SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the quarter ended June 30, 2007
|
Commission
file number 1-5467
|
VALHI,
INC.
|
(Exact
name of Registrant as specified in its
charter)
|
Delaware
|
|
87-0110150
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(IRS
Employer
Identification
No.)
|
5430
LBJ Freeway, Suite 1700, Dallas,
Texas 75240-2697
|
(Address
of principal executive offices) (Zip
Code)
|
Registrant's
telephone number, including area
code: (972) 233-1700
Indicate
by check mark:
Whether
the Registrant (1) has filed all reports required to be filed by Section
13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(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
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 .
Number
of shares of the Registrant's common stock outstanding on July 31, 2007:
113,999,078.
VALHI,
INC. AND SUBSIDIARIES
INDEX
|
Page
number
|
|
|
Part
I. FINANCIAL
INFORMATION
|
|
|
|
Item
1. Financial
Statements.
|
|
|
|
Condensed
Consolidated Balance
Sheets –
December
31, 2006; and
June 30, 2007 (unaudited)
|
3
|
|
|
Condensed
Consolidated
Statements of Operations (unaudited) – Three and six months ended
June 30, 2006 (as adjusted);
and
Three and six months
ended June 30, 2007
|
5
|
|
|
Condensed
Consolidated
Statements of Cash Flows (unaudited)
–
Six
months ended June
30, 2006 (as adjusted); and
Six
months ended June 30,
2007
|
6
|
|
|
Condensed
Consolidated
Statement of Stockholders’ Equity
and Comprehensive
Income – Six months ended
June
30, 2007
(unaudited)
|
8
|
|
|
Notes
to Condensed Consolidated
Financial Statements
(unaudited)
|
9
|
|
|
Item
2. Management’s
Discussion and Analysis of Financial
Condition
and Results of
Operations.
|
27
|
|
|
Item
3. Quantitative
and Qualitative Disclosures About
Market
Risk
|
45
|
|
|
Item
4. Controls
and Procedures
|
46
|
|
|
Part
II. OTHER
INFORMATION
|
|
|
|
Item
1. Legal
Proceedings.
|
48
|
|
|
Item
1A. Risk
Factors.
|
49
|
|
|
Item
2. Unregistered
Sales of Equity Securities and
Use
of Proceeds; Share
Repurchases
|
50
|
|
|
Item
4. Submission
of Matters to a Vote of Security Holders
|
|
|
|
Item
6. Exhibits.
|
51
|
|
|
Items
3
and 5 of Part II are omitted because there is no information to
report.
VALHI,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
millions)
ASSETS
|
|
December
31,
2006
|
|
|
June
30,
2007
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
189.2
|
|
|
$ |
147.0
|
|
Restricted cash equivalents
|
|
|
9.1
|
|
|
|
6.8
|
|
Marketable securities
|
|
|
12.6
|
|
|
|
8.8
|
|
Accounts and other receivables, net
|
|
|
231.0
|
|
|
|
299.2
|
|
Inventories, net
|
|
|
309.0
|
|
|
|
321.1
|
|
Prepaid expenses and
other
|
|
|
17.9
|
|
|
|
16.6
|
|
Deferred income taxes
|
|
|
10.6
|
|
|
|
9.9
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
779.4
|
|
|
|
809.4
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Marketable
securities
|
|
|
259.0
|
|
|
|
332.4
|
|
Investment in affiliates
|
|
|
396.7
|
|
|
|
133.9
|
|
Pension asset
|
|
|
40.1
|
|
|
|
44.9
|
|
Goodwill
|
|
|
385.2
|
|
|
|
384.9
|
|
Other intangible assets
|
|
|
3.9
|
|
|
|
3.5
|
|
Deferred income taxes
|
|
|
264.4
|
|
|
|
273.3
|
|
Other assets
|
|
|
64.7
|
|
|
|
61.2
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
1,414.0
|
|
|
|
1,234.1
|
|
|
|
|
|
|
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
|
42.1
|
|
|
|
42.9
|
|
Buildings
|
|
|
242.2
|
|
|
|
254.6
|
|
Equipment
|
|
|
928.4
|
|
|
|
953.6
|
|
Mining properties
|
|
|
30.7
|
|
|
|
33.4
|
|
Construction in progress
|
|
|
20.6
|
|
|
|
41.3
|
|
|
|
|
1,264.0
|
|
|
|
1,325.8
|
|
Less accumulated depreciation
|
|
|
652.7
|
|
|
|
704.8
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
|
611.3
|
|
|
|
621.0
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
2,804.7
|
|
|
$ |
2,664.5
|
|
VALHI,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In
millions)
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
December
31,
2006
|
|
|
June
30,
2007
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$ |
1.2
|
|
|
$ |
1.2
|
|
Accounts payable
and accrued liabilities
|
|
|
238.7
|
|
|
|
242.1
|
|
Income taxes
|
|
|
11.1
|
|
|
|
18.8
|
|
Deferred income taxes
|
|
|
2.2
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
253.2
|
|
|
|
263.8
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
785.3
|
|
|
|
814.0
|
|
Deferred income taxes
|
|
|
479.2
|
|
|
|
430.0
|
|
Accrued pension costs
|
|
|
188.7
|
|
|
|
188.8
|
|
Accrued post
retirement benefit (OPEB) costs
|
|
|
33.6
|
|
|
|
34.3
|
|
Accrued environmental costs
|
|
|
46.1
|
|
|
|
43.3
|
|
Other liabilities
|
|
|
28.1
|
|
|
|
90.0
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent liabilities
|
|
|
1,561.0
|
|
|
|
1,600.4
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
123.7
|
|
|
|
127.3
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
-
|
|
|
|
667.3
|
|
Common stock
|
|
|
1.2
|
|
|
|
1.2
|
|
Additional paid-in capital
|
|
|
107.4
|
|
|
|
39.2
|
|
Retained earnings
(deficit)
|
|
|
839.2
|
|
|
|
(4.9 |
) |
Accumulated other comprehensive income (loss)
|
|
|
(43.1 |
) |
|
|
8.1
|
|
Treasury stock
|
|
|
(37.9 |
) |
|
|
(37.9 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
866.8
|
|
|
|
673.0
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, minority interest and
stockholders’ equity
|
|
$ |
2,804.7
|
|
|
$ |
2,664.5
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Notes 11 and 13)
See
accompanying Notes to Condensed Consolidated Financial
Statements.
VALHI,
INC. AND
SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF
OPERATIONS
(In
thousands, except per share
data)
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(as
adjusted)
|
|
|
|
|
|
(as
adjusted)
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
and other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
399.6
|
|
|
$ |
389.0
|
|
|
$ |
753.9
|
|
|
$ |
748.0
|
|
Other,
net
|
|
|
10.3
|
|
|
|
11.4
|
|
|
|
23.1
|
|
|
|
23.8
|
|
Equity
in earnings of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Titanium
Metals Corporation
("TIMET")
|
|
|
20.3
|
|
|
|
-
|
|
|
|
42.5
|
|
|
|
26.9
|
|
Other
|
|
|
(.2 |
) |
|
|
1.0
|
|
|
|
(2.0 |
) |
|
|
.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues and other income
|
|
|
430.0
|
|
|
|
401.4
|
|
|
|
817.5
|
|
|
|
799.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
309.6
|
|
|
|
316.1
|
|
|
|
581.1
|
|
|
|
595.0
|
|
Selling,
general and administrative
|
|
|
59.9
|
|
|
|
60.5
|
|
|
|
114.0
|
|
|
|
115.4
|
|
Loss
on prepayment of debt
|
|
|
22.3
|
|
|
|
-
|
|
|
|
22.3
|
|
|
|
-
|
|
Interest
|
|
|
19.2
|
|
|
|
15.9
|
|
|
|
36.0
|
|
|
|
31.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses
|
|
|
411.0
|
|
|
|
392.5
|
|
|
|
753.4
|
|
|
|
741.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
19.0
|
|
|
|
8.9
|
|
|
|
64.1
|
|
|
|
57.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
(benefit) for income taxes
|
|
|
(1.1 |
) |
|
|
13.3
|
|
|
|
18.0
|
|
|
|
33.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in after-tax
Earnings
|
|
|
2.4
|
|
|
|
.5
|
|
|
|
5.0
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
17.7
|
|
|
$ |
(4.9 |
) |
|
$ |
41.1
|
|
|
$ |
21.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per basic and
diluted
share
|
|
$ |
.15
|
|
|
$ |
(.04 |
) |
|
$ |
.35
|
|
|
$ |
.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends per share
|
|
$ |
.10
|
|
|
$ |
.10
|
|
|
$ |
.20
|
|
|
$ |
.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
116.4
|
|
|
|
114.9
|
|
|
|
116.5
|
|
|
|
114.9
|
|
Outstanding
stock options impact
|
|
|
.4
|
|
|
|
.2
|
|
|
|
.4
|
|
|
|
.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
116.8
|
|
|
|
115.1
|
|
|
|
116.9
|
|
|
|
115.1
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
VALHI,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
millions)
|
|
Six
months ended
June
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(as
adjusted)
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income
|
|
$ |
41.1
|
|
|
$ |
21.2
|
|
Depreciation and amortization
|
|
|
37.1
|
|
|
|
32.6
|
|
Loss
on prepayment of debt
|
|
|
22.3
|
|
|
|
-
|
|
Call
premium paid on Senior Secured Notes
|
|
|
(20.9 |
) |
|
|
-
|
|
Benefit plan expense greater
(less)
than cash funding requirements:
|
|
|
|
|
|
|
|
|
Defined benefit pension plans
|
|
|
(2.5 |
) |
|
|
(2.5 |
) |
Other postretirement benefit plans
|
|
|
(1.7 |
) |
|
|
.3
|
|
Deferred income taxes
|
|
|
10.8
|
|
|
|
28.0
|
|
Minority interest
|
|
|
5.0
|
|
|
|
3.0
|
|
Other, net
|
|
|
.7
|
|
|
|
1.9
|
|
Equity in:
|
|
|
|
|
|
|
|
|
TIMET
|
|
|
(42.5 |
) |
|
|
(26.9 |
) |
Other
|
|
|
2.0
|
|
|
|
(.5 |
) |
Net distributions from (contributions to):
Manufacturing joint venture
|
|
|
(.2 |
) |
|
|
(1.4 |
) |
Other
|
|
|
.3
|
|
|
|
.3
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts and other receivables, net
|
|
|
(50.6 |
) |
|
|
(50.2 |
) |
Inventories, net
|
|
|
18.6
|
|
|
|
(3.7 |
) |
Accounts payable and accrued liabilities
|
|
|
(18.8 |
) |
|
|
(8.7 |
) |
Accounts with affiliates
|
|
|
3.8
|
|
|
|
(10.4 |
) |
Income taxes
|
|
|
(22.5 |
) |
|
|
6.7
|
|
Other, net
|
|
|
3.0
|
|
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(15.0 |
) |
|
|
(11.6 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(19.2 |
) |
|
|
(22.8 |
) |
Capitalized
permit costs
|
|
|
(3.7 |
) |
|
|
(5.0 |
) |
Purchases of:
|
|
|
|
|
|
|
|
|
Kronos common stock
|
|
|
(25.2 |
) |
|
|
-
|
|
CompX common stock
|
|
|
(1.8 |
) |
|
|
-
|
|
TIMET
common stock
|
|
|
(17.0 |
) |
|
|
(.7 |
) |
Business
unit, net of cash acquired
|
|
|
(9.8 |
) |
|
|
-
|
|
Marketable securities
|
|
|
(16.9 |
) |
|
|
(17.2 |
) |
Proceeds from disposal of marketable
securities
|
|
|
15.8
|
|
|
|
20.9
|
|
Change in restricted cash equivalents, net
|
|
|
(1.1 |
) |
|
|
2.4
|
|
Other, net
|
|
|
1.7
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(77.2 |
) |
|
|
(20.4 |
) |
|
|
|
|
|
|
|
|
|
VALHI,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In
millions)
|
|
Six
months ended
June
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(as
adjusted)
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
Indebtedness:
|
|
|
|
|
|
|
Borrowings
|
|
$ |
649.2
|
|
|
$ |
177.6
|
|
Principal payments
|
|
|
(597.8 |
) |
|
|
(159.7 |
) |
Deferred financing costs paid
|
|
|
(8.9 |
) |
|
|
-
|
|
Dividends paid
|
|
|
(24.1 |
) |
|
|
(22.8 |
) |
Distributions to minority interest
|
|
|
(4.5 |
) |
|
|
(4.4 |
) |
Treasury stock acquired
|
|
|
(10.2 |
) |
|
|
(3.1 |
) |
Issuance
of common stock and other
|
|
|
.3
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used
in) financing
activities
|
|
|
4.0
|
|
|
|
(11.4 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - net change from:
|
|
|
|
|
|
|
|
|
Operating, investing and financing activities
|
|
|
(88.2 |
) |
|
|
(43.4 |
) |
Currency translation
|
|
|
2.0
|
|
|
|
1.2
|
|
Cash and cash
equivalents at beginning of period
|
|
|
275.0
|
|
|
|
189.2
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at end of period
|
|
$ |
188.8
|
|
|
$ |
147.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest, net of amounts capitalized
|
|
$ |
28.1
|
|
|
$ |
30.6
|
|
Income taxes, net
|
|
|
28.1
|
|
|
|
11.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
financing activities:
|
|
|
|
|
|
|
|
|
Dividend
of TIMET common stock
|
|
$ |
-
|
|
|
$ |
899.3
|
|
Issuance
of preferred stock in settlement of
tax
obligation
|
|
|
-
|
|
|
|
667.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
VALHI,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
Six
months ended June 30, 2007
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Retained
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Preferred
stock
|
|
|
Common
Stock
|
|
|
paid-in
capital
|
|
|
earnings
(deficit)
|
|
|
comprehensive
income (loss)
|
|
|
Treasury
stock
|
|
|
stockholders’
equity
|
|
|
Comprehensive
income
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
$ |
-
|
|
|
$ |
1.2
|
|
|
$ |
107.4
|
|
|
$ |
839.2
|
|
|
$ |
(43.1 |
) |
|
$ |
(37.9 |
) |
|
$ |
866.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21.2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21.2
|
|
|
$ |
21.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
(11.4 |
) |
|
|
(11.4 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(22.8 |
) |
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
of TIMET common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(56.9 |
) |
|
|
(850.4 |
) |
|
|
8.0
|
|
|
|
-
|
|
|
|
(899.3 |
) |
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in accounting –
FIN
No. 48
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1.6 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(1.6 |
) |
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of preferred stock
|
|
|
667.3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
667.3
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
43.2
|
|
|
|
-
|
|
|
|
43.2
|
|
|
|
43.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3.1 |
) |
|
|
(3.1 |
) |
|
|
-
|
|
Retired
|
|
|
-
|
|
|
|
-
|
|
|
|
(1.2 |
) |
|
|
(1.9 |
) |
|
|
-
|
|
|
|
3.1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other,
net
|
|
|
-
|
|
|
|
-
|
|
|
|
1.3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1.3
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2007
|
|
$ |
667.3
|
|
|
$ |
1.2
|
|
|
$ |
39.2
|
|
|
$ |
(4.9 |
) |
|
$ |
8.1
|
|
|
$ |
(37.9 |
) |
|
$ |
673.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
72.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
VALHI,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2007
(unaudited)
Note
1
- Organization
and basis of presentation:
Organization
- We are majority owned by Contran Corporation, which directly or through
its subsidiaries owns approximately 93% of our outstanding common stock at
June
30, 2007. 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.
Basis
of Presentation - Consolidated in this Quarterly Report are the results of
our majority-owned and wholly-owned subsidiaries, including NL Industries,
Inc.,
Kronos Worldwide, Inc., CompX International, Inc., Tremont LLC and Waste
Control
Specialists LLC (“WCS”). Prior to March 26, 2007 we were the largest
shareholder of Titanium Metals Corporation (“TIMET”), although we owned less
than a majority interest and therefore we accounted for our investment by
the
equity method. See Note 5. Kronos (NYSE: KRO), NL (NYSE:
NL), CompX (NYSE: CIX) and TIMET (NYSE: TIE) each file periodic reports with
the
Securities and Exchange Commission (“SEC”).
The
unaudited Condensed Consolidated Financial Statements contained in this
Quarterly Report have been prepared on the same basis as the audited
Consolidated Financial Statements included in our Annual Report on Form 10-K
for
the year ended December 31, 2006 that we filed with the SEC on March 13,
2007
(the “2006 Annual Report”), except as disclosed in Note 14. In our
opinion, we have made all necessary adjustments (which include only normal
recurring adjustments) in order to state fairly, in all material respects,
our
consolidated financial position, results of operations and cash flows as
of the
dates and for the periods presented. We have condensed the
Consolidated Balance Sheet at December 31, 2006 contained in this Quarterly
Report as compared to our audited Consolidated Financial Statements at that
date, and we have omitted certain information and footnote disclosures
(including those related to the Consolidated Balance Sheet at December 31,
2006)
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America
(“GAAP”). Our results of operations for the interim periods ended
June 30, 2007 may not be indicative of our operating results for the full
year. The Condensed Consolidated Financial Statements contained in
this Quarterly Report should be read in conjunction with our 2006 Consolidated
Financial Statements contained in our 2006 Annual Report.
Unless
otherwise indicated, references in this report to “we,” “us” or “our” refer to
Valhi, Inc and its subsidiaries, taken as a whole.
Note
2
- Business
segment information:
Business
segment
|
|
Entity
|
|
%
owned at
June
30, 2007
|
|
|
|
|
|
Chemicals
|
|
Kronos
Worldwide, Inc.
|
|
95%
|
Component
products
|
|
CompX
International Inc.
|
|
70%
|
Waste
management
|
|
Waste
Control Specialists LLC
|
|
100%
|
Titanium
metals
|
|
TIMET
|
|
1%
|
Our
ownership of Kronos includes 59% we hold directly and 36% held directly by
NL. We own 83% of NL. Our ownership of TIMET includes 1%
held by 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 82% of
the outstanding common stock of CompX. NL also owns an additional 2%
of CompX directly.
Prior
to
March 26, 2007, we owned 35% of TIMET directly and through a wholly-owned
subsidiary. On March 26, 2007 we completed a special dividend of the
TIMET stock we owned. As a result we now own approximately 1% of the
TIMET shares outstanding. We accounted for our ownership of TIMET by
the equity method through the date of the special dividend. See Note
5. 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.
|
|
Three
months ended
June
30,
|
|
|
Six
months ended
June
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(as
adjusted)
|
|
|
|
|
|
(as
adjusted)
|
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemicals
|
|
$ |
345.1
|
|
|
$ |
342.6
|
|
|
$ |
649.4
|
|
|
$ |
656.6
|
|
Component products
|
|
|
50.2
|
|
|
|
45.3
|
|
|
|
97.2
|
|
|
|
88.8
|
|
Waste management
|
|
|
4.3
|
|
|
|
1.1
|
|
|
|
7.3
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$ |
399.6
|
|
|
$ |
389.0
|
|
|
$ |
753.9
|
|
|
$ |
748.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemicals
|
|
$ |
268.0
|
|
|
$ |
279.7
|
|
|
$ |
500.0
|
|
|
$ |
524.1
|
|
Component products
|
|
|
37.8
|
|
|
|
33.4
|
|
|
|
73.2
|
|
|
|
64.8
|
|
Waste management
|
|
|
3.8
|
|
|
|
3.0
|
|
|
|
7.9
|
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
$ |
309.6
|
|
|
$ |
316.1
|
|
|
$ |
581.1
|
|
|
$ |
595.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemicals
|
|
$ |
77.1
|
|
|
$ |
62.9
|
|
|
$ |
149.4
|
|
|
$ |
132.5
|
|
Component products
|
|
|
12.4
|
|
|
|
11.9
|
|
|
|
24.0
|
|
|
|
24.0
|
|
Waste management
|
|
|
.5
|
|
|
|
(1.9 |
) |
|
|
(.6 |
) |
|
|
(3.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin
|
|
$ |
90.0
|
|
|
$ |
72.9
|
|
|
$ |
172.8
|
|
|
$ |
153.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemicals
|
|
$ |
33.2
|
|
|
$ |
24.6
|
|
|
$ |
66.4
|
|
|
$ |
54.9
|
|
Component products
|
|
|
5.7
|
|
|
|
4.8
|
|
|
|
10.8
|
|
|
|
10.4
|
|
Waste management
|
|
|
(1.1 |
) |
|
|
(3.2 |
) |
|
|
(3.7 |
) |
|
|
(6.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
37.8
|
|
|
|
26.2
|
|
|
|
73.5
|
|
|
|
59.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TIMET
|
|
|
20.4
|
|
|
|
-
|
|
|
|
42.5
|
|
|
|
26.9
|
|
Other
|
|
|
(.3 |
) |
|
|
1.0
|
|
|
|
(2.0 |
) |
|
|
.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General corporate items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
|
10.6
|
|
|
|
7.9
|
|
|
|
20.4
|
|
|
|
15.8
|
|
Insurance recoveries
|
|
|
.6
|
|
|
|
.5
|
|
|
|
2.8
|
|
|
|
3.0
|
|
Securities transaction gains, net
|
|
|
-
|
|
|
|
.2
|
|
|
|
.2
|
|
|
|
.5
|
|
General expenses, net
|
|
|
(8.6 |
) |
|
|
(11.0 |
) |
|
|
(15.0 |
) |
|
|
(17.0 |
) |
Loss on prepayment of debt
|
|
|
(22.3 |
) |
|
|
-
|
|
|
|
(22.3 |
) |
|
|
-
|
|
Interest expense
|
|
|
(19.2 |
) |
|
|
(15.9 |
) |
|
|
(36.0 |
) |
|
|
(31.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$ |
19.0
|
|
|
$ |
8.9
|
|
|
$ |
64.1
|
|
|
$ |
57.3
|
|
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 the way we define operating
income. Intersegment sales are not material.
Note
3 – Accounts and other receivables, net:
|
|
December
31,
2006
|
|
|
June
30,
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$ |
228.0
|
|
|
$ |
283.4
|
|
Notes
receivable
|
|
|
3.2
|
|
|
|
4.0
|
|
Refundable
income taxes
|
|
|
1.9
|
|
|
|
1.6
|
|
Receivable
from affiliates:
|
|
|
|
|
|
|
|
|
Contran
– income taxes, net
|
|
|
.6
|
|
|
|
12.9
|
|
Other
|
|
|
.2
|
|
|
|
-
|
|
Accrued
interest and dividends receivable
|
|
|
.1
|
|
|
|
.1
|
|
Allowance
for doubtful accounts
|
|
|
(3.0 |
) |
|
|
(2.8 |
) |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
231.0
|
|
|
$ |
299.2
|
|
Note
4
- Inventories,
net:
|
|
December
31,
2006
|
|
|
June
30,
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
Raw materials:
|
|
|
|
|
|
|
Chemicals
|
|
$ |
46.1
|
|
|
$ |
57.5
|
|
Component products
|
|
|
5.8
|
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
Total raw materials
|
|
|
51.9
|
|
|
|
64.8
|
|
|
|
|
|
|
|
|
|
|
In-process products:
|
|
|
|
|
|
|
|
|
Chemicals
|
|
|
25.7
|
|
|
|
13.1
|
|
Component products
|
|
|
8.7
|
|
|
|
10.5
|
|
|
|
|
|
|
|
|
|
|
Total in-process products
|
|
|
34.4
|
|
|
|
23.6
|
|
|
|
|
|
|
|
|
|
|
Finished products:
|
|
|
|
|
|
|
|
|
Chemicals
|
|
|
168.4
|
|
|
|
172.2
|
|
Component products
|
|
|
7.1
|
|
|
|
7.7
|
|
|
|
|
|
|
|
|
|
|
Total finished products
|
|
|
175.5
|
|
|
|
179.9
|
|
|
|
|
|
|
|
|
|
|
Supplies (primarily chemicals)
|
|
|
47.2
|
|
|
|
52.8
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
309.0
|
|
|
$ |
321.1
|
|
Note
5 - Other noncurrent assets:
|
|
December
31,
2006
|
|
|
June
30,
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
Available-for-sale
marketable securities:
|
|
|
|
|
|
|
The
Amalgamated Sugar Company LLC
|
|
$ |
250.0
|
|
|
$ |
250.0
|
|
TIMET
|
|
|
-
|
|
|
|
72.6
|
|
Other
|
|
|
9.0
|
|
|
|
9.8
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
259.0
|
|
|
$ |
332.4
|
|
|
|
|
|
|
|
|
|
|
Investment
in affiliates:
|
|
|
|
|
|
|
|
|
TIMET:
|
|
|
|
|
|
|
|
|
Common stock
|
|
$ |
264.1
|
|
|
$ |
-
|
|
Preferred stock
|
|
|
.2
|
|
|
|
-
|
|
Total investment in TIMET
|
|
|
264.3
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
TiO2 manufacturing joint venture
|
|
|
113.6
|
|
|
|
115.0
|
|
Other
|
|
|
18.8
|
|
|
|
18.9
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
396.7
|
|
|
$ |
133.9
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Waste disposal site operating permits, net
|
|
$ |
22.8
|
|
|
$ |
27.7
|
|
IBNR
receivables
|
|
|
6.6
|
|
|
|
7.1
|
|
Deferred financing costs
|
|
|
9.2
|
|
|
|
8.5
|
|
Loans and other receivables
|
|
|
3.2
|
|
|
|
1.7
|
|
Restricted cash equivalents
|
|
|
.4
|
|
|
|
.4
|
|
Other
|
|
|
22.5
|
|
|
|
15.8
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
64.7
|
|
|
$ |
61.2
|
|
On
March
26, 2007, we completed a special dividend of the TIMET common stock we owned
to
our stockholders. Each of our stockholders received .4776 of a share
of TIMET common stock for each share of our common stock held. For
financial reporting purposes, we continued to apply the equity method to
our
investment in TIMET through March 31, 2007. We accounted for our
dividend of TIMET common stock as a spin-off in which we reduced our
stockholders’ equity by the aggregate book value of the shares distributed, net
of applicable tax, or approximately $899.3 million. For income tax
purposes, the dividend of TIMET common stock was taxable to us based on the
difference between the aggregate fair value of the TIMET shares distributed
($36.90 per share, or an aggregate of $2.1 billion) and our tax basis of
the
shares distributed. This tax obligation was approximately $667.7
million, after we utilized available net operating loss (“NOL”) carryforwards of
$57.8 million and alternative minimum tax credit (“AMT”) carryforwards of $1.1
million.
We
and our qualifying subsidiaries are
members of Contran’s consolidated U.S. federal income tax group (the “Contran
Tax Group”), and we make payments to Contran for income taxes in amounts that we
would have paid to the U.S. Internal Revenue Service had we not been a member
of
the Contran Tax Group. As a member of the Contran Tax Group, the tax obligation
generated from the special dividend is payable to Contran. In order
to discharge substantially all of this tax obligation we owed to Contran,
in
March 2007 we issued to Contran shares of a new issue of our preferred
stock. See Note 9. Because Contran directly or indirectly
owned approximately 92% of our common stock at March 26, 2007, we distributed
a
substantial portion of the TIMET shares to other members of the Contran Tax
Group. As a result, Contran is not currently required to pay
approximately $619.0 million of this tax obligation to the applicable tax
authority, because the gain on the shares distributed to members of Contran’s
Tax Group is currently deferred at the Contran level. This income tax
liability would become payable by Contran to the applicable tax authority
when
the shares of TIMET common stock we distributed to other members of the Contran
Tax Group are sold or otherwise transferred outside the Contran Tax Group
or in
the event of certain restructuring transactions involving Contran and
us.
As
discussed in the 2006 Annual Report, NL owns approximately 4.7 million shares
of
our common stock, and for financial reporting purposes we account for our
proportional interest in such shares as treasury stock. Under
Delaware Corporation Law, NL receives dividends on its Valhi
shares. As a result, NL received approximately 2.2 million shares of
the TIMET common stock we distributed in the special dividend. In
addition, in March 2007 we purchased shares of our common stock in market
transactions under our repurchase program described in Note
9. Because we purchased these shares between the record date and
payment date of the special dividend, we became entitled to receive the shares
of TIMET common stock we distributed in the special dividend with respect
to the
shares of our common stock we repurchased, or approximately 19,000 shares
of
TIMET common stock. We allocated the cost of our shares we
repurchased between the TIMET and Valhi common stock acquired based upon
relative market values on the date of purchase, and we allocated an aggregate
of
$.7 million to the TIMET shares we acquired. At the end of the first
quarter, the aggregate number of TIMET shares we owned represented approximately
1% of TIMET’s outstanding common stock. Accordingly, effective March
31, 2007 we began accounting for our shares of TIMET common stock as
available-for-sale marketable securities carried at fair value, and the
difference between the aggregate fair value and the cost basis of our TIMET
shares is recognized as a component of accumulated other comprehensive income,
net of applicable income tax and minority interest. The cost basis of
the TIMET shares received by NL is $11.4 million, which represents our basis
in
such TIMET shares under the equity method immediately before the special
dividend. At June 30, 2007, the quoted market price for TIMET’s
common stock was $31.90 per share, for an aggregate market value of our TIMET
shares of $72.6 million. As a result, approximately $32.5 million of
unrealized gain, net of applicable income tax and minority interest, related
to
these share of TIMET common stock is included in our other comprehensive
income. The income tax recognized in other comprehensive income
includes $21.2 million of current income tax generated at the Valhi level
related to the distribution, for the TIMET shares NL received.
For
income tax purposes, the tax basis
in the shares of TIMET received by NL in the special dividend is equal to
the
fair value of such TIMET shares on the date of the special
dividend. However, if the fair value of all of the TIMET shares we
distributed exceeds our cumulative earnings and profits as of the end of
2007,
NL would be required to reduce the tax basis of its shares of Valhi common
stock
by an amount equal to the lesser of (i) its tax basis in such Valhi shares
and
(ii) its pro-rata share of the amount by which the aggregate fair value of
the
TIMET shares we distributed exceeds our earnings and
profits. Additionally, if NL’s pro-rata share of the amount by which
the aggregate fair value of the TIMET shares we distributed exceeds our earnings
and profits is greater than the tax basis of its Valhi shares, NL would be
required to recognize a capital gain for the difference. We have
estimated we will have no cumulative earnings and profits as of the end of
2007. In addition, the fair value of the TIMET shares received by NL
exceeds the aggregate tax basis of its Valhi shares. Accordingly, the
benefit to NL associated with receiving a fair-value tax basis in its TIMET
shares was completely offset by the elimination of the tax basis in its Valhi
shares and the capital gain NL is required to recognize for the
excess. NL’s income tax generated from this capital gain is
approximately $13.5 million. For financial reporting purposes, NL
provides deferred income taxes for the excess of the carrying value over
the tax
basis of its shares of both Valhi and TIMET common stock, and as a result
the
$13.5 million current income tax generated by NL was offset by deferred income
taxes NL had previously provided on its shares of Valhi common
stock. However, because we account for our proportional interest in
the Valhi shares held by NL as treasury stock, we also eliminate our
proportional interest in the deferred income taxes NL recognizes at its level
with respect to the Valhi shares it holds. As a result, for financial
reporting purposes we had not previously recognized our proportional interest
in
the $13.5 million of income taxes (or $11.2 million) that NL had previously
recognized. Accordingly, as part of the special dividend we were
required to recognize $11.2 million of income taxes related to the income
tax
effect to NL of the special dividend.
NL
is
also a member of the Contran Tax Group, and NL makes payments to us for income
taxes in amounts it would have paid to the U.S. Internal Revenue Service
had NL
not been a member of the Contran Tax Group. Approximately $12.6 million of
the
$13.5 million tax generated by NL is payable to us (the remaining $.9 million
relates to one of NL’s subsidiaries that is not a member of the Contran Tax
Group). We are not currently required to pay this $12.6 million tax
liability to Contran, nor is Contran currently required to pay this tax
liability to the applicable tax authority, because the related taxable gain
is
currently deferred at our level and the Contran level since we and NL are
members of the Valhi tax group on a separate company basis and of the Contran
Tax Group. This income tax liability would become payable by us to
Contran, and by Contran to the applicable tax authority, when the shares
of
Valhi common stock held by NL are sold or otherwise transferred outside the
Contran Tax Group or in the event of certain restructuring transactions
involving NL and Valhi. At June 30, 2007, this $12.6 million is
recognized as a component of our deferred income taxes.
A
summary
of the $899.3 million net reduction in our stockholders’ equity as a result of
the special dividend is summarized as follows:
|
|
Amount
|
|
|
|
(In
millions)
|
|
|
|
|
|
Investment
in TIMET
|
|
$ |
276.7
|
|
Deferred
income taxes previously recognized:
|
|
|
|
|
Investment
in TIMET
|
|
|
(56.9 |
) |
NOL
and AMT carryforwards
|
|
|
21.4
|
|
Income
taxes generated from the special dividend:
|
|
|
|
|
Valhi
level, net of amount included in other
comprehensive
income
|
|
|
646.9
|
|
NL
level
|
|
|
11.2
|
|
|
|
|
|
|
Total
|
|
$ |
899.3
|
|
Certain
selected financial information of TIMET is summarized below:
|
|
December
31,
2006
|
|
|
|
(In
millions)
|
|
|
|
|
|
Current assets
|
|
$ |
757.6
|
|
Property and equipment
|
|
|
329.8
|
|
Marketable securities
|
|
|
56.8
|
|
Other noncurrent assets
|
|
|
72.7
|
|
|
|
|
|
|
Total assets
|
|
$ |
1,216.9
|
|
|
|
|
|
|
Current liabilities
|
|
$ |
211.1
|
|
Accrued pension and postretirement benefits
|
|
|
80.2
|
|
Other noncurrent liabilities
|
|
|
25.4
|
|
Minority interest
|
|
|
21.3
|
|
Stockholders’ equity
|
|
|
878.9
|
|
|
|
|
|
|
Total liabilities, minority interest and
stockholders’ equity
|
|
$ |
1,216.9
|
|
|
|
Three
months ended
June
30,
|
|
|
Six
months ended
June
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
300.9
|
|
|
$ |
341.2
|
|
|
$ |
587.8
|
|
|
$ |
682.9
|
|
Cost
of sales
|
|
|
194.6
|
|
|
|
205.7
|
|
|
|
373.2
|
|
|
|
414.0
|
|
Operating
income
|
|
|
93.6
|
|
|
|
118.0
|
|
|
|
188.7
|
|
|
|
234.2
|
|
Net
income attributable to common stockholders
|
|
|
54.3
|
|
|
|
76.3
|
|
|
|
111.1
|
|
|
|
151.4
|
|
Note
6
- Accounts
payable and accrued liabilities:
|
|
|
|
|
|
|
|
|
December
31,
2006
|
|
|
June
30,
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
101.8
|
|
|
$ |
98.4
|
|
Employee benefits
|
|
|
37.4
|
|
|
|
32.7
|
|
Payable
to affiliates:
|
|
|
|
|
|
|
|
|
Louisiana
Pigment Company
|
|
|
11.7
|
|
|
|
11.4
|
|
Contran
– trade items
|
|
|
5.5
|
|
|
|
6.2
|
|
Environmental costs
|
|
|
13.6
|
|
|
|
12.2
|
|
Deferred income
|
|
|
4.9
|
|
|
|
.8
|
|
Interest
|
|
|
7.6
|
|
|
|
7.6
|
|
Reserve
for uncertain tax positions
|
|
|
-
|
|
|
|
.3
|
|
Other
|
|
|
56.2
|
|
|
|
72.5
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
238.7
|
|
|
$ |
242.1
|
|
|
|
|
|
|
|
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
Reserve
for uncertain tax positions
|
|
$ |
-
|
|
|
$ |
62.5
|
|
Insurance claims and expenses
|
|
|
13.9
|
|
|
|
13.0
|
|
Employee benefits
|
|
|
7.2
|
|
|
|
7.2
|
|
Other
|
|
|
7.0
|
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
28.1
|
|
|
$ |
90.0
|
|
Our
reserve for uncertain tax positions is discussed in Note 14.
Note
7 - Long-term debt:
|
|
December
31,
2006
|
|
|
June
30,
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valhi
- Snake River Sugar Company
|
|
$ |
250.0
|
|
|
$ |
250.0
|
|
|
|
|
|
|
|
|
|
|
Subsidiary
debt:
|
|
|
|
|
|
|
|
|
Kronos International
6.5% Senior Secured Notes
|
|
|
525.0
|
|
|
|
535.6
|
|
Kronos U.S. bank credit facility
|
|
|
6.4
|
|
|
|
24.3
|
|
Other
|
|
|
5.1
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
Total subsidiary debt
|
|
|
536.5
|
|
|
|
565.2
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
786.5
|
|
|
|
815.2
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
1.2
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$ |
785.3
|
|
|
$ |
814.0
|
|
During
the first six months of 2007, we borrowed a net $17.9 million under Kronos’ U.S.
bank credit facility. The average interest rate on the outstanding
borrowings under this facility at June 30, 2007 was 8.25%.
Note
8 - Employee benefit plans:
Defined
benefit plans - The components of net periodic
defined benefit pension cost are presented in the table below.
|
|
Three
months ended
June
30,
|
|
|
Six
months ended
June
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
2.0
|
|
|
$ |
2.0
|
|
|
$ |
3.8
|
|
|
$ |
3.9
|
|
Interest cost
|
|
|
5.9
|
|
|
|
6.5
|
|
|
|
11.8
|
|
|
|
13.0
|
|
Expected return on plan assets
|
|
|
(6.4 |
) |
|
|
(7.0 |
) |
|
|
(12.7 |
) |
|
|
(14.0 |
) |
Amortization of prior service cost
|
|
|
.1
|
|
|
|
.1
|
|
|
|
.2
|
|
|
|
.3
|
|
Amortization of net transition
obligations
|
|
|
.1
|
|
|
|
.1
|
|
|
|
.3
|
|
|
|
.2
|
|
Recognized actuarial losses
|
|
|
2.3
|
|
|
|
2.0
|
|
|
|
4.4
|
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
4.0
|
|
|
$ |
3.7
|
|
|
$ |
7.8
|
|
|
$ |
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
benefits - The components of net periodic
postretirement benefit cost are presented in the table below.
|
|
Three
months ended
June
30,
|
|
|
Six
months ended
June
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
.1
|
|
|
$ |
.1
|
|
|
$ |
.1
|
|
|
$ |
.2
|
|
Interest
cost
|
|
|
.5
|
|
|
|
.5
|
|
|
|
1.0
|
|
|
|
1.0
|
|
Amortization
of prior service credit
|
|
|
(.1 |
) |
|
|
-
|
|
|
|
(.2 |
) |
|
|
(.2 |
) |
Recognized
actuarial losses
|
|
|
-
|
|
|
|
-
|
|
|
|
.1
|
|
|
|
.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
.5
|
|
|
$ |
.6
|
|
|
$ |
1.0
|
|
|
$ |
1.1
|
|
Contributions
- We expect our 2007 contributions for our pension and postretirement
benefit plans to be consistent with the amounts we disclosed in our 2006
Annual
Report.
Note
9 – Stockholders’ equity:
Share
repurchases - Our board of directors has previously authorized the
repurchase of up to 10.0 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. 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
the first six months of 2007, we purchased approximately 175,400 shares of
our
common stock in market transactions for an aggregate purchase price of $3.1
million. We cancelled these treasury shares, and allocated their cost
to common stock at par value, additional paid-in capital and retained
earnings. At June 30, 2007, approximately 4.4 million shares were
available for purchase under the repurchase authorization.
Preferred
stock – As discussed in Note 5, we incurred a tax obligation to Contran
upon payment of the special dividend in the amount of $667.7 million. In
order to discharge $667.3 million of this tax obligation, in March 2007 we
issued to Contran 5,000 shares of a new issue of our Series A Preferred Stock
having a liquidation preference of $133,466.75 per share, or an aggregate
liquidation preference of $667.3 million. The 5,000 preferred shares
we issued to Contran represents all of the shares of Series A Preferred Stock
we
are authorized to issue. The preferred stock has a par value of $.01 per
share and pays a non-cumulative cash dividend at an annual rate of 6% of
the
aggregate liquidation preference only when authorized and declared by our
board
of directors. The shares of Series A Preferred Stock are non-convertible,
and
the shares do not carry any redemption or call features (either at our option
or
the option of the holder). A holder of the Series A shares does not
have any voting rights, except in limited circumstances, and is not entitled
to
a preferential dividend right that is senior to our shares of common
stock. Upon the liquidation, dissolution or winding up of our
affairs, a holder of the Series A shares is entitled to be paid a liquidation
preference of $133,466.75 per share, plus an amount (if any) equal to any
declared but unpaid dividends, before any distribution of assets is made
to
holders of our common stock. We recorded the shares of Series A
Preferred Stock issued to Contran at $667.3 million, representing the amount
of
the discharged tax obligation. We did not declare any dividends on the Series
A
Preferred Stock through June 30, 2007.
Note
10 - Other income, net:
|
|
Six
months ended
June
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
Securities
earnings:
|
|
|
|
|
|
|
Dividends and interest
|
|
$ |
19.5
|
|
|
$ |
15.8
|
|
Securities transactions, net
|
|
|
.2
|
|
|
|
.5
|
|
|
|
|
|
|
|
|
|
|
Total securities earnings
|
|
|
19.7
|
|
|
|
16.3
|
|
|
|
|
|
|
|
|
|
|
Currency transactions, net
|
|
|
(3.0 |
) |
|
|
1.4
|
|
Insurance recoveries
|
|
|
2.8
|
|
|
|
3.0
|
|
Other, net
|
|
|
3.6
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
$ |
23.1
|
|
|
$ |
23.8
|
|
Note
11 - Provision for income taxes:
|
|
Six
months ended
June
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(as
adjusted)
|
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
Expected
tax expense, at U.S. federal statutory
income
tax rate of 35%
|
|
$ |
22.4
|
|
|
$ |
20.1
|
|
Incremental
U.S. tax and rate differences on
equity
in earnings
|
|
|
6.9
|
|
|
|
2.2
|
|
Non-U.S.
tax rates
|
|
|
(.9 |
) |
|
|
(.3 |
) |
Nondeductible
expenses
|
|
|
1.6
|
|
|
|
1.5
|
|
Adjustment
of prior year income taxes, net
|
|
|
(2.0 |
) |
|
|
-
|
|
Contingency
reserve adjustment, net
|
|
|
(9.2 |
) |
|
|
-
|
|
Canadian
tax rate change
|
|
|
(1.3 |
) |
|
|
-
|
|
German
tax attribute adjustment
|
|
|
-
|
|
|
|
8.7
|
|
U.S.
state income taxes, net
|
|
|
.8
|
|
|
|
.8
|
|
Other,
net
|
|
|
(.3 |
) |
|
|
.1
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
$ |
18.0
|
|
|
$ |
33.1
|
|
Following
a European Union Court of Justice decision and subsequent proceedings which
concluded in the second quarter of 2007 that we believe may favorably impact
us,
we initiated a new tax planning strategy. If we are successful, we would
generate a substantial cash tax benefit in the form of refunds of income
taxes
we have previously paid in Europe which we currently do not expect to affect
our
future earnings when received. It may be a number of years before we know
if our implementation of this tax planning strategy will be successful, and
accordingly we have not currently recognized any refundable income taxes
that we
might ultimately receive. Partially as a result of and consistent with our
initiation of this new tax planning strategy, in the second quarter of 2007
we
amended prior-year income tax returns in Germany. As a consequence of
amending our tax returns, our German corporate and trade tax net operating
loss
carryforwards were reduced by an aggregate of euro 13.4 million and euro
22.6
million, respectively, and, accordingly, we recognized an $8.7 million provision
for deferred income taxes in the second quarter of 2007 related to the
adjustment of our German tax attributes.
Certain
of our non-U.S. tax returns are being examined and tax authorities may propose
tax deficiencies including interest and penalties. 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.
In
July
2007, Germany enacted certain changes in their income tax laws. The most
significant change is the reduction of the German corporate and trade income
tax
rates. We have a significant net deferred income tax asset in Germany,
primarily related to the benefit associated with our corporate and trade
tax net
operating loss carryforwards. We measure our net deferred taxes using the
applicable enacted tax rates, and the effect of any change in the applicable
enacted tax rate is recognized in the period of enactment. Accordingly, we
estimate we will report a decrease in our net deferred tax asset in Germany
of
approximately $86 million in the third quarter of 2007. This decrease will
be reported as a component of our income tax expense.
Note
12 - Minority interest:
|
|
December
31,
2006
|
|
|
June
30,
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
Minority
interest in net assets:
|
|
|
|
|
|
|
NL Industries
|
|
$ |
56.0
|
|
|
$ |
58.3
|
|
CompX International
|
|
|
45.4
|
|
|
|
46.6
|
|
Kronos Worldwide
|
|
|
22.3
|
|
|
|
22.4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
123.7
|
|
|
$ |
127.3
|
|
|
|
Six
months ended
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
Minority interest in net earnings:
|
|
|
|
|
|
|
NL Industries
|
|
$ |
1.6
|
|
|
$ |
.7
|
|
CompX International
|
|
|
1.9
|
|
|
|
1.7
|
|
Kronos Worldwide
|
|
|
1.5
|
|
|
|
.6
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
5.0
|
|
|
$ |
3.0
|
|
Note
13 - Commitments and contingencies:
Lead
pigment litigation - NL
NL's
former operations included the manufacture of lead pigments for use in paint
and
lead-based paint. 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 pending cases and 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 been entered against us. However, see the
discussion below in The State of Rhode Island case.
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). In 2002 a trial was held on the sole question of whether lead
pigment in paint on Rhode Island buildings is a public nuisance, and resulted
in
a mistrial when the jury was unable to reach a unanimous decision. A
second trial commenced in 2005, and in February 2006, the jury found that
we and
two other defendants: (i) substantially contributed to the creation of a
public
nuisance as a result of the collective presence of lead pigment in paints
and
coatings on buildings in Rhode Island; and (ii) should be ordered to abate
the
public nuisance. In March 2007, after the trial court denied our
post-trial motions, we appealed to the Rhode Island Supreme Court, thereafter,
the State cross-appealed the issue of exclusion of past and punitive damages,
as
well as the dismissal of one of the defendants. The appeal is proceeding,
and concurrently therewith, the trial court is moving forward with the abatement
phase of the matter. The parties have submitted their respective
recommendations regarding the appointment of one or more special masters
to
advise the trial court in its consideration of a remedial order to implement
the
abatement remedy. In June 2007, the trial court issued an order
enumerating the powers, duties and responsibilities of the special master
and
establishing a schedule for the State’s submission of a detailed proposal for
abatement and the defendants’ responsive submissions. The trial court
further indicated that it anticipated appointing a special master by September
2007. The extent, nature and cost of any abatement remedy will be
determined only following the resolution of the pending appeal and the
conclusion of the trail court’s special master proceedings relating to the
abatement remedy.
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 we have raised in the appeal 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 the 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 consolidated financial condition and
liquidity.
We
have
not accrued any amounts for any of the pending lead pigment and lead-based
paint
litigation cases, including the Rhode Island case. Liability
that may result, if any, cannot be reasonably estimated. In addition,
new cases may continue to be filed against us. We cannot assure you
that we will not incur liability in the future in respect of any of the pending
or possible litigation in view of the inherent uncertainties involved in
court
and jury rulings. The resolution of any of these cases could 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 consolidated
financial condition and liquidity.
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 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 facilities 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 mining locations of NL, are
the
subject of civil litigation, administrative proceedings or investigations
arising under federal and state environmental laws. Additionally, in
connection with past disposal practices, 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 or 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 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;
|
|
·
|
solvency
of other 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 regarding
site
cleanup costs or allocation of 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 cause our expenditures to exceed
our
current estimates. Because we may be jointly and severally liable for the
total
remediation cost at certain sites, the amount we are ultimately liable for
may
exceed our accruals due to, among other things, the 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, additional environmental matters may 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
our environmental 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, as assets when their receipt is deemed probable. At
June 30, 2007, we had no receivables for recoveries.
We
do not
know and cannot estimate the exact time frame over which we will make payments
for our 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 of our control. At each
balance sheet date, we estimate the amount of our accrued environmental costs
we
will pay within the next 12 months. We classify this estimate as a
current liability, and we classify the remaining accrued environmental costs
as
a noncurrent liability.
Changes
in our accrued environmental costs during the first six months of 2007 are
as
follows:
|
|
Amount
|
|
|
|
(In
millions)
|
|
|
|
|
|
Balance
at the beginning of the period
|
|
$ |
59.7
|
|
Reductions
credited to income, net
|
|
|
(.2 |
) |
Payments,
net
|
|
|
(4.0 |
) |
|
|
|
|
|
Balance
at the end of the period
|
|
$ |
55.5
|
|
|
|
|
|
|
Amounts recognized in the Consolidated Balance Sheet at the
end of the period:
|
|
|
|
|
Current liability
|
|
$ |
12.2
|
|
Noncurrent liability
|
|
|
43.3
|
|
|
|
|
|
|
Total
|
|
$ |
55.5
|
|
NL
- On a quarterly basis, we evaluate the potential
range of its liability at sites where we have been named as a PRP or
defendant. At June 30, 2007, we had accrued $48.0 million for those
environmental matters which we believe are reasonably estimable. We
believe 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 we believe it is currently possible to estimate costs is
approximately $71 million, including the amount currently accrued. We
have not discounted these estimates to present value.
At
June
30, 2007, there were approximately 20 sites for which we cannot estimate
a range
of costs. For these sites, generally the investigation is in the
early stages, and we are unable to determine whether or not we actually had
any
association with the site, the nature of our responsibility, if any, for
the
contamination at the site and the extent of contamination at the
site. The timing and availability of information on these sites is
dependent on events outside of NL’s control, such as when the party alleging
liability provides information to NL. On certain previously inactive
sites, we have 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. These costs could
be material to us if NL were ultimately found liable.
Tremont
- Prior to 2005, 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 on contractual issues held in June 2007
and a
second hearing to be held in August 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 $1.7 million accrued at
June 30, 2007 for this matter.
Other
- We have also
accrued approximately $5.8 million at June 30, 2007 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.
Other
litigation
We
have
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 our former operations containing asbestos, silica
and/or
mixed dust. Approximately 470 of these types of cases remain pending,
involving a total of approximately 7,000 plaintiffs and their
spouses. In addition the claims of approximately 3,300 former
plaintiffs have been administratively dismissed from Ohio State
Courts. We do not expect these claims will be re-opened unless the
plaintiffs meet the courts’ medical criteria for asbestos-related
claims. 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 of these matters will be
consistent with our historical costs (which are not material), furthermore,
we
do not expect any reasonably possible outcome would involve amounts material
to
our consolidated financial position, results of operations or
liquidity. We have and will continue to vigorously seek dismissal
and/or a finding of no liability from each claim. In addition, from
time to time, we have received notices regarding asbestos or silica claims
purporting to be brought against 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.
For
a
discussion of other legal proceedings to which we are a party, refer to our
2006
Annual Report.
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 and asbestos lawsuits. The issue of
whether insurance coverage for defense costs or indemnity or both will be
found
to exist for our lead pigment and asbestos 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 asbestos litigation matters in determining related
accruals.
We
have agreements with two former
insurance carriers pursuant to which the carriers reimburse 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 these carriers for
past
defense costs incurred by us, because of certain issues that arise 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 or asbestos 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.
For
a
complete discussion of certain litigation involving us and certain of our
former
insurance carriers, refer to our 2006 Annual Report.
Note
14 – Recent accounting pronouncements:
Uncertain
Tax Positions - On January 1, 2007, we adopted Financial
Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 48, Accounting
for Uncertain Tax Positions. 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 Statement of Financial
Accounting Standards (“SFAS”) 109, Accounting for Income Taxes, and enhances the
disclosure requirements for our income tax policies and reserves. Among
other things, FIN 48 prohibits 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 prior income tax accounting policies had already complied with
this aspect of the new standard. We are also required to reclassify any
reserves we have for uncertain tax positions from deferred income tax
liabilities, where they were classified under prior GAAP, to a separate current
or noncurrent liability, depending on the nature of the tax
position.
We
accrue
interest and penalties on our uncertain tax positions as a component of our
provision for income taxes. The amount of interest and penalties we
accrued during the first half of 2007 was not material, and at June 30, 2007
we
had an aggregate of $4.9 million accrued for interest and penalties for our
uncertain tax positions.
Upon
adoption of FIN 48 effective January 1, 2007, we increased our existing reserves
for uncertain tax positions, which we had previously classified as part of
our
deferred income taxes, by $1.6 million which was accounted for as a decrease
in
our retained earnings in accordance with the transition provisions of the
new
standard. At June 30, 2007 we had approximately $62.8 million accrued
for uncertain tax positions (including $.3 million classified as a current
liability). Substantially all of this net increase had previously
been recognized as a component of our deferred income taxes. Of the
$56.9 million amount we had recognized for uncertain tax positions at January
1,
2007, $55.3 million was reclassified from deferred income tax liabilities
(where
we classified such reserves prior to our adoption of FIN 48), and the remainder
was accounted for as a reduction in our retained earnings in accordance with
the
transition provisions of the new standard. In addition, the benefits
associated with approximately $58.6 million of our reserves for uncertain
tax
positions at June 30, 2007 would, if recognized, affect our effective income
tax
rate. We do not currently believe that the unrecognized tax benefits will
change significantly within the next twelve months.
We
file
income tax returns in various U.S. federal, state and local jurisdictions.
We also file income tax returns in various foreign jurisdictions, principally
in
Germany, Canada, Taiwan, Belgium and Norway. Our domestic income tax
returns prior to 2003 are generally considered closed to examination by
applicable tax authorities. Our foreign income tax returns are generally
considered closed to examination for years prior to 2002 for Germany, Canada
and
Taiwan; 2001 for Belgium and 1996 for Norway.
Planned
Major Maintenance Activities - In September 2006,
the FASB issued FASB Staff Position (“FSP”) No. AUG AIR-1, Accounting for
Planned Major Maintenance Activities, which we adopted in the fourth
quarter of 2006. Under FSP No. AUG AIR-1 we are no longer permitted
to accrue in advance for planned major maintenance. In the past our
Chemicals Segment accrued in advance for planned major
maintenance. We retroactively adjusted our financial statements to
reflect the direct expense method of accounting for planned major maintenance
expense for prior periods in compliance with the new standard. The
effect of adopting the FSP on our previously reported Consolidated Financial
Statements is contained in our 2006 Annual Report.
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 choose, 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 only to 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. We have not yet
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.
ITEM
2. 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 Industries, Inc., Kronos Worldwide,
Inc., CompX International, Inc., Tremont LLC and Waste Control Specialists
LLC
(“WCS”). Prior to March 26, 2007 we were the largest shareholder of
Titanium Metals Corporation (“TIMET”) although we owned less than a majority
interest. Kronos (NYSE: KRO), NL (NYSE: NL), CompX (NYSE: CIX) and
TIMET (NYSE: TIE) 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 titanium dioxide pigments (“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 is also a leading
manufacturer of stainless steel exhaust systems, gauges and throttle
controls for the performance marine
industry.
|
|
·
|
Waste
Management– WCS is our wholly-owned subsidiary which owns and
operates a West Texas facility for the processing, treatment and,
storage
of hazardous, toxic and low level radioactive waste as well as
the
disposal of hazardous, toxic and certain 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 disposal capabilities.
|
On
March
26, 2007 we completed a special dividend of the TIMET common stock we owned
to
our stockholders. We accounted for our 35% interest in TIMET by the
equity method through March 31, 2007. As a result we now own
approximately 1% of TIMET’s outstanding common stock. Accordingly we
now account for our share of TIMET common stock as available-for-sale marketable
securities carried at fair value. See Note 5 to the Condensed
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.
General
This
Quarterly Report contains forward-looking statements within the meaning of
the
Private Securities Litigation Reform Act of 1995. Statements in
this Quarterly Report on Form 10-Q that are not historical in nature are
forward-looking in nature about our future that are not statements of historical
fact. Statements in this report including, but not limited to,
statements found in Item 2 - "Management’s Discussion and Analysis of Financial
Condition and Results of Operations," 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 our actual future results to differ materially from
those described herein are the risks and uncertainties discussed in this
Quarterly Report and those described from time to time in our other filings
with
the SEC including, but not limited to, the following:
|
·
|
Future
supply and demand for our products;
|
|
·
|
The
cyclicality of certain of our businesses (such as Kronos’ TiO2
operations;
|
|
·
|
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 TiO2in
advance of
anticipated price decreases;
|
|
·
|
Changes
in our raw material and other operating costs (such as energy
costs);
|
|
·
|
The
possibility of labor disruptions;
|
|
·
|
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);
|
|
·
|
Competitive
products and substitute products;
|
|
·
|
Possible
disruption of our business or increases in the cost of doing business
resulting from terrorist activities or global
conflicts;
|
|
·
|
Customer
and competitor strategies;
|
|
·
|
The
impact of pricing and production
decisions;
|
|
·
|
Competitive
technology positions;
|
|
·
|
The
introduction of trade barriers;
|
|
·
|
Restructuring
transactions involving us and our
affiliates;
|
|
·
|
Potential
consolidation of our competitors;
|
|
·
|
The
extent to which our subsidiaries were to become unable to pay us
dividends;
|
|
·
|
Uncertainties
associated with new product
development;
|
|
·
|
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);
|
|
·
|
Operating
interruptions (including, but not limited to, labor disputes, leaks,
natural disasters, fires, explosions, unscheduled or unplanned
downtime
and transportation interruptions);
|
|
·
|
The
timing and amounts of insurance
recoveries;
|
|
·
|
Our
ability to renew or refinance credit
facilities;
|
|
·
|
The
ultimate outcome of income tax audits, tax settlement initiatives
or other
tax matters;
|
|
·
|
The
ultimate ability to utilize income tax attributes or changes in
income tax
rates related to such 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);
|
|
·
|
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);
|
|
·
|
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);
|
|
·
|
The
ultimate resolution of pending litigation (such as NL's lead pigment
litigation and litigation surrounding environmental matters of
NL and
Tremont); and
|
|
·
|
Possible
future litigation.
|
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.
Net
Income Overview
Quarter
Ended June 30, 2006 Compared to the Quarter Ended June 30, 2007
-
We
reported a net loss of $4.9 million, or $.04 per diluted share, in the second
quarter of 2007 compared to net income of $17.7 million, or $.15 per diluted
share, in the second quarter of 2006. Our diluted earnings per share
decreased from 2006 to 2007 primarily due to the net effects of:
|
·
|
an
income tax charge recognized by our Chemicals Segment in
2007;
|
|
·
|
a
charge in 2006 from the redemption of our 8.875% Senior Secured
Notes;
|
|
·
|
certain
income tax benefits recognized by our Chemicals Segment in
2006;
|
|
·
|
the
elimination of equity in earnings from TIMET due to the distribution
of
our TIMET shares in the first quarter of
2007;
|
|
·
|
lower
interest expense in 2007 resulting from the April 2006 refinancing
of our
Senior Notes;
|
|
·
|
lower
dividend income from Amalgamated Sugar Company in 2007 as they
completed
the additional dividend they owed to us during 2006;
and
|
|
·
|
lower
operating income from each of our Chemicals, Component Products
and Waste
Management Segments.
|
Our
net
income in 2006 includes (net of tax and minority interest):
|
·
|
a
charge related to the redemption of our 8.875% Senior Secured Notes
of
$.09 per diluted share; and
|
|
·
|
an
aggregate income tax benefit of $.07 per diluted share associated
with our
Chemicals Segments’ operations related to the withdrawal of certain income
tax assessments previously made by the Belgium and Norwegian tax
authorities, the favorable resolution of certain income tax issues
related
to our German and Belgium operations and the enactment of a reduction
in
Canadian federal income tax rates.
|
Our
net
income in 2007 includes a charge of $.05 per diluted share (net of tax and
minority interest) related to the adjustment of certain German tax attributes
within our Chemicals Segment.
Six
Months Ended June 30, 2006 Compared to the Six Months Ended June 30, 2007
We
reported net income of $21.2 million, or $.18 per diluted share, in the first
six months of 2007 compared to net income of $41.1 million, or $.35 per diluted
share, in the first six months of 2006. Our diluted earnings per
share decreased from 2006 to 2007 primarily due to the net effects
of:
|
·
|
an
income tax charge recognized by our Chemicals Segment in
2007;
|
|
·
|
a
charge in 2006 from the redemption of our 8.875% Senior Secured
Notes;
|
|
·
|
certain
income tax benefits recognized by our Chemicals Segment in
2006;
|
|
·
|
lower
equity in earnings from TIMET due to the distribution of our TIMET
shares
in the first quarter of 2007;
|
|
·
|
lower
interest expense in 2007 resulting from the April 2006 refinancing
of our
Senior Notes;
|
|
·
|
lower
dividend income from Amalgamated Sugar Company in 2007 as they
completed
the additional dividend they owed to us during 2006;
and
|
|
·
|
lower
operating income from each of our Chemicals, Component Products
and Waste
Management Segments.
|
Our
net
income in 2006 includes (net of tax and minority interest):
|
·
|
a
charge related to the redemption of our 8.875% Senior Secured Notes
of
$.09 per diluted share;
|
|
·
|
an
aggregate income tax benefit of $.07 per diluted share associated
with our
Chemicals Segments’ operations related to the withdrawal of certain income
tax assessments previously made by the Belgium and Norwegian tax
authorities, the favorable resolution of certain income tax issues
related
to our German and Belgium operations and the enactment of a reduction
in
Canadian federal income tax rates;
and
|
|
·
|
income
of $.01 per diluted share related to certain insurance recoveries
recognized by NL.
|
Our
net
income in 2007 includes (net of tax and minority interest):
|
·
|
a
charge of $.05 per diluted share related to the adjustment of certain
German tax attributes within our Chemicals Segment;
and
|
|
·
|
income
of $.01 per diluted share related to certain insurance recoveries
recognized by NL.
|
Current
Forecast for 2007 –
We
expect
to report a loss for the full year 2007 primarily due to German tax law changes
enacted in July of 2007 (more fully discussed below) which we expect to create
additional tax expense of
approximately $86 million in the third quarter of 2007. In addition
we expect lower operating income for the full year 2007 compared to 2006
due
to:
|
·
|
lower
equity in earnings from TIMET resulting from the March 2007 distribution
of our TIMET shares to our
stockholders;
|
|
·
|
lower
expected operating income across all of our segments in 2007;
and
|
|
·
|
the
gain from the land we sold in 2006.
|
Segment
Operating Results - 2006 Compared to 2007 –
Chemicals
-
We
consider TiO2
to be a “quality of life” product, with demand affected by gross domestic
product (or “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:
|
·
|
Our
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);
|
|
·
|
Our
TiO2
sales and production volumes; and
|
|
·
|
Our
manufacturing costs, particularly maintenance and energy-related
expenses.
|
The
key
performance indicators for our Chemicals Segment are TiO2 average
selling
prices, and levels of TiO2 sales
and
production volumes.
|
|
Three
months ended June 30,
|
|
|
Six
months ended June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
%
Change
|
|
|
2006
|
|
|
2007
|
|
|
%
Change
|
|
|
|
(Dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
345.1
|
|
|
$ |
342.6
|
|
|
|
(1 |
)% |
|
$ |
649.4
|
|
|
$ |
656.6
|
|
|
|
1 |
% |
Cost
of sales
|
|
|
268.0
|
|
|
|
279.7
|
|
|
|
4
|
|
|
|
500.0
|
|
|
|
524.1
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
$ |
77.1
|
|
|
$ |
62.9
|
|
|
|
(19 |
)% |
|
$ |
149.4
|
|
|
$ |
132.5
|
|
|
|
(11 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$ |
33.2
|
|
|
$ |
24.6
|
|
|
|
(26 |
)% |
|
$ |
66.4
|
|
|
$ |
54.9
|
|
|
|
(17 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
78 |
% |
|
|
82 |
% |
|
|
|
|
|
|
77 |
% |
|
|
80 |
% |
|
|
|
|
Gross
margin
|
|
|
22
|
|
|
|
18
|
|
|
|
|
|
|
|
23
|
|
|
|
20
|
|
|
|
|
|
Operating
income
|
|
|
10
|
|
|
|
7
|
|
|
|
|
|
|
|
10
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ti02
operating
statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
volumes*
|
|
|
139
|
|
|
|
137
|
|
|
|
(2 |
)% |
|
|
264
|
|
|
|
262
|
|
|
|
(1 |
)% |
Production
volumes*
|
|
|
130
|
|
|
|
128
|
|
|
|
(2 |
) |
|
|
257
|
|
|
|
261
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
change in net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ti02
product
pricing
|
|
|
|
|
|
|
|
|
|
|
(4 |
)% |
|
|
|
|
|
|
|
|
|
|
(3 |
)% |
Ti02
sales
volumes
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
Ti02
product
mix
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Changes
in currency exchange rates
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
(1 |
)% |
|
|
|
|
|
|
|
|
|
|
1 |
% |
*
Thousands of metric tons
Net
Sales - Our Chemicals Segment’s sales declined slightly in the second
quarter of 2007 compared to the second quarter of 2006 primarily due to
decreases in average Ti02
selling
prices and a 2% decrease in sales volumes offset somewhat
by the impact of favorable changes in currency exchange rates, which increased
sales by approximately $15 million, or 4% in the quarter. Sales for
the first six months of 2007 increased slightly over the same period in 2006
as
the impact of favorable changes in currency exchange rates, which increased
sales by approximately $31 million, or 5%, more than offset the decline in
selling prices and sales volumes in the period. We expect
average selling prices in the second half of 2007 will continue to trend
downward and be lower than the average selling prices in the first half of
2007.
Sales
volumes in both the second quarter and first six months of 2007 declined
over
the prior periods as sales volumes declines in North America as a result
of
decreased demand more than offset increased sales volumes in Europe and export
markets. We expect overall demand for TiO2 will
continue to
remain high for the remainder of the year in Europe and export markets, and
somewhat weaker in North America.
Cost
of Sales - Our Chemicals Segment’s cost of sales increased in second
quarter and first six months of 2007 compared to the same periods last year
primarily due to the impact of an increase in utility costs, primarily energy
costs (which increased 2% in the first six months of 2007 compared to 2006),
an
increase in raw material costs (which increased 1% in the first six months
of
2007 compared to 2006) and currency fluctuations (primarily the
euro). Cost of sales as a percentage of net sales increased in the
first six months of 2007 compared to 2006 as the unfavorable effects of higher
raw material and other operating costs and lower average TiO2 selling
prices more
than offset the favorable effect of higher TiO2 production
volumes. TiO2 production
volumes
increased 2% in the first six months of 2007 compared to the same period
of
2006. Our operating rates were near full capacity in both periods,
and our TiO2
production volumes in the first six months of 2007 were a new record for
us.
Operating
Income - Our Chemicals Segment’s operating income declined in both the
second quarter and the first six months of 2007 primarily due to of the decrease
in gross margin. Our gross margin has decreased as pricing has not
improved to offset the negative impact of our increased operating costs
(primarily raw materials and energy costs) and lower sales
volumes. Changes in currency rates have positively affected our gross
margin and operating income. We estimate the positive effect of
changes in foreign currency exchange rates increased operating income by
$4
million and $7 million in the second quarter and first six months of 2007,
respectively, compared to the same period in 2006.
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 an additional
$8.1 million and $1.8 million in the first six months of 2006 and 2007,
respectively. These amounts reduced our reported Chemicals Segment operating
income as compared to amounts reported by Kronos. Certain of the
basis differences became fully amortized in the third quarter of 2006, and
as a
result the amortization of our purchase accounting adjustments is lower in
2007
as compared to 2006.
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 2007 as compared to 2006.
|
|
Increase
|
|
|
|
Three
months ended
June
30, 2007
vs.
2006
|
|
|
Six
months ended
June
30, 2007
vs.
2006
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
Impact
on:
|
|
|
|
|
|
|
Net
sales
|
|
$ |
15
|
|
|
$ |
31
|
|
Operating
income
|
|
|
4
|
|
|
|
7
|
|
Outlook
- Through our
debottlenecking program, we have added capacity to our Chemicals Segment’s
German chloride-process facility, and 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.
We
expect our Chemicals Segments’
income for the remainder of 2007 will be lower than 2006. Our
expectations as to the future of the TiO2 industry
are based
upon a number of factors beyond our control, including worldwide growth of
gross
domestic product, competition in the marketplace, unexpected or earlier than
expected capacity additions and technological advances. If actual
developments differ from 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.
|
|
Three
months ended June 30,
|
|
|
Six
months ended June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
%
Change
|
|
|
2006
|
|
|
2007
|
|
|
%
Change
|
|
|
|
(Dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
50.2
|
|
|
$ |
45.3
|
|
|
|
(10 |
)% |
|
$ |
97.2
|
|
|
$ |
88.8
|
|
|
|
(9 |
)% |
Cost
of sales
|
|
|
37.8
|
|
|
|
33.4
|
|
|
|
(12 |
) |
|
|
73.2
|
|
|
|
64.8
|
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
$ |
12.4
|
|
|
$ |
11.9
|
|
|
|
(4 |
)% |
|
$ |
24.0
|
|
|
$ |
24.0
|
|
|
|
- |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$ |
5.7
|
|
|
$ |
4.8
|
|
|
|
(15 |
)% |
|
$ |
10.8
|
|
|
$ |
10.4
|
|
|
|
(4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
75 |
% |
|
|
74 |
% |
|
|
|
|
|
|
75 |
% |
|
|
73 |
% |
|
|
|
|
Gross
margin
|
|
|
25
|
|
|
|
26
|
|
|
|
|
|
|
|
25
|
|
|
|
27
|
|
|
|
|
|
Operating
income
|
|
|
11
|
|
|
|
11
|
|
|
|
|
|
|
|
11
|
|
|
|
12
|
|
|
|
|
|
Net
Sales - Our Component Products Segment’s sales decreased in the second
quarter and first six months of 2007 as compared to the second quarter and
first
six months of 2006 primarily due to lower sales of certain products to the
office furniture market where Asian competitors have established selling
prices
at a level below which we consider would return a minimal margin and the
effect
of lower order rates from many of our customers due to unfavorable economic
conditions. For the first six months of 2007 compared to the same
period in 2006 the sales decline was partially offset by new sales volumes
generated from the April 2006 acquisition of a marine component
business.
Cost
of Sales - Our Component Products Segment’s cost of goods sold decreased in
2007 as compared to 2006 due to decreased sales volumes. As a percent
of sales, Component Products cost of goods sold was lower in 2007 as compared
to
2006 primarily due to improvements in product mix and the full realization
in
2007 of certain cost reductions implemented during 2006, offset in part by
unfavorable changes in currency exchange rates and increases in raw material
costs.
Operating
Income – Our Component Products Segment’s gross margin and
operating income as a percentage of sales increased in 2007 primarily due
to a
more favorable product mix as well as decreased operating costs as a result
of a
continuous focus on reducing costs across all product
lines. Operating income decreased in both the second quarter of 2007
and the first six months of 2007 compared to the same periods in 2006 primarily
due to the effect of lower sales and foreign currency expense which negatively
impacted operating income by $.7 million in the second quarter and $.5 million
in the first six months of 2007. While we have experienced higher raw
material costs, we have mitigated any unfavorable impact to gross margin
and
operating income through the implementation of sales price increases across
most
of the products that were affected.
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 effect
on our
Component Products Segment’s sales and operating income in 2007 as compared to
2006.
|
|
Increase
(decrease)
|
|
|
|
Three
months ended
June
30, 2007
vs.
2006
|
|
|
Six
months ended
June
30, 2007
vs.
2006
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
Impact
on:
|
|
|
|
|
|
|
Net
sales
|
|
$ |
.1
|
|
|
$ |
-
|
|
Operating
income
|
|
|
(.7 |
) |
|
|
(.5 |
) |
Outlook
- Demand is slowing across most product segments as customers react to the
condition of the overall economy. Asian sourced competitive pricing
pressures are expected to continue to be a challenge for us as Asian
manufacturers, particularly those located in China, gain share in certain
markets. We believe the impact of this environment will be mitigated
through our ongoing initiatives to expand both new products and new market
opportunities. Our strategy in responding to the competitive pricing
pressure has included reducing production cost 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. As a
result of pursuing this strategy, we will forgo certain segment sales in
favor
of developing new products 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 the remainder of 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 -
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
4.3
|
|
|
$ |
1.1
|
|
|
$ |
7.3
|
|
|
$ |
2.6
|
|
Cost
of goods sold
|
|
|
3.8
|
|
|
|
3.0
|
|
|
|
7.9
|
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
$ |
.5
|
|
|
$ |
(1.9 |
) |
|
$ |
(.6 |
) |
|
$ |
(3.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
$ |
(1.1 |
) |
|
$ |
(3.2 |
) |
|
$ |
(3.7 |
) |
|
$ |
(6.2 |
) |
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 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 byproduct 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 early
2009. We do not know if we will be successful in obtaining these
licenses. While the approvals for these licenses are still in
progress, 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 decreased
during the second quarter and first six months of 2007 compared to 2006,
and our
Waste Management operating loss increased, due to lower utilization of our
waste
management services, primarily due to the completion in 2006 of a few projects
that have not yet been replaced with new business in 2007. We
continue to seek to increase our Waste Management Segment’s sales volumes from
waste streams permitted under our current licenses.
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 increase our Waste Management Segment’s sales, and
decrease our Waste Management Segment’s operating losses, in
2007. Our ability to increase our 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 discussed in Note 5 to the Condensed
Consolidated Financial Statements, we completed a special dividend of our
TIMET
common stock on March 26, 2007. We now own approximately 1% of
TIMET’s common stock, and we account for our investment in TIMET’s common stock
as available-for-sale marketable securities carried at fair value in future
periods.
We
accounted for our interest in TIMET by the equity method through March 31,
2007.
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 differed from the amount
that would have been 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 $2.4 million in the first six months of 2006
and $.6 million in the first six months of 2007. The percentage
increases in our equity in earnings of TIMET in 2007 as compared to the same
period in 2006 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 2007 as compared
to
2006 due to TIMET’s issuance of shares of its common stock, primarily from the
conversion of shares of its convertible preferred stock into TIMET common
stock
and the exercise of options to purchase TIMET common stock held by
its employees.
General
Corporate Items, Interest Expense, Provision (Benefit) for Income Taxes and
Minority Interest - 2007 Compared to 2006
Interest
and Dividend Income – A significant portion of our interest and dividend
income in both 2006 and 2007 relates to the distributions we received from
The
Amalgamated Sugar Company LLC. We recognized dividend income from the
LLC of $7.3 and $14.4 million in the second quarter and first six months
of
2006, respectively, compared to $6.3 million and $12.7 million in the second
quarter and first six months of 2007, respectively.
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 aggregate annual distributions from the LLC
of
approximately $25.4 million. In addition, because certain specified
conditions were met during the fourth quarter of 2005 and all of 2006, the
LLC
was required to distribute to us an additional $25 million during the 15-month
period ending December 31, 2006. This aggregate $25 million
distribution was in addition to the $25.4 million distribution noted
above. We received approximately $6 million of this additional amount
in 2006, (including approximately $1.7 million which the LLC paid us during
the
first six months of 2006). We expect our interest and dividend income
for all of 2007 will be lower than 2006, due to the one-time $6 million in
dividend distributions we received from the LLC during 2006.
Insurance
Recoveries – Insurance recoveries relate primarily 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 agreements with two former insurance carriers pursuant to which the
carriers reimburse us for a portion of our past and future lead pigment
litigation defense costs, and the insurance recoveries in 2006 and 2007 include
amounts we received from these carriers. We are not able to determine how
much we will ultimately recover from the carriers for past defense costs
incurred because of certain issues that arise regarding which past defense
costs
qualify for reimbursement. Insurance recoveries in 2006 also include
amounts we received for prior legal defense and indemnity coverage for certain
of our 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 and asbestos
litigation matters, we do not know if we will be successful in obtaining
additional 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 13 to our Condensed Consolidated Financial
Statements.
Corporate
Expenses, Net - Corporate expenses were 28% higher at $11.0 million in the
second quarter of 2007 compared $8.6 million in the same period in 2006 and
13%
higher at $17.0 million in the first six months of 2007 compared to $15.0
million in the first six months of 2006. Corporate expenses were
higher in both periods primarily due to higher litigation and related expenses
at NL partially offset by lower environmental and pension
expenses. 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 occur during
the remainder of 2007, our corporate expenses would be higher than our current
estimates. See Note 13 to the 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 in 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 in the second quarter
of
2006.
Interest
Expense – We have a significant amount of indebtedness denominated in the
euro, primarily through our subsidiary Kronos International, Inc.
(“KII”). KII has euro 400 million aggregate principal amount of 6.5%
Senior Secured Notes due in 2013 outstanding (and had the euro 375 million
aggregate principal amount of 8.875% Senior Secured Notes outstanding until
May
2006). The interest expense we recognize on these fixed rate Notes
will vary with fluctuations in the euro exchange rate.
Interest
expense decreased $3.3 million from $19.2 million in the second quarter of
2006
to $15.9 million in the second quarter of 2007. Interest expense
decreased $4.5 million from $36.0 million in the first six months of 2006
to
$31.5 million in the first six months of 2007. Interest expense was lower
in the
second quarter of 2007 because we replaced the 8.875% Senior Secured Notes
with
6.5% Senior Secured Notes during the second quarter of 2006 offset by the
effect
of having both notes outstanding during May 2006. This interest
savings was enhanced by favorable changes in currency exchange rates in 2007
compared to 2006.
Provision
(Benefit) for Income Taxes– Our income tax expense was $13.3 million in the
second quarter of 2007 compared to a benefit of $1.1 million in the second
quarter of 2006. Our income tax expense for the first six months of 2007
was
$33.1 million compared to $18.0 million in the first six months of
2006. The income tax benefit we recognized in the second quarter of
2006, and the unusually low overall effective income tax rate we recognized
in
the first six months of 2006, is primarily due to a $12.6 million reduction
in
our tax contingency reserves related to favorable developments with certain
income tax issues related to our German, Belgium and Norwegian operations
and a
benefit from a reduction of Canadian tax rates. The income tax provision
in 2007
includes an $8.7 million charge related to the adjustment of certain German
income tax attributes.
In
July
2007, Germany enacted certain changes in their income tax laws. The
most significant change is the reduction of the German corporate and trade
income tax rates. We have a significant net deferred income tax asset
in Germany, primarily related to the benefit associated with our corporate
and
trade tax net operating loss carryforwards. We measure our net
deferred taxes using the applicable enacted tax rates, and the effect of
any
change in the applicable enacted tax rate is recognized in the period of
enactment. Accordingly, we estimate we will report a decrease in our
net deferred tax asset in Germany of approximately $86 million in the third
quarter of 2007. This decrease will be reported as a component of our
income tax expense.
See
Note
11 to the Condensed Consolidated Financial Statements for a tabular
reconciliation of our statutory tax expense to our actual tax
expense.
Minority
Interest – Minority interest in earnings declined
from $2.4 million in the second quarter of 2006 to $.5 million in the second
quarter of 2007 and declined from $5.0 million in the first six months of
2006
to $3.0 million in the first six months of 2007, due to lower income at NL,
Kronos and CompX. See Note 12 to the Condensed Consolidated Financial
Statements.
LIQUIDITY
AND CAPITAL RESOURCES
Consolidated
Cash Flows
Operating
Activities -
Trends
in
cash flows from operating activities (excluding the impact of significant
asset
dispositions and relative changes in assets and liabilities) are generally
similar to trends in our earnings.
Cash
flows used in our operating activities decreased from $15.0 million in the
first
six months of 2006 to $11.6 million in the first six months of
2007. This decrease in cash used 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 2007 of $8.6 million, due primarily to relative
changes in
Kronos’ inventory levels;
|
|
·
|
lower
consolidated operating income in 2007 of $14.4 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
8.85%
Senior Secured Notes, which is required to be included in cash
flows from
operating activities; and
|
|
·
|
lower
cash paid for income taxes in 2007 of $17.1 million due in part
to the
2006 payment of certain income taxes associated with the settlement
of
prior year income tax audits.
|
Changes
in working capital were affected by accounts receivable and inventory
changes. Kronos’ average days sales outstanding (“DSO”) increased
from 61 days at December 31, 2006 to 68 days at June 30, 2007 due to the
timing
of collection on higher accounts receivable balances at the end of
June. CompX’s average DSO increased from 41 days at December 31, 2006
to 44 days at June 30, 2007 due to timing of collection on the higher accounts
receivable balance at the end of June. For comparative purposes,
Kronos’ average DSO increased from 55 days at December 31, 2005 to 65 days at
June 30, 2006, and CompX’s average DSO increased from 40 days to 41
days.
Kronos’
average days sales in inventory (“DSI”) decreased from 68 days at December 31,
2006 to 55 days at June 30, 2007, but relative changes in inventory did not
provide any operating cash flows in the first six months of 2007 due to the
impact of our increasing costs and currency
fluctuations. CompX’s average DSI increased from 57 days at
December 31, 2006 to 70 days at June 30, 2007 primarily due to the higher
cost
of commodity raw materials at June 30, 2007 combined with lower than expected
sales. For comparative purposes, Kronos’ average DSI decreased from
59 days at December 31, 2005 to 50 days at June 30, 2006 and CompX’s average DSI
decreased from 59 days, at December 31, 2005 to 57 days at June 30, 2006
primarily as a result of a lower commodity raw material inventory balance
at
June 30, 2006 as a result of the utilization of a higher than normal commodity
raw material inventory balance acquired in the latter part of 2005.
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.
|
|
Six
months ended
June
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
Cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
Kronos
|
|
$ |
(19.0 |
) |
|
$ |
(.1 |
) |
CompX
|
|
|
11.3
|
|
|
|
5.3
|
|
Waste Control Specialists
|
|
|
(2.8 |
) |
|
|
(6.3 |
) |
NL Parent
|
|
|
(2.4 |
) |
|
|
(4.8 |
) |
Tremont
|
|
|
(.8 |
) |
|
|
(1.7 |
) |
Valhi Parent
|
|
|
34.8
|
|
|
|
32.5
|
|
Other
|
|
|
(.1 |
) |
|
|
(.5 |
) |
Eliminations
|
|
|
(36.0 |
) |
|
|
(36.0 |
) |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(15.0 |
) |
|
$ |
(11.6 |
) |
Investing
and Financing Activities–
Our
Chemicals Segment accounted for approximately $16.6 million of our consolidated
capital expenditures in the first six months of 2007, $5.5 million for our
Component Products Segment with the remainder of capital expenditures and
the
entire $4.1 million in capitalized permit costs for our Waste Management
Segment.
We
purchased the following securities in market transactions during the first
six
months of 2007:
|
·
|
other
marketable securities for a net of $17.2 million;
and
|
|
·
|
TIMET
common stock for $.7 million.
|
We
paid
aggregate cash dividends on our common stock of $22.8 million ($.10 per share
per quarter) in the first six months of 2007 to our
shareholders. Distributions to minority interest in the first six
months of 2007 are primarily comprised of Kronos cash dividends paid to
shareholders other than us or NL, and CompX dividends paid to shareholders
other
than NL.
We
purchased approximately 175,400 shares of our common stock in market
transactions for $3.1 million during the first six months of 2007. We
funded these purchases with our available cash on hand. We and some of our
subsidiaries issued a nominal amount of common stock upon the exercise of
stock
options.
Outstanding
Debt Obligations
At
June
30, 2007, our consolidated third-party indebtedness was comprised
of:
|
·
|
KII’s
euro 400 million aggregate principal amount of its 6.5% Senior
Secured
Notes ($535.6 million at June 30, 2007) due in
2013;
|
|
·
|
our
$250
million loan from Snake River Sugar Company due in
2027;
|
|
·
|
Kronos’
U.S. revolving bank credit facility ($24.3 million outstanding)
due in
2008; and
|
|
·
|
approximately
$5.3 million of other indebtedness.
|
We
and
all of our subsidiaries are in compliance with all of our debt covenants
at June
30, 2007. See Note 7 to the Condensed Consolidated Financial
Statements. At June 30, 2007, 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 our revolving bank credit facility could
require us 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 June 30,
2008)
and our long-term obligations (defined as the five-year period ending December
31, 2012, our time period for long-term budgeting). If actual
developments differ from our expectations, our liquidity could be adversely
affected.
At
June
30, 2007, we had credit available under existing facilities of $295 million,
which was comprised of:
|
·
|
$146
million under Kronos’ various U.S. and non-U.S. credit
facilities;
|
|
·
|
$99
million under Valhi’s revolving bank credit facility;
and
|
|
·
|
$50
million under CompX’s revolving credit
facility.
|
At
June
30, 2007, we had an aggregate of $245.3 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
|
|
$ |
61.4
|
|
Kronos
|
|
|
45.2
|
|
NL parent
|
|
|
96.1
|
|
CompX
|
|
|
28.0
|
|
Tremont
|
|
|
4.0
|
|
Waste Control Specialists
|
|
|
10.6
|
|
|
|
|
|
|
Total cash, cash equivalents, and marketable
securities
|
|
$ |
245.3
|
|
Amounts
included for NL in the table above include the 2.2 million shares of TIMET
common stock NL received in our special dividend. See Note 5 to the
Condensed Consolidated Financial Statements.
Capital
Expenditures –
We
intend
to invest a total of approximately $79 million for capital expenditures during
2007. Capital expenditures are primarily for improvements and
upgrades to existing facilities. We spent $22.9 million though
June 30, 2007.
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 July 31, 2007 we had
approximately 4.4 million shares available for repurchase of our common stock
under the authorizations described in Note 9 to the Condensed 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 29.0 million shares of
Kronos we held at June 30, 2007 and Kronos’ current quarterly dividend rate of
$.25 per share, we would receive aggregate annual dividends from Kronos of
approximately $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 June
30,
2007, we would receive aggregate annual dividends from NL of approximately
$20.2
million. We do not expect to receive any distributions from WCS 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 decision 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 could 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 $5.5 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 subsidiaries under the terms of a revolving credit facility that
matures in March 2008. WCS borrowed a net $11.7 million from our
subsidiary during the first six months of 2007. The outstanding
amount of this intercompany borrowing, which is eliminated in our Condensed
Consolidated Financial Statements, was $16.3 million at June 30, 2007 and
$4.6
million at December 31, 2006. We expect that WCS will likely borrow
additional amounts during the remainder of 2007 from our
subsidiary.
Investment
in The Amalgamated Sugar Company LLC –
The
terms
of The Amalgamated Sugar Company LLC Company Agreement provide for annual
"base
level" of cash dividend distributions (sometimes referred to as distributable
cash) by the LLC of $26.7 million, from which 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.
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 the 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 our 2006 Annual Report.
Commitments
and Contingencies
There
have been no material changes in our contractual obligations since we filed
our
2006 Annual Report, and we refer you to the report for a complete description
of
these commitments.
We
are
subject to certain commitments and contingencies, as more fully described
in
Notes 11 and 13 to the Condensed Consolidated Financial Statements and in
Part
II, Item 1 of this Quarterly Report, including
|
·
|
certain
income tax examinations which are underway in various U.S. and
non-U.S.
jurisdictions;
|
|
·
|
certain
environmental remediation matters involving NL, Tremont and
Valhi;
|
|
·
|
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 13 to the Condensed
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 NL and other pigment manufacturers have been
successful. Examples of such proposed legislation include bills which
would permit civil liability for damages on the basis of market share, rather
than requiring plaintiffs to prove that the defendant's product caused the
alleged damage, and bills which would revive actions barred by the statute
of
limitations. While no legislation or regulations have been enacted to
date that are expected to have a material adverse effect on our consolidated
financial position, results of operations or liquidity, enactment of such
legislation could have such an effect.
Recent
Accounting Pronouncements
See
Note
14 to the Condensed Consolidated Financial Statements
Critical
Accounting Policies
There
have been no changes in the first six months of 2007 with respect to our
critical accounting policies presented in Management’s Discussion and Analysis
of Financial Condition and Results of Operation in our 2006 Annual
Report.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
We
are
exposed to market risk, including foreign currency exchange rates, interest
rates and equity security prices. For a discussion of such market
risk items, refer to Part I, Item 7A - “Quantitative and Qualitative Disclosure
About Market Risk” in our 2006 Annual Report. There have been no
material changes in these market risks during the first six months of
2007.
We
have
substantial operations located outside the United States for which the
functional currency is not the U.S. dollar. As a result, our assets
and liabilities, results of operations and cash flows will fluctuate based
upon
changes in foreign currency exchange rates.
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. We also periodically use
currency forward contracts to manage risk associated with other currency
transactions such as intercompany dividends from foreign
subsidiaries. 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. To manage our risk,
at June 30, 2007 our Chemicals Segment held a series of contracts, with
expiration dates ranging from July to December 2007, to exchange an aggregate
of
U.S. $30 million for Canadian dollars at exchange rates ranging from Cdn.
$1.062
to Cdn. $1.065 per U.S. dollar. At June 30, 2007, our Component
Products Segment also had one contract outstanding to manage exchange rate
risk
to exchange an aggregate of U.S. $2.1 million for Canadian dollars at an
exchange rate of Cdn $1.13 per U.S. dollar. This contract does not
qualify for hedge accounting and matured in July 2007. At June 30,
2007 the actual exchange rate was Cdn. $1.063 per U.S. dollar. The
estimated fair value of such foreign currency forward contracts at June 30,
2007
is not significant.
ITEM
4. 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 operating effectiveness
of our
disclosure controls and procedures as of June 30, 2007. Based upon
their evaluation, these executive officers have concluded that our disclosure
controls and procedures were effective as of June 30, 2007.
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:
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·
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pertain
to the maintenance of records that in reasonable detail accurately
and
fairly reflect our transactions and dispositions of our
assets,
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·
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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
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·
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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.
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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
Condensed 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.
Changes
in Internal Control Over Financial Reporting –
There
has
been no change to our internal control over financial reporting during the
quarter ended June 30, 2007 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Part
II. OTHER INFORMATION
Item
1. Legal
Proceedings.
In
addition to the matters discussed below, refer to Note 13 to the Condensed
Consolidated Financial Statements, and to our 2006 Annual Report and our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2007.
Jackson,
et al. v. The Glidden Co., et al., Court of Common Pleas, Cuyahoga County,
Cleveland, Ohio (Case No. 236835). In June 2007, the Ohio Supreme
Court denied review of the appellate court’s affirmation of the summary judgment
order. This decision concludes the case in our favor.
State
of Rhode Island v. Lead Industries Association, et al. (Superior Court of
Rhode Island, No. 99-5226). Please refer to Note 13 to our Condensed
Consolidated Financial Statements.
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). In June
2007, the Missouri Supreme Court affirmed the dismissal of this
case. This decision concludes the case in our favor.
County
of Santa Clara v. Atlantic Richfield Company, et al. (Superior Court of the
State of California, County of Santa Clara, Case No. CV788657). In
May 2007, plaintiffs appealed the trial court’s ruling that the contingency fee
arrangement between plaintiffs and their counsel was unlawful, and the trail
court granted a stay of the case pending resolution of this appeal.
City
of Milwaukee v. NL Industries, Inc. and Mautz Paint (Circuit Court, Civil
Division, Milwaukee County, Wisconsin, Case No. 01CV003066). The case
was tried in May and June 2007, and in June 2007 the jury returned a verdict
in
favor of NL. In July 2007, plaintiff filed motions to set aside the
verdict and requested a new trial, including a motion to change the
verdict. The court has scheduled a hearing on these motions in
September 2007.
In
re: Lead Paint Litigation (Superior Court of New Jersey, Middlesex County,
Case Code 702). In June 2007, the New Jersey Supreme Court reversed
the appellate court’s ruling on the state’s public nuisance count, with
instructions to dismiss the case. This decision concludes the case in
our favor.
Jackson,
et al., v. Phillips Building Supply of Laurel, et al. (Circuit Court of
Jones County, Mississippi, Dkt. Co. 2002-10-CV1). The time for appeal
of the order granting our summary judgment motion has expired. The
decision granting summary judgment concludes the case in our favor.
Jones
v. NL Industries, Inc., et al., United States District Court, Northern
District of Mississippi (Case No. 4:03cv229-M-B). In July 2007, the
Fifth Circuit Court of Appeals rejected the appeal and thus affirmed the
trial
court’s decision and verdict. This decision concludes the case in our
favor.
Terry,
et al. v. NL Industries, Inc., et al. (United States District Court,
Southern District of Mississippi, Case No. 4:04 CV 269 PB). In May
2007, the court dismissed the plaintiffs’ fraudulent concealment
count.
City
of E. Cleveland, Ohio v. Sherwin-Williams Company et al. (Court of Common
Pleas, Cuyahoga County, Ohio, Case No. CV06602785); and City of Cincinnati,
Ohio v. Sherwin-Williams Company et al. (Court of Common Pleas, Hamilton
County, Ohio, Case No. A 0611226). In June 2007, each of these Cities
voluntarily dismissed their respective case without prejudice.
City
of Lancaster, Ohio v. Sherwin-Williams Company et al. (Court of Common
Pleas, Fairfield County, Ohio, Case No. 2006 CV 01055); City of Toledo, Ohio
v. Sherwin-Williams Company et al. (Court of Common Pleas, Lucas County,
Ohio, Case No. G-4801-CI-200606040-000); and Columbus City, Ohio v.
Sherwin-Williams Company et al. (Court of Common Pleas, Franklin County,
Ohio, Case No. 06CVH-12-16480). In May 2007, each of the courts
stayed these cases pending a decision by the Ohio Supreme Court, which was
issued on August 1, 2007, upholding the enactment of 2006 SB 117, a bill
which
clarified the State’s product liability law, as applicable to public nuisance
actions.
State
of Ohio, ex rel. Marc Dann Attorney General v. Sherwin-Williams Company et
al.
(Court of Common Pleas, Franklin County, Ohio, Case No. 07 CVC 04
4587). In May 2007, this case was consolidated with the
Columbus case.
City
of Canton, Ohio v. Sherwin-Williams Company et al. (Court of Common Pleas,
Stark County, Ohio, Case No. 2006CV05048). In May 2007, the court
granted the Stark County Housing Authority’s motion to
intervene. Also in May, the court consolidated the City
ofMassillon case, which was also pending before the court, with
this case. In July 2007, the court heard arguments on the defendants’
motion to dismiss and took the matter under advisement.
City
of Massillon, Ohio v. Sherwin-Williams Company et al. (Court of Common
Pleas, Stark County, Ohio, Case No. 2007CV01224). In May 2007, this
case was consolidated with the Canton case.
City
of Youngstown, Ohio v. Sherwin-Williams Company et al. (Court of Common
Pleas, Mahoning County, Ohio, Case No. 2007 CV 01167); City of Athens, Ohio
v. Sherwin-Williams Company et al. (Court of Common Pleas, Athens County,
Ohio, Case No. 07CI136); and City of Dayton, Ohio v. Sherwin-Williams
Company et al. (Court of Common Pleas, Montgomery County, Ohio, Case No.
2007 CV 02701). In May 2007, defendants in each of these cases filed
a motion to dismiss the case.
Circuit
Court cases in Milwaukee County, Wisconsin. During the second
quarter of 2007, four of the cases were removed to Federal court.
In
June
2007, we were served with crossclaims by a third-party defendant in Michel
et al. v. Brothers Services, Inc. et al. (Superior Court of New Jersey,
Monmouth County, New Jersey, Case No. MON-L-2240-07). Plaintiffs, a
minor child and his parents, seek damages for injuries purportedly caused
by
lead on the surfaces of the home in which they reside. We intend to
deny all liability and to defend against all of the cross claims
vigorously.
The
Quapaw Tribe of Oklahoma et al. v. Blue Tee Corp. et al. (United States
District Court, Northern District of Oklahoma, Case No. 03-CII-846H(J)),
formerly The Quapaw Tribe of Oklahoma et al. v. ASARCO Incorporated et
al. In June 2007, plaintiffs amended the complaint to drop the
class allegations.
Brown
et al. v. NL Industries, Inc. et al. (Circuit Court Wayne County, Michigan,
Case No. 06-602096 CZ). In May 2007, we moved to dismiss several
plaintiffs who failed to respond to discovery requests.
Item
1A. Risk
Factors.
For
a
discussion of the risk factors related to our businesses, refer to Part I,
Item
1A, “Risk Factors,” in our 2006 Annual report. There have been no
material changes to such risk factors during the first six months of
2007.
Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds; Share
Repurchases.
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Our
board
of directors has previously authorized the repurchase of up to 10.0 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. We may repurchase our common 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 its completion. We will use cash on
hand to acquire the shares. Repurchased shares may be retired and
cancelled or may be added to our treasury and used for employee benefit plans,
future acquisitions or other corporate purposes. See Note 9 to the
Condensed Consolidated Financial Statements.
The
following table discloses certain information regarding the shares of our
common
stock we purchased during June of 2007 (there were no purchases during April
or
May 2007). All of these purchases were made under the repurchase
program in open market transactions.
Period
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Total
number of shares purchased
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Average
price
paid
per
share, including
commissions
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Total
number of shares purchased as part of a publicly-announced
plan
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Maximum
number of shares that may yet be purchased under the publicly-announced
plan at end of period
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June
1, 2007
to June
30,
2007
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73,700
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$ |
15.06
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73,700
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4,413,700
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Item
4. Submission
of Matters to a Vote of Security Holders.
Our
2007 Annual Meeting of Shareholders
was held on May 31, 2007. Thomas E. Barry, Norman S. Edelcup, W.
Hayden McIlroy, Glenn R. Simmons, Harold C. Simmons, J. Walter Tucker, Jr.
and
Steven L. Watson were elected as directors, each receiving votes “for” their
election from at least 97.6% of the 114.2 million common shares eligible
to vote
at the Annual Meeting.
Item
6. Exhibits.
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31.1
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Certification
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31.2
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Certification
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32.1
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Certification
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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VALHI,
INC.
(Registrant)
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Date
August 8,
2007
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/s/
Bobby D.
O’Brien
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Bobby
D. O’Brien
(Vice
President and Chief
Financial
Officer)
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Date August
8, 2007
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/s/
Gregory M.
Swalwell
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Gregory
M. Swalwell
(Vice
President and Controller,
Principal
Accounting Officer)
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