COAM along with Contran and another Contran subsidiary. Mr. Harold
C.
Simmons is the manager of COAM. The Cancer Research Agreement, as amended
through December 31, 2006, provides for funds of up to $51.6 million through
2015. Funding requirements pursuant to the Cancer Research Agreement is without
recourse to the COAM partners and the partnership agreement provides that no
partner shall be required to make capital contributions. Capital contributions
are expensed as paid. We have not made contributions to COAM during the past
three years, and we do not expect we will make any capital contributions to
COAM
in 2007.
We
provide certain research, laboratory and quality control services within and
outside the sweetener industry for The Amalgamated Sugar Company LLC and others.
We have also granted to The Amalgamated Sugar Company LLC a non-exclusive,
royalty-free perpetual license to use all currently existing or hereafter
developed technology which is applicable to sugar operations and provides for
payment of certain royalties to The Amalgamated Sugar Company LLC from future
sales or licenses of the subsidiary’s technology to third parties. Research and
development services charged to The Amalgamated Sugar Company LLC, included
in
other income, were $956,000 in 2004, $1.0 million in 2005 and $1.1 million
in
2006. The Amalgamated Sugar Company LLC provides certain administrative services
to us, and the cost of such services (based upon estimates
of the time devoted by employees of the LLC to our affairs, and the compensation
of such persons)
is
considered in the agreed-upon research and development services fee paid by
the
LLC to us and is not separately quantified.
Receivables
from and payables to affiliates are summarized in the table below.
|
|
December 31,
|
|
|
|
2005
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Current
receivables from affiliates:
|
|
|
|
|
|
|
|
Contran
- income taxes, net
|
|
$
|
33
|
|
$
|
630
|
|
Other
|
|
|
1
|
|
|
200
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34
|
|
$
|
830
|
|
|
|
|
|
|
|
|
|
Current payables to affiliates:
|
|
|
|
|
|
|
|
Louisiana Pigment Company
|
|
$
|
9,803
|
|
$
|
11,732
|
|
Contran - trade items
|
|
|
3,940
|
|
|
5,482
|
|
Other
|
|
|
11
|
|
|
17
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,754
|
|
$
|
17,231
|
|
Payables
to Louisiana Pigment Company are primarily for the purchase of TiO2.
Our
purchases
in the ordinary course of business from LPC are disclosed in Note
7.
Note
18 - Commitments and contingencies:
Lead
pigment litigation - NL
NL’s
former operations included the manufacture of lead pigments for use in paint
and
lead-based paint. We, other former manufacturers of lead pigments for use in
paint and lead-based paint (together, the “former pigment manufacturers”), 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, counties, cities or their public housing authorities and
school districts, and certain others have been asserted as class actions. These
lawsuits seek recovery under a variety of theories, including public and private
nuisance, negligent product design, negligent failure to warn, strict liability,
breach of warranty, conspiracy/concert of action, aiding and abetting,
enterprise liability, market share or risk contribution liability, intentional
tort, fraud and misrepresentation, violations of state consumer protection
statutes, supplier negligence and similar claims.
The
plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and health concerns associated with
the
use of lead-based paints, including damages for personal injury, contribution
and/or indemnification for medical expenses, medical monitoring expenses and
costs for educational programs. A number of cases are inactive or have been
dismissed or withdrawn. Most of the remaining cases are in various pre-trial
stages. Some are on appeal following dismissal or summary judgment rulings
in
favor of either the defendants or the plaintiffs. In addition, various other
cases are pending (in which we are not a defendant) seeking recovery for injury
allegedly caused by lead pigment and lead-based paint. Although we are not
a
defendant in these cases, the outcome of these cases may have an impact on
cases
that might be filed against us in the future.
We
believe that these actions are without merit, and we intend to continue to
deny
all allegations of wrongdoing and liability and to defend against all actions
vigorously. We have never settled any of these cases, nor have any final adverse
judgments against us been entered. We have not accrued any amounts for pending
lead pigment and lead-based paint litigation. We cannot reasonably estimate
liability that may result, if any. We can not assure you that we 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 we were to incur any such future liability, it could
have a material adverse effect on our consolidated financial position, results
of operations and liquidity.
In
October 1999, we were served with a complaint in State
of Rhode Island v. Lead Industries Association, et al.
(Superior Court of Rhode Island, No. 99-5226). The State seeks compensatory
and
punitive damages, as well as reimbursement for public and private building
abatement expenses and funding of a public education campaign and health
screening programs. In a 2002 trial on the sole question of whether lead pigment
in paint on Rhode Island buildings is a public nuisance, the trial judge
declared a mistrial when the jury was unable to reach a verdict on the question,
with the jury reportedly deadlocked 4-2 in defendants' favor. In 2005, the
trial
court dismissed both the conspiracy claim with prejudice, and the State
dismissed its Unfair Trade Practices Act claim against us without prejudice.
A
second trial commenced against us and three other defendants on November 1,
2005
on the State’s remaining claims of public nuisance, indemnity and unjust
enrichment. Following the State’s presentation of its case, the trial court
dismissed the State’s claims of indemnity and unjust enrichment. The public
nuisance claim was sent to the jury in February 2006, and the jury found that
we
and two other defendants substantially contributed to the creation of a public
nuisance as a result of the collective presence of lead pigments in paints
and
coatings on buildings in Rhode Island. The jury also found that we and the
two
other defendants should be ordered to abate the public nuisance. Following
the
trial, the trial court dismissed the State’s claim for punitive damages. In
February 2007, the court denied the defendants’ post-trial motions to dismiss,
for a new trial and for judgment not withstanding the verdict. Additionally,
the
court set a hearing in March 2007 to enter a judgment and order. The court
established a schedule over 60 days following entry of a judgment for briefing
on the issue of the appointment of a special master to advise the court on,
among other things, the extent nature and cost of any abatement remedy. The
scope of the abatement remedy will be determined by the judge with the
assistance of the special master who has not been selected yet. The extent,
nature and cost of such remedy are not currently known and will be determined
only following additional proceedings. We intend to appeal any judgment that
the
trial court may enter against us.
The
Rhode
Island
case is
unique in that this is the first time that an adverse verdict in the lead
pigment litigation has been entered against us. We believe there are a number
of
meritorious issues which can be appealed in this case; therefore we currently
believe it is not probable that we will ultimately be found liable in this
matter. In addition, we cannot reasonably estimate potential liability, if
any,
with respect to this and the other lead pigment litigation. However, legal
proceedings are subject to inherent uncertainties, and we cannot assure you
that
any appeal would be successful. Therefore it is reasonably possible we could
in
the near term conclude that it is probable we have incurred some liability
in
this Rhode
Island matter
that would result in recognizing a loss contingency accrual. The potential
liability could have a material adverse impact on net income for the interim
or
annual period during which such liability is recognized, and a material adverse
impact on our financial condition and liquidity. Various other cases in which
we
are a defendant are also pending in other jurisdictions, and new cases may
continue to be filed against us, the resolution of which could also result
in
recognition of a loss contingency accrual that could have a material adverse
impact on our net income for the interim or annual period during which such
liability is recognized, and a material adverse impact on our financial
condition and liquidity. We cannot reasonably estimate the potential impact
on
our results of operations, financial condition or liquidity related to these
matters.
Environmental
matters and litigation
General
- Our
operations are governed by various environmental laws and regulations.
Certain
of our businesses are and have been engaged in the handling, manufacture or
use
of substances or compounds that may be considered toxic or hazardous within
the
meaning of applicable environmental laws and regulations. As with other
companies engaged in similar businesses, certain of our past and current
operations and products have the potential to cause environmental or other
damage. We have implemented and continue to implement various policies and
programs in an effort to minimize these risks. Our
policy is to maintain compliance with applicable environmental laws and
regulations at all of our plants and to strive to improve our environmental
performance. From time to time, we may be subject to environmental regulatory
enforcement under U.S. and foreign statutes, the 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, could adversely affect our production, handling, use,
storage, transportation, sale or disposal of such substances. We
believe all of our plants are in substantial compliance with applicable
environmental laws.
Certain
properties and facilities used in our former businesses, including divested
primary and secondary lead smelters and former NL mining locations, are the
subject of civil litigation, administrative proceedings or investigations
arising under federal and state environmental laws. Additionally, in connection
with past disposal practices, we are currently involved as a defendant,
potentially responsible party (“PRP”) or both, pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act, as amended by the
Superfund Amendments and Reauthorization Act (“CERCLA”), and similar state laws
in various governmental and private actions associated with waste disposal
sites, mining locations, and facilities we or our predecessors currently or
previously owned, operated or used, by us, our 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 we may be jointly and severally liable for these costs, in
most cases we are only one of a number of PRPs who may also be jointly and
severally liable. In addition, we are a party to a number of personal injury
lawsuits filed in various jurisdictions alleging claims related to environmental
conditions alleged to have resulted from our operations.
Environmental
obligations are difficult to assess and estimate for numerous reasons
including:
|
·
|
complexity
and differing interpretations of governmental
regulations,
|
|
·
|
number
of PRPs and their ability or willingness to fund such allocation
of
costs,
|
|
·
|
financial
capabilities of the PRPs and the allocation of costs among
them,
|
|
·
|
multiplicity
of possible solutions; and
|
|
·
|
number
of 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 we are potentially responsible for the release of hazardous
substances at other sites, could result in expenditures in excess of amounts
currently estimated by us to be required for such matters. In addition, with
respect to the other PRPs and the fact that we
may be
jointly and severally liable for the total remediation cost at certain sites,
we
ultimately could be liable for amounts in excess of our accruals due to, among
other things, reallocation of costs among PRPs or the insolvency of one or
more
PRPs. We cannot assure you that
actual costs will not exceed accrued amounts or the upper end of the range
for
sites for which estimates have been made, and we cannot assure you that costs
will not be incurred for sites where no estimate presently can be made. Further,
we cannot assure you that additional environmental matters will not arise in
the
future. If
we
were to incur any future liability, this could have a material adverse effect
on
our consolidated financial position, results of operations and liquidity.
We
record
liabilities related to environmental remediation obligations when estimated
future expenditures are probable and reasonably estimable. We adjust such
accruals as further information becomes available to us or circumstances change.
We generally do not discount estimated future expenditures to their present
value due to the uncertainty of the timing of the pay out. We recognize
recoveries of remediation costs from other parties, if any, when their receipt
is deemed probable. At December 31, 2006, we have not recognized any receivables
for such matters.
We
do not
know and cannot estimate the exact time frame over which we will make payments
with respect to accrued environmental costs. The timing of payments depends
upon
a number of factors including the timing of the actual remediation process
which
in turn depends on factors outside our control. At each balance sheet date,
we
estimate the amount of our accrued environmental costs which we expect to pay
over the subsequent 12 months, and we classify this estimate as a current
liability. We classify the remaining accrued environmental costs as a noncurrent
liability.
Changes
in our accrued
environmental costs during the past three years are presented in the table
below. The amount shown in the table below for payments against our accrued
environmental costs in 2004 is net of a $1.5 million recovery of remediation
costs previously expended by NL that was paid to us by other PRPs in 2004
pursuant to an agreement we entered into with the other PRPs.
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at the beginning of the year
|
|
$
|
86,681
|
|
$
|
76,766
|
|
$
|
65,726
|
|
Additions
charged to expense, net
|
|
|
2,477
|
|
|
5,703
|
|
|
4,015
|
|
Payments,
net
|
|
|
(12,392
|
)
|
|
(16,743
|
)
|
|
(10,021
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at the end of the year
|
|
$
|
76,766
|
|
$
|
65,726
|
|
$
|
59,720
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in our Consolidated
Balance Sheet at the end of the year:
|
|
|
|
|
|
|
|
|
|
|
Current liability
|
|
$
|
21,316
|
|
$
|
16,565
|
|
$
|
13,585
|
|
Noncurrent liability
|
|
|
55,450
|
|
|
49,161
|
|
|
46,135
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
76,766
|
|
$
|
65,726
|
|
$
|
59,720
|
|
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. At December 31, 2006, NL had
accrued $51 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
for sites for which NL believes it is currently possible to estimate costs
is
approximately $75 million, including the amount currently accrued. NL has not
discounted these estimates to present value.
At
December 31, 2006, 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 NL actually had any
association with the site, or if NL had an association with the site, the nature
of its responsibility, if any, for the contamination at the site and the extent
of contamination. The timing of when information would become available to
us to
allow us to estimate a range of loss is unknown and dependent on events outside
of our control, such as when the party alleging liability provides information
to us. At certain of these sites that had previously been inactive, NL has
received general and special notices of liability from the EPA alleging that
NL,
along with other PRPs, is liable for past and future costs of remediating
environmental contamination allegedly caused by former operations conducted
at
the sites. These notifications may assert that NL, along with other PRPs, is
liable for past clean-up costs that could be material to us if NL were
ultimately found liable.
Tremont
- Prior
to
2004, 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
had entered into an agreement with Halliburton Energy Services, Inc., another
PRP for this site that provides for, among other things, the interim sharing
of
remediation costs associated with the site pending a final allocation of costs
and an agreed-upon procedure through arbitration with the first hearing now
to
be held in June 2007 to determine the final allocation of costs. On December
9,
2005, Halliburton and DII Industries, LLC, another PRP of this site, filed
suit
in the United States District Court for the Southern District of Texas, Houston
Division, Case No. H-05-4160, against NL, Tremont and certain of its
subsidiaries, M-I, L.L.C., Milwhite, Inc. and Georgia-Pacific Corporation
seeking:
|
·
|
to
recover response and remediation costs incurred at the site,
|
|
·
|
a
declaration of the parties’ liability for response and remediation costs
incurred at the site,
|
|
·
|
a
declaration of the parties’ liability for response and remediation costs
to be incurred in the future at the site; and
|
|
·
|
a
declaration regarding the obligation of Tremont to indemnify Halliburton
and DII for costs and expenses attributable to the site.
|
On
December 27, 2005, a subsidiary of Tremont filed suit in the United States
District Court for the Western District of Arkansas, Hot Springs Division,
Case
No. 05-6089, against Georgia-Pacific, seeking to recover response costs it
has
incurred and will incur at the site. Subsequently, plaintiffs in the
Houston
litigation agreed to stay that litigation by entering into an amendment with
NL,
Tremont and its affiliates to the arbitration agreement previously agreed upon
for resolving the allocation of costs at the site. Tremont subsequently also
agreed with Georgia Pacific to stay the Arkansas
litigation,
and subsequently that matter was consolidated with the Houston
litigation, where the court recently agreed to stay the plaintiffs claims
against Tremont and its subsidiaries, and denied Tremont’s motions to dismiss
and to stay the claims made by M-I, Milwhite and Georgia Pacific. Tremont has
accrued for this site based upon the agreed-upon interim cost sharing
allocation. Tremont
has $3 million accrued at December 31, 2006 which represents the probable and
reasonably estimable costs to be incurred through 2008 with respect to the
interim remediation measures. Tremont currently expects it will be at least
2008
before the nature and extent of any final remediation measures for this site
are
known. Tremont has not accrued costs for any final remediation measures at
this
site because no reasonable estimate can currently be made of the cost of any
final remediation measures.
TIMET
- At
December 31, 2006, TIMET had accrued approximately $2 million for environmental
cleanup matters, principally related to their facility in Nevada. The upper
end
of the range of reasonably possible costs related to these matters, including
the current accrual, is approximately $4 million.
Other
- We
have
also accrued approximately $6 million at December 31, 2006 for other
environmental cleanup matters. This accrual is near the upper end of the range
of our estimate of reasonably possible costs for such matters.
Other
litigation
NL
has
been named as a defendant in various lawsuits in several jurisdictions, alleging
personal injuries as a result of occupational exposure primarily to products
manufactured by some of their former operations containing asbestos, silica
and/or mixed dust. Approximately 500 of these types of cases remain pending,
involving a total of approximately 10,400 plaintiffs and their spouses. We
have
not accrued any amounts for this litigation because of the uncertainty of
liability and inability to reasonably estimate the liability, if any. To date,
we have not been adjudicated liable in any of these matters. Based on
information available to us, including:
· facts
concerning our historical operations,
· the
rate
of new claims,
· the
number of claims from which we have been dismissed; and
· our
prior
experience in the defense of these matters.
We
believe the range of reasonably possible outcomes for these matters will be
consistent with our historical costs (which are not material), and we do not
expect any reasonably possible outcome would involve amounts that are material
to us. We have and will continue to vigorously seek dismissal from each claim
and/or a finding of no liability for us in each case. In addition, from time
to
time, we receive notices regarding asbestos or silica claims purporting to
be
brought against our former subsidiaries, including notices provided to insurers
with which we have entered into settlements extinguishing certain insurance
policies. These insurers may seek indemnification from us.
In
April
2006, we were served with a complaint in Murphy,
et al. v. NL Industries, Inc., et al. (United States District Court, District
of
New Jersey, Case No. 2:06-cv-01535-WHW-SDW).
The
plaintiffs, three former minority shareholders of EMS, seek damages related
to
their equity investment in EMS. The defendants named in the complaint are
Contran, Valhi, NL, EMS and certain current or former of our officers or
directors and certain current or former officers or directors of EMS. EMS was
formed in 1998 as a majority-owned environmental management subsidiary that
contractually assumed certain of our environmental liabilities. In June 2005,
EMS received notices from the three minority shareholders indicating that they
were exercising their right, which became exercisable on June 1, 2005, to
require EMS to purchase their preferred shares in EMS as of June 30, 2005 for
a
formula-determined amount as provided in EMS’ certificate of incorporation. In
accordance with the certificate of incorporation, EMS made a determination
in
good faith of the amount payable to the three former minority shareholders
to
purchase their shares of EMS stock. In June 2005 EMS set aside funds as payment
for the shares of EMS. As of December 31, 2006, however, the shareholders had
not tendered their shares or received any of such funds. The plaintiffs claim
that, in preparing the valuation of the plaintiffs’ preferred shares for
purchase by EMS, defendants engaged in a pattern of racketeering activity and
a
conspiracy in violation of United States and New Jersey laws. In addition,
the
plaintiffs allege that defendants have committed minority shareholder
oppression, fraud, breach of fiduciary duty, civil conspiracy, aiding and
abetting fraud, aiding and abetting breach of fiduciary duty, breach of contract
and tortuous interference with economic relations under New Jersey laws. In
July
2006, defendants filed motions to disqualify plaintiffs’ counsel, compel
arbitration, transfer venue to the Northern District of Texas, to dismiss the
claims against the individual defendants for lack of personal jurisdiction
and
to dismiss the complaint.
In
addition to the litigation described above, we and our affiliates are involved
in various other environmental, contractual, product liability, patent (or
intellectual property), employment and other claims and disputes incidental
to
our present and former businesses. In certain cases, we have insurance coverage
for these items, although we do not expect any additional material insurance
coverage for our environmental claims.
We
currently believe the disposition of all claims and disputes, individually
or in
the aggregate, should not have a material adverse effect on our consolidated
financial position, results of operations and liquidity beyond the accruals
we
have already provided.
Insurance
coverage claims
We
are
involved in various legal proceedings with certain of our former insurance
carriers regarding the nature and extent of the carriers’ obligations to us
under insurance policies with respect to certain lead pigment lawsuits. The
issue of whether insurance coverage for defense costs or indemnity or both
will
be found to exist for our lead pigment litigation depends upon a variety of
factors, and we cannot assure you that such insurance coverage will be
available. We have not considered any potential insurance recoveries for
lead pigment or environmental litigation matters in determining related
accruals.
We
have
an agreement with a former insurance carrier pursuant to which the carrier
reimburses us for a portion of our past and future lead pigment litigation
defense costs. We are not able to determine how much we ultimately will
recover from the carrier for past defense costs incurred by us, because the
carrier has certain discretion regarding which past defense costs qualify for
reimbursement. While we continue to seek additional insurance recoveries, we
do
not know if we will be successful in obtaining reimbursement for either defense
costs or indemnity. We have not considered any additional potential
insurance recoveries in determining accruals for lead pigment litigation
matters. Any additional insurance recoveries would be recognized when the
receipt is probable and the amount is determinable.
We
have
settled insurance coverage claims concerning environmental claims with certain
of our principal former carriers. We do not expect further material settlements
relating to environmental remediation coverage.
New
York cases
-
In
October 2005 we were served with a complaint in OneBeacon
American Insurance Company v. NL Industries, Inc., et al.
(Supreme Court of the State of New York, County of New York, Index No.
603429-05). The plaintiff, a former insurance carrier, seeks a declaratory
judgment of its obligations to us under insurance policies issued to us by
the
plaintiff’s predecessor with respect to certain lead pigment lawsuits filed
against us. In March 2006, the trial court denied our motion to dismiss. In
April 2006, we filed a notice of appeal of the trial court’s ruling.
In
February 2006, we were served with a complaint in Certain
Underwriters at Lloyds, London v. Millennium Holdings LLC
et al.
(Supreme Court of the State of New York, County of New York, Index No.
06/60026). The plaintiff, a former insurance carrier of ours, seeks a
declaratory judgment of its obligations to us under insurance policies issued
to
us by plaintiff with respect to certain lead pigment lawsuits. In April 2006,
the trial court denied our motion to dismiss. In October 2006, we filed a notice
of appeal of the trial court’s ruling.
Texas
cases
- In
November 2005, we filed an action against OneBeacon and certain other insurance
companies, which also issued insurance policies to us in the past, captioned
NL
Industries, Inc. v. OneBeacon America Insurance Company, et.
al.
(District Court for Dallas County, Texas, Case No. 05-11347). In this action,
we
are asserting that OneBeacon breached its contractual obligations to us under
its insurance policies and are also seeking a declaratory judgment as to
OneBeacon’s and the other insurance companies’ rights and obligations pursuant
to the policies issued to us in connection with certain lead pigment actions.
In
January 2007, the parties filed a stipulation with the court in which we agreed
that the claims in this action would be added to NL
Industries, Inc. v. American Re Insurance Company, et al
(described below).
In
April
2006, we filed a comprehensive action against all of the insurance companies
which issued policies to us that potentially could provide insurance for lead
pigment actions and/or asbestos actions asserted against us, captioned
NL
Industries, Inc. v. American Re Insurance Company, et al.
(Dallas
County Court at Law, Texas, Case No. CC-06-04523-E). In this action, we assert
that defendants have breached their obligations to us under such insurance
policies with respect to lead pigment and asbestos claims, and we seek a
declaration as to the rights and obligations of each insurance company with
respect to such claims. In October 2006, the court stayed this proceeding
pending outcome of the appeal in the New York action captioned OneBeacon
American Insurance Company v. NL Industries, Inc., et. al.
(described above).
In
September 2006, we filed a declaratory judgment action against OneBeacon and
certain other former insurance companies, captioned NL
Industries, Inc. v. OneBeacon America Insurance Company, et al.
(Dallas
County Court at Law, Texas, Case No. CC-06-13934-A) seeking interpretation
of a
Stand-Still Agreement, which is governed by Texas law. In December 2006, this
case was consolidated into NL
Industries, Inc. v. American Re Insurance Company, et al
(described above).
Other
matters
Concentrations
of credit risk. Sales
of
TiO2
accounted for approximately 90% of our Chemicals sales during the past three
years. TiO2
is
generally sold to the paint, plastics and paper industries, which are generally
considered "quality-of-life" markets whose demand for TiO2
is
influenced by the relative economic well-being of the various geographic
regions. TiO2
is sold
to over 4,000 customers and the ten largest customers accounted for about
one-fourth of chemicals sales. In each of the past three years, approximately
one-half of our TiO2
sales
volumes were to Europe with about 40% attributable to North
America.
We
sell
our Component Products primarily to original equipment manufacturers in North
America. In 2006, the ten largest customers accounted for approximately 38%
of
component products sales. No single customer accounted for more than 10% of
such
sales in 2006.
The
majority of our Titanium Metals sales are to customers in the aerospace
industry, including airframe and engine manufacturers. TIMET's ten largest
customers accounted for about 49% in 2006.
At
December 31, 2006, consolidated cash, cash equivalents and restricted cash
includes $33.8 million invested in U.S. Treasury securities purchased under
short-term agreements to resell (2005 - $56.0 million), substantially all of
which were held in trust for the Company by a single U.S. bank. At December
31,
2006, consolidated cash, cash equivalents and restricted cash includes
approximately $79 million on deposit at a single U.S. bank (2005 - $128
million).
Operating
leases.
Our
principal Chemicals Segment operating subsidiary in Germany, Kronos Titan GmbH,
leases the land under its Leverkusen TiO2
production facility pursuant to a lease with Bayer AG that expires in 2050.
We
own the Leverkusen facility itself, which represents approximately one-third
of
our current TiO2
production capacity. This facility is located within Bayer’s extensive
manufacturing complex. We periodically establish the rent for the land lease
associated with our Leverkusen facility 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 land lease; rather,
any change in the rent is subject solely to periodic negotiation between Bayer
and us. Any change in the rent based on negotiations is recognized as part
of
lease expense starting from the time such change is agreed upon by both of
us,
as any such change in the rent is accounted for as “contingent rentals” under
GAAP. Under
a
separate supplies and services agreement expiring in 2011, Bayer provides some
raw materials, including chlorine, auxiliary and operating materials, utilities
and services necessary for us to operate our Leverkusen facility.
We
also
lease various other manufacturing facilities and equipment. Some of the leases
contain purchase and/or various term renewal options at fair market and fair
rental values, respectively. In most cases we expect that, in the normal course
of business, such leases will be renewed or replaced by other leases. Rent
expense related to continuing operations approximated $12 million in each of
2004, 2005 and 2006. At December 31, 2006, our future minimum payments under
noncancellable operating leases having an initial or remaining term of more
than
one year were as follows:
Years
ending December 31,
|
|
Amount
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
2007
|
|
$
|
7,891
|
|
2008
|
|
|
6,236
|
|
2009
|
|
|
4,165
|
|
2010
|
|
|
3,141
|
|
2011
|
|
|
1,541
|
|
2012 and thereafter
|
|
|
20,218
|
|
|
|
|
|
|
Total(1)
|
|
$
|
43,192
|
|
(1)Approximately
$22 million relates to the Leverkusen facility lease. The minimum commitment
amounts for the lease included in the table above for each year through the
2050
expiration of the lease are based upon the current annual rental rate as of
December 31, 2006.
Long-term
contracts. We
have
long-term supply contracts that provide for our TiO2
feedstock requirements through 2010. The agreements require us to purchase
certain minimum quantities of feedstock with minimum purchase commitments
aggregating approximately $776 million at December 31, 2006.
Income
taxes. Contran
and us have agreed to a policy providing for the allocation of tax liabilities
and tax payments as described in Note 1. Under applicable law, we, as well
as
every other member of the Contran Tax Group, are each jointly and severally
liable for the aggregate federal income tax liability of Contran and the other
companies included in the Contran Tax Group for all periods in which we are
included in the Contran Tax Group. Contran has agreed, however, to indemnify
us
for any liability for income taxes of the Contran Tax Group in excess of our
tax
liability previously computed and paid by us in accordance with the tax
allocation policy.
Note
19 - Recent accounting pronouncements:
Inventory
Costs
- Statement
of Financial Accounting Standards (“SFAS”) No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4,
became
effective for us for inventory costs incurred on or after January 1, 2006.
SFAS
No. 151 requires that the allocation of fixed production overhead costs to
inventory be based on normal capacity of the production facilities, as defined
by SFAS No. 151. SFAS No. 151 also clarifies the accounting for abnormal amounts
of idle facility expense, freight handling costs and wasted material, requiring
those items be recognized as current-period charges. Our existing production
cost policies complied with the requirements of SFAS No. 151, therefore the
adoption of SFAS No. 151 did not affect our Consolidated Financial
Statements.
Stock
Options
- We
adopted the fair value provisions of SFAS No. 123R, Share-Based
Payment,
on
January 1, 2006 using the modified prospective application method. SFAS No.
123R, among other things, requires the cost of employee compensation paid with
equity instruments to be measured based on the grant-date fair value. That
cost
is then recognized over the vesting period. Using the modified prospective
method, we will apply the provisions of the standard to any new equity
compensation granted after January 1, 2006. The number of non-vested equity
awards issued by us and our subsidiaries as of December 31, 2005 was not
material, and therefore the effect of adopting the fair value provisions of
SFAS
No. 123R was not material. NL
accounted for their equity awards under the variable accounting method whereby
the equity awards were revalued based on the current trading price at each
balance sheet date. We now account for these awards using the liability method
under SFAS No. 123R, which is substantially identical to the variable accounting
method we previously used. We recorded net compensation cost for stock-based
employee compensation of approximately $3.4 million in 2004, and we recorded
net
compensation income for stock-based employee compensation of approximately
$1.1
million in 2005 and $.4 million in 2006.
Planned
Major Maintenance Activities
- In
September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) No. AUG AIR-1, Accounting
for Planned Major Maintenance Activities.
Under
FSP No. AUG AIR-1, accruing in advance for major maintenance is no longer
permitted. Upon adoption of this standard, companies that previously accrued
in
advance for major maintenance activities are required to retroactively restate
their financial statements to reflect a permitted method of expense for all
periods presented. In the past our Chemicals Segment accrued in advance for
planned major maintenance. We adopted this standard effective December 31,
2006.
Accordingly, we have retroactively restated our Consolidated Financial
Statements to reflect the direct expense method of accounting for planned major
maintenance (a method permitted under this standard). The effect of adopting
this standard on our previously-reported Consolidated Financial Statements
is
summarized in the tables bellow.
|
|
December
31,
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
in accrued maintenance costs
|
|
$
|
4,272
|
|
$
|
3,421
|
|
$
|
3,898
|
|
Increase
in current deferred income
tax liability
|
|
|
1,445
|
|
|
1,180
|
|
|
1,342
|
|
Increase
in noncurrent deferred income
tax
liability
|
|
|
431
|
|
|
394
|
|
|
540
|
|
Increase in minority interest in
net assets of subsidiaries
|
|
|
283
|
|
|
423
|
|
|
276
|
|
Increase in retained earnings
|
|
|
1,681
|
|
|
867
|
|
|
1,270
|
|
Increase in accumulated other
comprehensive income - foreign currency
|
|
|
432
|
|
|
557
|
|
|
470
|
|
Increase in total stockholders’ equity
|
|
|
2,113
|
|
|
1,424
|
|
|
1,740
|
|
|
|
Years ended December 31,
|
|
|
|
2004
|
|
2005
|
|
|
|
(In
thousands, except
per
share amounts)
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
Maintenance expense
included in cost of sales
|
|
$
|
1,120
|
|
$
|
(709
|
)
|
Provision for income taxes
|
|
|
(426
|
)
|
|
438
|
|
Minority interest in after
tax earnings
|
|
|
120
|
|
|
(132
|
)
|
Net income
|
|
|
(814
|
)
|
|
403
|
|
Net income per diluted share
|
|
$
|
(.01
|
)
|
$
|
.01
|
|
|
|
|
|
|
|
|
|
Other comprehensive income - foreign currency
|
|
$
|
125
|
|
$
|
(87
|
)
|
Total comprehensive income
(loss)
|
|
|
(689
|
)
|
|
316
|
|
Pension
and Other Postretirement Plans -
In
September 2006, the FASB issued SFAS No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans.
SFAS No. 158 requires us to recognize an asset or liability for the over or
under funded status of each of our individual defined benefit pension and
postretirement benefit plans on our Consolidated Balance Sheets. This
standard does not change the existing recognition and measurement requirements
that determine the amount of periodic benefit cost we recognize in net income.
We adopted the asset and liability recognition and disclosure requirements
of
this standard effective December 31, 2006 on a prospective basis, in which
we
recognized through other comprehensive income all of our prior unrecognized
gains and losses and prior service costs or credits, net of tax and minority
interest, as of December 31, 2006. We will recognize all future changes in
the
funded status of these plans through comprehensive income, net of tax and
minority interest. These future changes will be recognized either in net income,
to the extent they are reflected in periodic benefit cost, or through other
comprehensive income. In addition, we currently use September 30 as a
measurement date for certain of our pension and postretirement benefit plans,
but under this standard we will be required to use December 31 as the
measurement date for all of our plans. The measurement date requirement of
SFAF
No. 158 will become effective for us by the end of 2008 and provides two
alternate transition methods; we have not yet determined which transition method
we will select.
See Note
11 for the effect the adoption had on our Consolidated Financial
Statements.
Quantifying
Financial Statement Misstatements
- In
the
third
quarter of
2006 the
SEC issued Staff Accounting Bulletin (“SAB”) No. 108 expressing their views
regarding the process of quantifying financial statement misstatements.
The SAB is effective for us as of December 31, 2006. According to SAB 108
both the “rollover” and “iron curtain” approaches must be considered when
evaluating a misstatement for materiality. This is referred to as the
“dual approach.” For companies that have previously evaluated
misstatements under one, but not both, of these methods, SAB 108 provides
companies with a one-time option to record the cumulative effect of their prior
unadjusted misstatements in a manner similar to a change in accounting principle
in their 2006 annual financial statements if (i) the cumulative amount of the
unadjusted misstatements as of January 1, 2006 would have been material under
the dual approach to their annual financial statements for 2005 or (ii) the
effect of correcting the unadjusted misstatements during 2006 would cause those
annual financial statements to be materially misstated under the dual
approach. The adoption of SAB 108 did not have a material effect on our
previously-reported consolidated financial position or results of
operations.
Fair
Value Measurements -
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements,
which
will become effective for us on January 1, 2007. SFAS No. 157 generally provides
a consistent, single fair value definition and measurement techniques for GAAP
pronouncements. SFAS No. 157 also establishes a fair value hierarchy for
different measurement techniques based on the objective nature of the inputs
in
various valuation methods. We will be required to ensure all of our fair value
measurements are in compliance with SFAS No. 157 on a prospective basis
beginning in the first quarter of 2008. In addition, we will be required to
expand our disclosures regarding the valuation methods and level of inputs
we
utilize in the first quarter of 2008. The adoption of this standard will not
have a material effect on our Consolidated Financial Statements.
Fair
Value Option
- In the
first quarter of 2007 the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities.
SFAS 159 permits companies to chose, at specified election dates, to measure
eligible items at fair value, with unrealized gains and losses included in
the
determination of net income. The decision to elect the fair value option
is generally applied on an instrument-by-instrument basis, is irrevocable unless
a new election date occurs, and is applied to the entire instrument and not
to
only specified risks or cash flows or a portion of the instrument. Items
eligible for the fair value option include recognized financial assets and
liabilities, other than an investment in a consolidated subsidiary, defined
benefit pension plans, OPEB plans, leases and financial instruments classified
in equity. An investment accounted for by the equity method is an eligible
item. The specified election dates include the date the company first
recognizes the eligible item, the date the company enters into an eligible
commitment, the date an investment first becomes eligible to be accounted for
by
the equity method and the date SFAS No. 159 first becomes effective for the
company. If we elect to measure eligible items at fair value under the
standard, we would be required to present certain additional disclosures for
each item we elect. SFAS No. 159 becomes effective for us on January 1, 2008,
although we may apply the provisions earlier on January 1, 2007 if, among other
things, we also adopt SFAS No. 157 on January 1, 2007 and elect to adopt SFAS
No. 159 by April 30, 2007. We have not yet determined when we will choose
to have SFAS No. 159 first become effective for us, nor have we determined
which, if any, of our eligible items we will elect to be measured at fair value
under the new standard. Therefore, we are currently unable to determine
the impact, if any, this standard will have on our consolidated financial
position or results of operations.
Uncertain
Tax Positions -
In
the
second quarter of 2006 the FASB issued FIN No. 48, Accounting
for Uncertain Tax Positions, which
will become effective for us on January 1, 2007. FIN 48 clarifies when and
how much of a benefit we can recognize in our Consolidated Financial Statements
for certain positions taken in our income tax returns under SFAS No. 109,
Accounting
for Income Taxes, and
enhances the disclosure requirements for our income tax policies and
reserves.
Among
other things, FIN 48 will prohibit us from recognizing the benefits
of a tax
position unless we believe it is more-likely-than-not our position will prevail
with the applicable tax authorities and limits the amount of the benefit to
the
largest amount for which we believe the likelihood of realization is greater
than 50%. FIN 48 also requires companies to accrue penalties and
interest on the difference between tax positions taken on their tax returns
and
the amount of benefit recognized for financial reporting purposes under the
new
standard. Our current income tax accounting policies comply with this
aspect of the new standard. We will also be required to reclassify any
reserves we have for uncertain tax positions from deferred income tax
liabilities, where they are currently recognized, to a separate current or
noncurrent liability, depending on the nature of the tax position. In January
2007, the FASB indicated that they will issue clarifying guidance regarding
certain aspects of the new standard by the end of March 2007. We are still
in
the process of evaluating the impact FIN 48 will have on our consolidated
financial position and results of operations, and do not expect we will complete
that evaluation until the FASB issues their clarifying guidance.
Note
20 - Financial instruments:
|
|
December
31,
|
|
|
|
2005
|
|
2006
|
|
|
|
Carrying
amount
|
|
Fair
value
|
|
Carrying
amount
|
|
Fair
value
|
|
|
|
(As
adjusted)
|
|
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
cash equivalents and restricted cash
equivalents
|
|
$
|
281.4
|
|
$
|
281.4
|
|
$
|
198.7
|
|
$
|
198.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
11.8
|
|
$
|
11.8
|
|
$
|
12.6
|
|
$
|
12.6
|
|
Noncurrent
|
|
|
258.7
|
|
|
258.7
|
|
|
259.0
|
|
|
259.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt (excluding capitalized leases):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publicly-traded
fixed rate debt -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KII
Senior Secured Notes
|
|
$
|
449.3
|
|
$
|
463.6
|
|
$
|
525.0
|
|
$
|
512.5
|
|
Snake
River Sugar Company loans
|
|
|
250.0
|
|
|
250.0
|
|
|
250.0
|
|
|
250.0
|
|
Other
fixed-rate debt
|
|
|
2.0
|
|
|
2.0
|
|
|
.3
|
|
|
.3
|
|
Variable
rate debt
|
|
|
11.5
|
|
|
11.5
|
|
|
6.5
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NL
common stock
|
|
$
|
51.3
|
|
$
|
115.7
|
|
$
|
56.0
|
|
$
|
84.8
|
|
Kronos
common stock
|
|
|
28.3
|
|
|
97.7
|
|
|
22.3
|
|
|
79.5
|
|
CompX
common stock
|
|
|
45.6
|
|
|
74.1
|
|
|
45.4
|
|
|
91.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valhi
common stockholders' equity
|
|
$
|
797.3
|
|
$
|
2,160.1
|
|
$
|
866.8
|
|
$
|
2,985.0
|
|
The
fair
value of our publicly-traded marketable securities and debt, minority interest
in NL Industries, Kronos and CompX and our common stockholders' equity are
all
based upon quoted market prices at each balance sheet date. The
estimated fair value of our investment in The Amalgamated Sugar Company LLC
is
$250 million (the redemption price of our investment in the LLC). The
fair
value of our fixed-rate nonrecourse loans from Snake River Sugar Company is
based upon the $250 million redemption price of our investment in the
Amalgamated Sugar Company LLC, which collateralizes the nonrecourse loans.
Fair
values of variable interest rate debt and other fixed-rate debt are deemed
to
approximate book value. Due
to
their near-term maturities, the carrying amounts of accounts receivable and
accounts payable are considered equivalent to fair value. See
Notes
4 and 9.
We
periodically use currency forward contracts to manage a portion of foreign
currency exchange rate market risk associated with trade receivables, or similar
exchange rate risk associated with future sales, denominated in a currency
other
than the holder's functional currency. These contracts generally relate to
our
Chemicals and Component Products operations. We have not entered into these
contracts for trading or speculative purposes in the past, nor do we currently
anticipate entering into such contracts for trading or speculative purposes
in
the future. Some of the currency forward contracts we enter into meet the
criteria for hedge accounting under GAAP and are designated as cash flow hedges.
For these currency forward contracts, gains and losses representing the
effective portion of our hedges are deferred as a component of accumulated
other
comprehensive income, and are subsequently recognized in earnings at the time
the hedged item affects earnings. For the currency forward contracts we enter
into which do not meet the criteria for hedge accounting, we mark-to-market
the
estimated fair value of such contracts at each balance sheet date, with any
resulting gain or loss recognized in income currently as part of net currency
transactions. We had no forward contracts outstanding at December 31, 2006.
At
December 31, 2005, we held a series of contracts, which mature at various dates
through March 31, 2006, to exchange an aggregate of U.S. $14.0 million for
an
equivalent amount of Canadian dollars at exchange rates of Cdn. $1.16 to Cdn.
$1.19 per U.S. dollar. At December 31, 2005, the actual exchange rate was Cdn.
$1.16 per U.S. dollar. The estimated fair value of such foreign currency forward
contracts at December 31, 2005 was not material.
Note
21 - Earnings
per share:
Basic
earnings per share of common stock is based upon the weighted average number
of
our common shares actually outstanding during each period. Diluted
earnings per share of common stock includes the impact of our outstanding
dilutive stock options as well as the dilutive effect, if any, of diluted
earnings per share reported by Kronos, NL, CompX or TIMET.
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
-
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
225,445
|
|
$
|
82,126
|
|
$
|
141,682
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
-
|
|
|
|
|
|
|
|
|
|
|
Average
common shares
|
|
|
120,197
|
|
|
118,155
|
|
|
116,110
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS from continuing operations
|
|
$
|
1.88
|
|
$
|
.69
|
|
$
|
1.22
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
225,445
|
|
$
|
82,126
|
|
$
|
141,682
|
|
Net
effect of diluted earnings per
share
of TIMET(1)
|
|
|
-
|
|
|
-
|
|
|
(2,292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
for diluted earnings per
share
|
|
$
|
225,445
|
|
$
|
82,126
|
|
$
|
139,390
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares -
basic
|
|
|
120,197
|
|
|
118,155
|
|
|
116,110
|
|
Stock
option conversion(1)
|
|
|
243
|
|
|
364
|
|
|
376
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares -
diluted
|
|
|
120,440
|
|
|
118,519
|
|
|
116,486
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS from continuing operations
|
|
$
|
1.87
|
|
$
|
.69
|
|
$
|
1.20
|
|
(1)
|
The
dilutive effect of dilutive earnings per share for Kronos, NL and
CompX in
2004, 2005 and 2006 and for TIMET in 2004 and 2005 was not
significant.
|
(2)
|
Stock
option conversion excludes anti-dilutive shares of 61,000 during
2004.
|
Note
22 - Quarterly
results of operations (unaudited):
|
|
Quarter
ended
|
|
|
|
March
31
|
|
June
30
|
|
Sept.
30
|
|
Dec.
31
|
|
|
|
(As
Adjusted)
|
|
|
|
(In
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
341.2
|
|
$
|
359.5
|
|
$
|
342.2
|
|
$
|
349.9
|
|
Gross
margin
|
|
|
90.7
|
|
|
98.9
|
|
|
82.5
|
|
|
78.6
|
|
Operating income
|
|
|
46.4
|
|
|
55.7
|
|
|
37.9
|
|
|
32.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
25.7
|
|
$
|
27.9
|
|
$
|
13.5
|
|
$
|
14.8
|
|
Discontinued operations
|
|
|
(.3
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
25.4
|
|
$
|
27.9
|
|
$
|
13.5
|
|
$
|
14.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per basic share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
.21
|
|
$
|
.24
|
|
$
|
.11
|
|
$
|
.13
|
|
Discontinued operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
.21
|
|
$
|
.24
|
|
$
|
.11
|
|
$
|
.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
354.3
|
|
$
|
399.6
|
|
$
|
383.1
|
|
$
|
344.4
|
|
Gross
margin
|
|
|
82.7
|
|
|
90.0
|
|
|
84.7
|
|
|
84.6
|
|
Operating income
|
|
|
35.7
|
|
|
37.8
|
|
|
36.8
|
|
|
38.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations(1)
|
|
$
|
23.4
|
|
$
|
17.8
|
|
$
|
20.1
|
|
$
|
80.4
|
|
Discontinued operations
|
|
|
-
|
|
|
(.1
|
)
|
|
-
|
|
|
.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
23.4
|
|
$
|
17.7
|
|
$
|
20.1
|
|
$
|
80.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per basic share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
.20
|
|
$
|
.15
|
|
$
|
.17
|
|
$
|
.70
|
|
Discontinued operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
.20
|
|
$
|
.15
|
|
$
|
.17
|
|
$
|
.70
|
|
(1)
We
recognized the following amounts during the fourth quarter of 2006:
· |
an
after-tax gain of $23.6 million, or $.20 per diluted share, related
to the
sale of certain land in Nevada;
|
· |
an
income tax benefit of $17.8 million, or $.15 per diluted share, net
of
minority interest related the favorable development with certain
income
tax audits of Kronos; and
|
· |
after-tax
income of $10.2 million, or $.09 per diluted share, related to our
pro-rata share of a gain recognized by TIMET on its sale of a business
investment.
|
See
Notes
12 and 15.
The
sum
of the quarterly per share amounts may not equal the annual per share amounts
due to relative changes in the weighted average number of shares used in the
per
share computations.
As
discussed in Note 19, effective December 31, 2006 we retroactively restated
our
Consolidated Financial Statements to reflect the direct expense method of
accounting for planned major maintenance in accordance with FSP No. AUG AIR-1).
The adoption of the FSP had the following effect on our previously reported
resuls of operations for the periods indicated:
|
|
Increase
(decrease)
|
|
|
|
Gross
margin and
operating
income
|
|
Net
income
|
|
Net
income
per
basis share
|
|
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31
|
|
$
|
1.5
|
|
$
|
1.0
|
|
$
|
.6
|
|
$
|
.5
|
|
$
|
-
|
|
$
|
-
|
|
June
30
|
|
|
(.7
|
)
|
|
(1.1
|
)
|
|
(.3
|
)
|
|
(.5
|
)
|
|
-
|
|
|
(.01
|
)
|
September
30
|
|
|
.3
|
|
|
.9
|
|
|
.1
|
|
|
.4
|
|
|
-
|
|
|
-
|
|
December
31
|
|
|
(.4
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
.7
|
|
$
|
.8
|
|
$
|
.4
|
|
$
|
.4
|
|
$
|
-
|
|
$
|
(.01
|
)
|
Note
23 - Subsequent
Events:
On
February 28, 2007, our board of directors declared a special dividend in the
form of all of the TIMET common stock we own. The special dividend is
payable on March 26, 2007 to our stockholders of record as of March 12,
2007. After the dividend is complete the only ownership interest we will
have in TIMET will be a nominal amount through our subsidiary NL. For financial
reporting purposes, we will record the special dividend by reducing our
stockholders’ equity by the carrying value of our investment in TIMET, net of
related deferred income taxes, as of the distribution date.
When
we
pay the special dividend, we will incur an income tax liability based on the
excess of the market value of the shares of TIMET on the date of distribution
over our income tax basis in the shares of TIMET distributed. Because we
are a member of the Contran Tax Group, as discussed in Note 1, we will owe
this
income tax liability to Contran. To
the
extent this income tax liability relates to TIMET shares distributed to other
members of the Contran Tax Group, this income tax will not be payable by Contran
to the applicable tax authority. Such income tax liability would become
payable by Contran to the applicable tax authoirty when the TIMET shares
distributed are sold or otherwise transferred outside the Contran Tax Group
or
in the event of certain restructuring transactions involving us and
Contran.
In
order
to settle our income tax obligation to Contran, we and Contran have agreed
that
concurrent with the payment of the special dividend, we will issue to Contran
5,000 shares of a newly established 6% Series A Preferred Stock that will have
an aggregate liquidation preference equal to the actual income tax obligation
we
incur from the special dividend. Among other terms, the Series A preferred
stock will contain no call or redemption features. Upon issuance the
Series A Preferred Stock will become part of our stockholders’
equity.
VALHI,
INC. AND SUBSIDIARIES
SCHEDULE
I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed
Balance Sheets
(In
thousands)
|
|
December
31,
|
|
|
|
2005
|
|
2006
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
119,763
|
|
$
|
67,344
|
|
Restricted cash equivalents
|
|
|
325
|
|
|
250
|
|
Accounts and notes receivable
|
|
|
6,241
|
|
|
816
|
|
Receivables from subsidiaries and affiliates:
|
|
|
|
|
|
|
|
Income
taxes, net
|
|
|
-
|
|
|
1,760
|
|
Other
|
|
|
2,281
|
|
|
3,025
|
|
Deferred income taxes
|
|
|
633
|
|
|
1,672
|
|
Other
|
|
|
233
|
|
|
239
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
129,476
|
|
|
75,106
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
Marketable securities - Investment in The
Amalgamated Sugar Company LLC
|
|
|
250,000
|
|
|
250,000
|
|
Restricted cash equivalents
|
|
|
382
|
|
|
409
|
|
Investment in and advances to subsidiaries and
affiliate
|
|
|
958,131
|
|
|
1,102,704
|
|
Other assets
|
|
|
210
|
|
|
173
|
|
Property and equipment, net
|
|
|
1,705
|
|
|
947
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
1,210,428
|
|
|
1,354,233
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,339,904
|
|
$
|
1,429,339
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Payables to subsidiaries and affiliates:
|
|
|
|
|
|
|
|
Income taxes, net
|
|
$
|
2,351
|
|
$
|
-
|
|
Other
|
|
|
16
|
|
|
-
|
|
Accounts payable and accrued liabilities
|
|
|
3,321
|
|
|
3,157
|
|
Income taxes
|
|
|
66
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
5,754
|
|
|
3,157
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
Long-term debt - Snake River Sugar Company
|
|
|
250,000
|
|
|
250,000
|
|
Deferred income taxes
|
|
|
285,322
|
|
|
308,658
|
|
Other
|
|
|
1,495
|
|
|
745
|
|
|
|
|
|
|
|
|
|
Total noncurrent liabilities
|
|
|
536,817
|
|
|
559,403
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
797,333
|
|
|
866,779
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
1,339,904
|
|
$
|
1,429,339
|
|
VALHI,
INC. AND SUBSIDIARIES
SCHEDULE
I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
Condensed
Statements of Income
(In
thousands)
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
and other income:
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
$
|
32,438
|
|
$
|
52,351
|
|
$
|
35,972
|
|
Write-off of accrued interest on loan to
Snake River Sugar Company
|
|
|
-
|
|
|
(21,638
|
)
|
|
-
|
|
Equity
in earnings of subsidiaries
and
affiliates
|
|
|
304,715
|
|
|
88,798
|
|
|
151,590
|
|
Other, net
|
|
|
3,306
|
|
|
2,286
|
|
|
3,876
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues and other income
|
|
|
340,459
|
|
|
121,797
|
|
|
191,438
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
9,302
|
|
|
8,424
|
|
|
7,889
|
|
Interest
|
|
|
25,202
|
|
|
24,116
|
|
|
24,086
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses
|
|
|
34,504
|
|
|
32,540
|
|
|
31,975
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
305,955
|
|
|
89,257
|
|
|
159,463
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
80,510
|
|
|
7,131
|
|
|
17,781
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
225,445
|
|
|
82,126
|
|
|
141,682
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
3,732
|
|
|
(272
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
229,177
|
|
$
|
81,854
|
|
$
|
141,682
|
|
|
|
|
|
|
|
|
|
|
|
|
VALHI,
INC. AND SUBSIDIARIES
SCHEDULE
I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
Condensed
Statements of Cash Flows
(In
thousands)
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
229,177
|
|
$
|
81,854
|
|
$
|
141,682
|
|
Write-off of accrued interest receivable
|
|
|
-
|
|
|
21,638
|
|
|
-
|
|
Deferred income taxes
|
|
|
75,435
|
|
|
10,895
|
|
|
20,694
|
|
Equity in earnings of subsidiaries
and affiliate:
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
(304,715
|
)
|
|
(88,798
|
)
|
|
(151,590
|
)
|
Discontinued operations
|
|
|
(3,732
|
)
|
|
272
|
|
|
-
|
|
Dividends from subsidiaries and
affiliates
|
|
|
37,209
|
|
|
58,639
|
|
|
87,004
|
|
Other, net
|
|
|
683
|
|
|
(273
|
)
|
|
(734
|
)
|
Net change in assets and liabilities
|
|
|
(9,264
|
)
|
|
17,199
|
|
|
(484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
24,793
|
|
|
101,426
|
|
|
96,572
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchases of:
|
|
|
|
|
|
|
|
|
|
|
Kronos common stock
|
|
|
(17,057
|
)
|
|
(7,039
|
)
|
|
(25,430
|
)
|
TIMET common stock
|
|
|
-
|
|
|
(17,972
|
)
|
|
(18,699
|
)
|
NL
common stock
|
|
|
-
|
|
|
-
|
|
|
(364
|
)
|
Loans to subsidiaries and affiliates:
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
(32,328
|
)
|
|
(35,416
|
)
|
|
(12,946
|
)
|
Collections
|
|
|
178,227
|
|
|
18,137
|
|
|
800
|
|
Investment in other subsidiary
|
|
|
-
|
|
|
(2,937
|
)
|
|
(2,401
|
)
|
Collection of loan to Snake River
Sugar Company
|
|
|
-
|
|
|
80,000
|
|
|
-
|
|
Change in restricted cash equivalents, net
|
|
|
44
|
|
|
57
|
|
|
48
|
|
Other, net
|
|
|
(558
|
)
|
|
(42
|
)
|
|
1,466
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used
in)
investing activities
|
|
|
128,328
|
|
|
34,788
|
|
|
(57,526
|
)
|
|
|
|
|
|
|
|
|
|
|
|
VALHI,
INC. AND SUBSIDIARIES
SCHEDULE
I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
Condensed
Statements of Cash Flows (Continued)
(In
thousands)
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Indebtedness:
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
$
|
53,000
|
|
$
|
5,000
|
|
$
|
-
|
|
Principal payments
|
|
|
(58,000
|
)
|
|
(5,000
|
)
|
|
-
|
|
Loans from affiliates:
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
30,529
|
|
|
-
|
|
|
-
|
|
Repayments
|
|
|
(54,154
|
)
|
|
-
|
|
|
-
|
|
Dividends
|
|
|
(29,804
|
)
|
|
(48,805
|
)
|
|
(47,981
|
)
|
Treasury stock acquired
|
|
|
-
|
|
|
(62,060
|
)
|
|
(43,794
|
)
|
Other, net
|
|
|
(424
|
)
|
|
77
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities
|
|
|
(58,853
|
)
|
|
(110,788
|
)
|
|
(91,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease)
|
|
|
94,268
|
|
|
25,426
|
|
|
(52,419
|
)
|
Valmont Insurance Company
|
|
|
(5,374
|
)
|
|
-
|
|
|
-
|
|
Balance at beginning of year
|
|
|
5,443
|
|
|
94,337
|
|
|
119,763
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
94,337
|
|
$
|
119,763
|
|
$
|
67,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures - cash paid
(received) for:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
25,116
|
|
$
|
23,342
|
|
$
|
24,702
|
|
Income taxes, net
|
|
|
(2,134
|
)
|
|
(8,023
|
)
|
|
1,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VALHI,
INC. AND SUBSIDIARIES
SCHEDULE
I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(CONTINUED)
Notes
to Condensed Financial Information
Note
1 - Basis
of presentation:
We
have
prepared the accompanying Financial Statements on a “Parent Company” basis. This
means that our investments in the common stock or membership interest of our
majority and wholly owned subsidiaries, including NL Industries, Inc., Kronos
Worldwide, Inc., Tremont LLC, Valcor, Inc. and Waste Control Specialists LLC,
are presented on the equity method of accounting. Our Consolidated Financial
Statements and the Notes thereto, which include the financial position, results
of operations and cash flows of these subsidiaries, are incorporated by
reference into these Parent Company Financial Statements. As we have discussed
in the Notes to our Consolidated Financial Statements, we have retroactively
adjusted our Consolidated Financial Statements due to a change in accounting
principle adopted by Kronos.
Note
2 - Investment
in and advances to subsidiaries and affiliate:
|
|
December
31,
|
|
|
|
2005
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in:
|
|
|
|
|
|
|
|
NL
Industries (NYSE: NL)
|
|
$
|
293,044
|
|
$
|
300,017
|
|
Kronos
Worldwide, Inc. (NYSE: KRO)
|
|
|
484,755
|
|
|
528,382
|
|
Tremont
LLC
|
|
|
126,025
|
|
|
179,610
|
|
Valcor
and subsidiary
|
|
|
(8,864
|
)
|
|
2,200
|
|
Waste
Control Specialists LLC
|
|
|
34,345
|
|
|
36,312
|
|
TIMET
(NYSE: TIE) common stock
|
|
|
24,059
|
|
|
51,416
|
|
TIMET
preferred stock
|
|
|
183
|
|
|
183
|
|
Total
|
|
|
953,547
|
|
|
1,098,120
|
|
|
|
|
|
|
|
|
|
Noncurrent
loans to Waste Control Specialists LLC
|
|
|
4,584
|
|
|
4,584
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
958,131
|
|
$
|
1,102,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
December 2004, Valmont Insurance Company, one of our subsidiaries, merged into
Tall Pines Insurance Company, a subsidiary of Tremont, with Tall Pines surviving
the merger. We previously included Valmont as part of our Parent Company
Financial Statements. At the date of merger, Valmont’s cash and cash equivalents
was approximately $5.4 million, and such amount is shown as a reconciling item
on the accompanying Condensed Statements of Cash Flows.
|
|
Years ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in earnings of subsidiaries and
affiliate
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NL
Industries
|
|
$
|
123,612
|
|
$
|
23,177
|
|
$
|
22,676
|
|
Kronos
Worldwide
|
|
|
99,489
|
|
|
34,278
|
|
|
43,382
|
|
Tremont
LLC
|
|
|
88,035
|
|
|
40,576
|
|
|
86,426
|
|
Valcor
|
|
|
5,399
|
|
|
-
|
|
|
1,385
|
|
Waste
Control Specialists LLC
|
|
|
(12,379
|
)
|
|
(13,358
|
)
|
|
(10,342
|
)
|
TIMET
|
|
|
559
|
|
|
4,125
|
|
|
8,063
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
304,715
|
|
$
|
88,798
|
|
$
|
151,590
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends from subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NL
Industries
|
|
$
|
-
|
|
$
|
30,264
|
|
$
|
20,181
|
|
Kronos
Worldwide
|
|
|
17,586
|
|
|
27,887
|
|
|
28,955
|
|
Tremont
LLC
|
|
|
19,623
|
|
|
488
|
|
|
37,868
|
|
Valcor
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Waste
Control Specialists LLC
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37,209
|
|
$
|
58,639
|
|
$
|
87,004
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in
earnings of discontinued operations relates to CompX’s operations in The
Netherlands.
Note
5 - Long-term
debt:
Our $250
million in loans from Snake River Sugar Company bear interest at a weighted
average fixed interest rate of 9.4%, are collateralized by our interest in
The
Amalgamated Sugar Company LLC and are due in January 2027. At December 31,
2006,
$37.5 million of such loans are recourse to us and the remaining $212.5 million
is nonrecourse to us. Under certain conditions, Snake River has the ability
to
accelerate the maturity of these loans.
At
December 31, 2006, we have a $100 million revolving bank credit facility which
matures in October 2007, generally bears interest at LIBOR plus 1.5% (for
LIBOR-based borrowings) or prime (for prime-based borrowings), and is
collateralized by 15 million shares of Kronos common stock we own. The agreement
limits our ability to pay dividends and incur additional indebtedness and
contains other provisions customary in lending transactions of this type. In
the
event of a change of control of us, as defined, the lenders would have the
right
to accelerate the maturity of the facility. The maximum amount we may borrow
under the facility is limited to one-third of the aggregate market value of
the
shares of Kronos common stock we have pledged. Based on Kronos’ December 31,
2006 quoted market price of $32.56 per share, the shares of Kronos common stock
pledged under the facility provide more than sufficient collateral coverage
to
allow for borrowings up to the full amount of the facility. At December 31,
2006, we would have become limited to borrowing less than the full $100 million
amount of the facility, or would be required to pledge additional collateral
if
the full amount of the facility had been borrowed, if the quoted market price
of
Kronos’ common stock was less than $20 per share. At December 31, 2006, we
haven’t borrowed any amounts under the facility, we had issued $1.7 million of
letters of credit under the facility and we could borrow up to $98.3 million
under the facility.
Note
6 - Income
taxes:
The
Amalgamated Sugar Company LLC is treated as a partnership for federal income
tax
purposes. Valhi Parent Company’s provision for income taxes (benefit) includes a
tax provision (benefit) attributable to Valhi’s equity in earnings (losses) of
Waste Control Specialists, as recognition of such income tax (benefit) is not
appropriate at the Waste Control Specialist level.
|
|
Years
ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of provision for income taxes
(benefit):
|
|
|
|
|
|
|
|
|
|
|
Currently payable (refundable)
|
|
$
|
5,075
|
|
$
|
(3,764
|
)
|
$
|
(2,913
|
)
|
Deferred income taxes
|
|
|
75,435
|
|
|
10,895
|
|
|
20,694
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
80,510
|
|
$
|
7,131
|
|
$
|
17,781
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid (received) for income taxes, net:
|
|
|
|
|
|
|
|
|
|
|
Received from subsidiaries
|
|
$
|
(2,174
|
)
|
$
|
(9,030
|
)
|
$
|
(85
|
)
|
Paid to Contran
|
|
|
-
|
|
|
503
|
|
|
1,237
|
|
Paid to tax authorities
|
|
|
40
|
|
|
504
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(2,134
|
)
|
$
|
(8,023
|
)
|
$
|
1,287
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
2005
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
(As
Adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
Components of the net deferred tax asset (liability) -
|
|
|
|
|
|
|
|
tax effect of temporary differences related to:
|
|
|
|
|
|
|
|
Investment
in:
|
|
|
|
|
|
|
|
The Amalgamated Sugar Company LLC
|
|
$
|
(102,945
|
)
|
$
|
(123,230
|
)
|
Kronos Worldwide
|
|
|
(184,994
|
)
|
|
(200,236
|
)
|
Reduction of deferred income tax assets of
subsidiaries that are members of the Contran Tax
Group - separate company U.S. net operating loss
carryforwards and other tax attributes that do not
exist at the Valhi level
|
|
|
(8,283
|
)
|
|
-
|
|
Federal
and state loss carryforwards and other
income
tax attributes
|
|
|
18,648
|
|
|
26,017
|
|
Accrued liabilities and other deductible differences
|
|
|
2,836
|
|
|
3,158
|
|
Other taxable differences
|
|
|
(9,951
|
)
|
|
(12,695
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(284,689
|
)
|
$
|
(306,986
|
)
|
|
|
|
|
|
|
|
|
Current
deferred tax asset
|
|
$
|
633
|
|
$
|
1,672
|
|
Noncurrent
deferred tax liability
|
|
|
(285,322
|
)
|
|
(308,658
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(284,689
|
)
|
$
|
(306,986
|
)
|