vhi10q0907.htm
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the quarter ended September 30, 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 October 31, 2007:
113,740,378.
VALHI,
INC. AND SUBSIDIARIES
INDEX
|
Page
number
|
|
|
Part
I. FINANCIAL
INFORMATION
|
|
|
|
Item
1. Financial
Statements.
|
|
|
|
Condensed
Consolidated Balance
Sheets –
December
31, 2006; and
September 30, 2007 (unaudited)
|
3
|
|
|
Condensed
Consolidated
Statements of Operations (unaudited) – Three and nine months ended
September 30, 2006 (as
adjusted);
and three and
nine months ended September
30, 2007
|
5
|
|
|
Condensed
Consolidated
Statements of Cash Flows (unaudited)
–
Nine
months ended
September 30, 2006 (as adjusted); and
nine
months ended
September 30, 2007
|
6
|
|
|
Condensed
Consolidated
Statement of Stockholders’ Equity
and Comprehensive
Income (Loss) – Nine months ended
September
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.
|
28
|
|
|
Item
3. Quantitative
and Qualitative Disclosure About
Market
Risk
|
47
|
|
|
Item
4. Controls
and Procedures
|
48
|
|
|
Part
II. OTHER
INFORMATION
|
|
|
|
Item
1. Legal
Proceedings.
|
50
|
|
|
Item
1A. Risk
Factors.
|
51
|
|
|
Item
2. Unregistered
Sales of Equity Securities and
Use
of Proceeds; Share
Repurchases
|
51
|
|
|
Item
6. Exhibits.
|
52
|
|
|
Items
3,
4 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
|
|
|
September
30,
2007
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
189.2
|
|
|
$ |
177.9
|
|
Restricted cash equivalents
|
|
|
9.1
|
|
|
|
6.7
|
|
Marketable securities
|
|
|
12.6
|
|
|
|
7.7
|
|
Accounts and other receivables, net
|
|
|
231.0
|
|
|
|
290.5
|
|
Inventories, net
|
|
|
309.0
|
|
|
|
316.0
|
|
Prepaid expenses and
other
|
|
|
17.9
|
|
|
|
28.9
|
|
Deferred income taxes
|
|
|
10.6
|
|
|
|
9.8
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
779.4
|
|
|
|
837.5
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Marketable
securities
|
|
|
259.0
|
|
|
|
336.7
|
|
Investment in affiliates
|
|
|
396.7
|
|
|
|
137.7
|
|
Pension asset
|
|
|
40.1
|
|
|
|
46.5
|
|
Goodwill
|
|
|
385.2
|
|
|
|
385.2
|
|
Other intangible assets
|
|
|
3.9
|
|
|
|
2.9
|
|
Deferred income taxes
|
|
|
264.4
|
|
|
|
193.6
|
|
Other assets
|
|
|
64.7
|
|
|
|
67.9
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
1,414.0
|
|
|
|
1,170.5
|
|
|
|
|
|
|
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
|
42.1
|
|
|
|
44.1
|
|
Buildings
|
|
|
242.2
|
|
|
|
263.9
|
|
Equipment
|
|
|
928.4
|
|
|
|
1,012.9
|
|
Mining properties
|
|
|
30.7
|
|
|
|
38.3
|
|
Construction in progress
|
|
|
20.6
|
|
|
|
53.7
|
|
|
|
|
1,264.0
|
|
|
|
1,412.9
|
|
Less accumulated depreciation
|
|
|
652.7
|
|
|
|
759.3
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
|
611.3
|
|
|
|
653.6
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
2,804.7
|
|
|
$ |
2,661.6
|
|
VALHI,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In
millions)
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
December
31,
2006
|
|
|
September
30,
2007
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$ |
1.2
|
|
|
$ |
23.6
|
|
Accounts payable
and accrued liabilities
|
|
|
238.7
|
|
|
|
288.7
|
|
Income taxes
|
|
|
11.1
|
|
|
|
23.2
|
|
Deferred income taxes
|
|
|
2.2
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
253.2
|
|
|
|
337.0
|
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
785.3
|
|
|
|
818.1
|
|
Deferred income taxes
|
|
|
479.2
|
|
|
|
405.9
|
|
Accrued pension costs
|
|
|
188.7
|
|
|
|
197.6
|
|
Accrued postretirement
benefit (OPEB) costs
|
|
|
33.6
|
|
|
|
34.7
|
|
Accrued environmental costs
|
|
|
46.1
|
|
|
|
40.2
|
|
Other liabilities
|
|
|
28.1
|
|
|
|
84.7
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent liabilities
|
|
|
1,561.0
|
|
|
|
1,581.2
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
123.7
|
|
|
|
125.0
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
-
|
|
|
|
667.3
|
|
Common stock
|
|
|
1.2
|
|
|
|
1.2
|
|
Additional paid-in capital
|
|
|
107.4
|
|
|
|
21.1
|
|
Retained earnings
(deficit)
|
|
|
839.2
|
|
|
|
(57.6 |
) |
Accumulated other comprehensive income (loss)
|
|
|
(43.1 |
) |
|
|
24.3
|
|
Treasury stock
|
|
|
(37.9 |
) |
|
|
(37.9 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
866.8
|
|
|
|
618.4
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, minority interest and
stockholders’ equity
|
|
$ |
2,804.7
|
|
|
$ |
2,661.6
|
|
|
|
|
|
|
|
|
|
|
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
millions, except per share
data)
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(as
adjusted)
|
|
|
|
|
|
(as
adjusted)
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
and other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
383.1
|
|
|
$ |
390.6
|
|
|
$ |
1,137.0
|
|
|
$ |
1,138.6
|
|
Other,
net
|
|
|
11.5
|
|
|
|
8.7
|
|
|
|
34.6
|
|
|
|
32.5
|
|
Equity
in earnings of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Titanium
Metals Corporation
("TIMET")
|
|
|
19.2
|
|
|
|
-
|
|
|
|
61.7
|
|
|
|
26.9
|
|
Other
|
|
|
4.6
|
|
|
|
1.3
|
|
|
|
2.6
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues and other income
|
|
|
418.4
|
|
|
|
400.6
|
|
|
|
1,235.9
|
|
|
|
1,199.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
298.4
|
|
|
|
315.0
|
|
|
|
879.6
|
|
|
|
910.0
|
|
Selling,
general and administrative
|
|
|
59.2
|
|
|
|
59.1
|
|
|
|
173.1
|
|
|
|
174.5
|
|
Loss
on prepayment of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
22.3
|
|
|
|
-
|
|
Interest
|
|
|
15.8
|
|
|
|
16.0
|
|
|
|
51.8
|
|
|
|
47.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses
|
|
|
373.4
|
|
|
|
390.1
|
|
|
|
1,126.8
|
|
|
|
1,132.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
45.0
|
|
|
|
10.5
|
|
|
|
109.1
|
|
|
|
67.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
22.6
|
|
|
|
69.1
|
|
|
|
40.6
|
|
|
|
102.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in after-tax
earnings
(losses)
|
|
|
2.3
|
|
|
|
(5.9 |
) |
|
|
7.3
|
|
|
|
(2.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
20.1
|
|
|
$ |
(52.7 |
) |
|
$ |
61.2
|
|
|
$ |
(31.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per basic and
diluted
share
|
|
$ |
.17
|
|
|
$ |
(.46 |
) |
|
$ |
.52
|
|
|
$ |
(.27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends per share
|
|
$ |
.10
|
|
|
$ |
.10
|
|
|
$ |
.30
|
|
|
$ |
.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
116.1
|
|
|
|
114.6
|
|
|
|
116.4
|
|
|
|
114.8
|
|
Outstanding
stock options impact
|
|
|
.4
|
|
|
|
-
|
|
|
|
.4
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
116.5
|
|
|
|
114.6
|
|
|
|
116.8
|
|
|
|
114.8
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
VALHI,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
millions)
|
|
Nine
months ended
September
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(as
adjusted)
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
61.2
|
|
|
$ |
(31.5 |
) |
Depreciation and amortization
|
|
|
55.9
|
|
|
|
49.1
|
|
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
|
|
|
(2.6 |
) |
|
|
(4.8 |
) |
Other postretirement benefit plans
|
|
|
(2.4 |
) |
|
|
.4
|
|
Deferred income taxes
|
|
|
21.3
|
|
|
|
82.0
|
|
Minority interest
|
|
|
7.3
|
|
|
|
(2.9 |
) |
Other, net
|
|
|
2.0
|
|
|
|
4.1
|
|
Equity in:
|
|
|
|
|
|
|
|
|
TIMET
|
|
|
(61.7 |
) |
|
|
(26.9 |
) |
Other
|
|
|
(2.6 |
) |
|
|
(1.8 |
) |
Net distributions from (contributions to):
Ti02
manufacturing joint venture
|
|
|
.5
|
|
|
|
(3.9 |
) |
Other
|
|
|
.3
|
|
|
|
.3
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts and other receivables, net
|
|
|
(43.9 |
) |
|
|
(44.6 |
) |
Inventories, net
|
|
|
28.8
|
|
|
|
17.0
|
|
Accounts payable and accrued liabilities
|
|
|
16.8
|
|
|
|
25.5
|
|
Accounts with affiliates
|
|
|
1.9
|
|
|
|
.4
|
|
Income taxes
|
|
|
(5.9 |
) |
|
|
9.7
|
|
Other, net
|
|
|
(19.4 |
) |
|
|
(15.7 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided
by operating activities
|
|
|
58.9
|
|
|
|
56.4
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(36.5 |
) |
|
|
(41.0 |
) |
Capitalized
permit costs
|
|
|
(5.4 |
) |
|
|
(5.5 |
) |
Purchases of:
|
|
|
|
|
|
|
|
|
Kronos common stock
|
|
|
(25.2 |
) |
|
|
-
|
|
CompX common stock
|
|
|
(2.3 |
) |
|
|
(2.2 |
) |
TIMET
common stock
|
|
|
(18.7 |
) |
|
|
(.7 |
) |
Business
unit, net of cash acquired
|
|
|
(9.8 |
) |
|
|
-
|
|
Marketable securities
|
|
|
(26.5 |
) |
|
|
(19.1 |
) |
Proceeds from disposal of marketable
securities
|
|
|
27.0
|
|
|
|
23.6
|
|
Change in restricted cash equivalents, net
|
|
|
(1.0 |
) |
|
|
2.6
|
|
Other, net
|
|
|
3.4
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(95.0 |
) |
|
|
(40.4 |
) |
|
|
|
|
|
|
|
|
|
VALHI,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In
millions)
|
|
Nine
months ended
September
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(as
adjusted)
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
Indebtedness:
|
|
|
|
|
|
|
Borrowings
|
|
$ |
722.2
|
|
|
$ |
263.3
|
|
Principal payments
|
|
|
(688.3 |
) |
|
|
(247.5 |
) |
Deferred financing costs paid
|
|
|
(8.9 |
) |
|
|
-
|
|
Dividends paid
|
|
|
(36.1 |
) |
|
|
(34.2 |
) |
Distributions to minority interest
|
|
|
(6.7 |
) |
|
|
(6.6 |
) |
Treasury stock acquired
|
|
|
(18.8 |
) |
|
|
(9.8 |
) |
Issuance
of common stock and other
|
|
|
.5
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
Net cash used
in financing activities
|
|
|
(36.1 |
) |
|
|
(32.4 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - net change from:
|
|
|
|
|
|
|
|
|
Operating, investing and financing activities
|
|
|
(72.2 |
) |
|
|
(16.4 |
) |
Currency translation
|
|
|
2.7
|
|
|
|
5.1
|
|
Cash and cash
equivalents at beginning of period
|
|
|
275.0
|
|
|
|
189.2
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at end of period
|
|
$ |
205.5
|
|
|
$ |
177.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest, net of amounts capitalized
|
|
$ |
35.0
|
|
|
$ |
37.3
|
|
Income taxes, net
|
|
|
25.0
|
|
|
|
14.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
(LOSS)
Nine
months ended September 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
(loss)
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
$ |
-
|
|
|
$ |
1.2
|
|
|
$ |
107.4
|
|
|
$ |
839.2
|
|
|
$ |
(43.1 |
) |
|
$ |
(37.9 |
) |
|
$ |
866.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(31.5 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(31.5 |
) |
|
$ |
(31.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
(22.8 |
) |
|
|
(11.4 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
(34.2 |
) |
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
59.4
|
|
|
|
-
|
|
|
|
59.4
|
|
|
|
59.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9.8 |
) |
|
|
(9.8 |
) |
|
|
-
|
|
Retired
|
|
|
-
|
|
|
|
-
|
|
|
|
(7.9 |
) |
|
|
(1.9 |
) |
|
|
-
|
|
|
|
9.8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other,
net
|
|
|
-
|
|
|
|
-
|
|
|
|
1.3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1.3
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2007
|
|
$ |
667.3
|
|
|
$ |
1.2
|
|
|
$ |
21.1
|
|
|
$ |
(57.6 |
) |
|
$ |
24.3
|
|
|
$ |
(37.9 |
) |
|
$ |
618.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
VALHI,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
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
September 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
September 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 (NYSE: VHI), taken as a whole.
Note
2
- Business
segment information:
Business
segment
|
|
Entity
|
|
%
owned at
September
30, 2007
|
|
|
|
|
|
Chemicals
|
|
Kronos
Worldwide, Inc.
|
|
95%
|
Component
products
|
|
CompX
International Inc.
|
|
71%
|
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. At September 30, 2007, NL
owned 82.4% of CompX Group, and TIMET owned the remaining 17.6% of CompX
Group. CompX Group’s sole asset is 83% of the outstanding common
stock of CompX. NL also owns an additional 3% of CompX
directly. During the first nine months of 2007, CompX purchased
approximately 114,000 shares of its Class A common stock in market transactions
for an aggregate of $2.2 million. See Note 12.
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. At September 30, 2007, TIMET owned an additional 3% of CompX, .5%
of NL and less than .1% of Kronos, see Note 12. 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
September 30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(as
adjusted)
|
|
|
|
|
|
(as
adjusted)
|
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemicals
|
|
$ |
331.6
|
|
|
$ |
343.3
|
|
|
$ |
981.0
|
|
|
$ |
999.9
|
|
Component products
|
|
|
48.8
|
|
|
|
46.4
|
|
|
|
146.0
|
|
|
|
135.2
|
|
Waste management
|
|
|
2.7
|
|
|
|
.9
|
|
|
|
10.0
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$ |
383.1
|
|
|
$ |
390.6
|
|
|
$ |
1,137.0
|
|
|
$ |
1,138.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemicals
|
|
$ |
259.0
|
|
|
$ |
277.3
|
|
|
$ |
759.1
|
|
|
$ |
801.4
|
|
Component products
|
|
|
36.0
|
|
|
|
35.1
|
|
|
|
109.2
|
|
|
|
99.9
|
|
Waste management
|
|
|
3.4
|
|
|
|
2.6
|
|
|
|
11.3
|
|
|
|
8.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
$ |
298.4
|
|
|
$ |
315.0
|
|
|
$ |
879.6
|
|
|
$ |
910.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemicals
|
|
$ |
72.6
|
|
|
$ |
66.0
|
|
|
$ |
221.9
|
|
|
$ |
198.5
|
|
Component products
|
|
|
12.8
|
|
|
|
11.3
|
|
|
|
36.8
|
|
|
|
35.3
|
|
Waste management
|
|
|
(.7 |
) |
|
|
(1.7 |
) |
|
|
(1.3 |
) |
|
|
(5.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin
|
|
$ |
84.7
|
|
|
$ |
75.6
|
|
|
$ |
257.4
|
|
|
$ |
228.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemicals
|
|
$ |
33.0
|
|
|
$ |
23.4
|
|
|
$ |
99.4
|
|
|
$ |
78.3
|
|
Component products
|
|
|
6.2
|
|
|
|
4.3
|
|
|
|
17.0
|
|
|
|
14.7
|
|
Waste management
|
|
|
(2.4 |
) |
|
|
(3.5 |
) |
|
|
(6.1 |
) |
|
|
(9.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
|
36.8
|
|
|
|
24.2
|
|
|
|
110.3
|
|
|
|
83.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TIMET
|
|
|
19.2
|
|
|
|
-
|
|
|
|
61.7
|
|
|
|
26.9
|
|
Other
|
|
|
4.6
|
|
|
|
1.3
|
|
|
|
2.6
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General corporate items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
earnings
|
|
|
10.6
|
|
|
|
7.6
|
|
|
|
31.2
|
|
|
|
23.9
|
|
Insurance recoveries
|
|
|
.1
|
|
|
|
1.2
|
|
|
|
2.9
|
|
|
|
4.2
|
|
General expenses, net
|
|
|
(10.5 |
) |
|
|
(7.8 |
) |
|
|
(25.5 |
) |
|
|
(24.8 |
) |
Loss on prepayment of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
(22.3 |
) |
|
|
-
|
|
Interest expense
|
|
|
(15.8 |
) |
|
|
(16.0 |
) |
|
|
(51.8 |
) |
|
|
(47.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$ |
45.0
|
|
|
$ |
10.5
|
|
|
$ |
109.1
|
|
|
$ |
67.8
|
|
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
|
|
|
September
30,
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$ |
228.0
|
|
|
$ |
288.0
|
|
Notes
receivable
|
|
|
3.2
|
|
|
|
3.9
|
|
Refundable
income taxes
|
|
|
1.9
|
|
|
|
1.5
|
|
Receivable
from affiliates:
|
|
|
|
|
|
|
|
|
Contran
– income taxes, net
|
|
|
.6
|
|
|
|
-
|
|
Other
|
|
|
.2
|
|
|
|
-
|
|
Accrued
interest and dividends receivable
|
|
|
.1
|
|
|
|
.1
|
|
Allowance
for doubtful accounts
|
|
|
(3.0 |
) |
|
|
(3.0 |
) |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
231.0
|
|
|
$ |
290.5
|
|
Note
4
- Inventories,
net:
|
|
December
31,
2006
|
|
|
September
30,
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
Raw materials:
|
|
|
|
|
|
|
Chemicals
|
|
$ |
46.1
|
|
|
$ |
64.6
|
|
Component products
|
|
|
5.8
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
Total raw materials
|
|
|
51.9
|
|
|
|
72.6
|
|
|
|
|
|
|
|
|
|
|
In-process products:
|
|
|
|
|
|
|
|
|
Chemicals
|
|
|
25.7
|
|
|
|
15.4
|
|
Component products
|
|
|
8.7
|
|
|
|
10.6
|
|
|
|
|
|
|
|
|
|
|
Total in-process products
|
|
|
34.4
|
|
|
|
26.0
|
|
|
|
|
|
|
|
|
|
|
Finished products:
|
|
|
|
|
|
|
|
|
Chemicals
|
|
|
168.4
|
|
|
|
153.5
|
|
Component products
|
|
|
7.1
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
Total finished products
|
|
|
175.5
|
|
|
|
161.5
|
|
|
|
|
|
|
|
|
|
|
Supplies (primarily chemicals)
|
|
|
47.2
|
|
|
|
55.9
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
309.0
|
|
|
$ |
316.0
|
|
Note
5 - Other noncurrent assets:
|
|
December
31,
2006
|
|
|
September
30,
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
Available-for-sale
marketable securities:
|
|
|
|
|
|
|
The
Amalgamated Sugar Company LLC
|
|
$ |
250.0
|
|
|
$ |
250.0
|
|
TIMET
|
|
|
-
|
|
|
|
76.4
|
|
Other
|
|
|
9.0
|
|
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
259.0
|
|
|
$ |
336.7
|
|
|
|
|
|
|
|
|
|
|
Investment
in affiliates:
|
|
|
|
|
|
|
|
|
TIMET:
|
|
|
|
|
|
|
|
|
Common stock
|
|
$ |
264.1
|
|
|
$ |
-
|
|
Preferred stock
|
|
|
.2
|
|
|
|
-
|
|
Total investment in TIMET
|
|
|
264.3
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
TiO2 manufacturing joint venture
|
|
|
113.6
|
|
|
|
117.5
|
|
Other
|
|
|
18.8
|
|
|
|
20.2
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
396.7
|
|
|
$ |
137.7
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Waste disposal site operating permits, net
|
|
$ |
22.8
|
|
|
$ |
28.4
|
|
Deferred financing costs
|
|
|
9.2
|
|
|
|
8.4
|
|
IBNR
receivables
|
|
|
6.6
|
|
|
|
7.1
|
|
Loans and other receivables
|
|
|
3.2
|
|
|
|
1.7
|
|
Restricted cash equivalents
|
|
|
.4
|
|
|
|
.4
|
|
Other
|
|
|
22.5
|
|
|
|
21.9
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
64.7
|
|
|
$ |
67.9
|
|
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 NL received is $11.4 million, which represents our basis in
such TIMET shares under the equity method immediately before the special
dividend. At September 30, 2007, the quoted market price for TIMET’s
common stock was $33.56 per share, for an aggregate market value of our TIMET
shares of $76.4 million. As a result, approximately $34.7 million of
unrealized gain, net of applicable income tax and minority interest, related
to
these shares of TIMET common stock is included in our other comprehensive
income. The income tax recognized in other comprehensive income
includes $22.5 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 September 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
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
271.8
|
|
|
$ |
297.3
|
|
|
$ |
859.6
|
|
|
$ |
980.3
|
|
Cost
of sales
|
|
|
174.0
|
|
|
|
199.3
|
|
|
|
547.2
|
|
|
|
613.4
|
|
Operating
income
|
|
|
84.6
|
|
|
|
81.3
|
|
|
|
273.3
|
|
|
|
315.4
|
|
Net
income attributable to common
stockholders
|
|
|
52.7
|
|
|
|
52.3
|
|
|
|
163.8
|
|
|
|
203.6
|
|
Note
6
- Accounts
payable and accrued liabilities:
|
|
|
|
|
|
|
|
|
December
31,
2006
|
|
|
September
30,
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
101.8
|
|
|
$ |
110.4
|
|
Employee benefits
|
|
|
37.4
|
|
|
|
40.1
|
|
Payable
to affiliates:
|
|
|
|
|
|
|
|
|
Louisiana
Pigment Company
|
|
|
11.7
|
|
|
|
9.8
|
|
Contran
– trade items
|
|
|
5.5
|
|
|
|
6.7
|
|
Contran
– income taxes, net
|
|
|
-
|
|
|
|
1.0
|
|
Accrued
sales discounts and rebates – Chemicals
|
|
|
8.5
|
|
|
|
21.2
|
|
Environmental costs
|
|
|
13.6
|
|
|
|
13.0
|
|
Deferred income
|
|
|
4.9
|
|
|
|
9.6
|
|
Interest
|
|
|
7.6
|
|
|
|
17.2
|
|
Reserve
for uncertain tax positions
|
|
|
-
|
|
|
|
.8
|
|
Other
|
|
|
47.7
|
|
|
|
58.9
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
238.7
|
|
|
$ |
288.7
|
|
|
|
|
|
|
|
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
Reserve
for uncertain tax positions
|
|
$ |
-
|
|
|
$ |
56.3
|
|
Insurance claims and expenses
|
|
|
13.9
|
|
|
|
13.4
|
|
Employee benefits
|
|
|
7.2
|
|
|
|
7.7
|
|
Other
|
|
|
7.0
|
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
28.1
|
|
|
$ |
84.7
|
|
Our
reserve for uncertain tax positions is discussed in Note 14.
Note
7 - Long-term debt:
|
|
December
31,
2006
|
|
|
September
30,
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valhi
- Snake River Sugar Company
|
|
$ |
250.0
|
|
|
$ |
250.0
|
|
|
|
|
|
|
|
|
|
|
Subsidiary
debt:
|
|
|
|
|
|
|
|
|
Kronos International
6.5% Senior Secured Notes
|
|
|
525.0
|
|
|
|
563.6
|
|
Kronos U.S. bank credit facility
|
|
|
6.4
|
|
|
|
22.4
|
|
Other
|
|
|
5.1
|
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
Total subsidiary debt
|
|
|
536.5
|
|
|
|
591.7
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
786.5
|
|
|
|
841.7
|
|
|
|
|
|
|
|
|
|
|
Less current maturities
|
|
|
1.2
|
|
|
|
23.6
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$ |
785.3
|
|
|
$ |
818.1
|
|
During
the first nine months of 2007, we borrowed a net $16.0 million under Kronos’
U.S. bank credit facility. The average interest rate on the
outstanding borrowings under this facility at September 30, 2007 was
7.75%.
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
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
2.0
|
|
|
$ |
2.0
|
|
|
$ |
5.8
|
|
|
$ |
5.9
|
|
Interest cost
|
|
|
6.1
|
|
|
|
7.0
|
|
|
|
17.8
|
|
|
|
20.0
|
|
Expected return on plan assets
|
|
|
(6.5 |
) |
|
|
(7.2 |
) |
|
|
(19.1 |
) |
|
|
(21.2 |
) |
Amortization of prior service cost
|
|
|
.1
|
|
|
|
.2
|
|
|
|
.3
|
|
|
|
.5
|
|
Amortization of net transition
obligations
|
|
|
.1
|
|
|
|
.1
|
|
|
|
.4
|
|
|
|
.3
|
|
Recognized actuarial losses
|
|
|
2.3
|
|
|
|
2.0
|
|
|
|
6.7
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
4.1
|
|
|
$ |
4.1
|
|
|
$ |
11.9
|
|
|
$ |
11.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
benefits - The components of net periodic
postretirement benefit cost are presented in the table below.
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
.1
|
|
|
$ |
-
|
|
|
$ |
.2
|
|
|
$ |
.2
|
|
Interest
cost
|
|
|
.5
|
|
|
|
.6
|
|
|
|
1.4
|
|
|
|
1.6
|
|
Amortization
of prior service credit
|
|
|
(.1 |
) |
|
|
(.1 |
) |
|
|
(.3 |
) |
|
|
(.3 |
) |
Recognized
actuarial losses
|
|
|
-
|
|
|
|
.1
|
|
|
|
.1
|
|
|
|
.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
.5
|
|
|
$ |
.6
|
|
|
$ |
1.4
|
|
|
$ |
1.7
|
|
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 nine months of 2007, we purchased 521,400 shares of our common stock
in market transactions for an aggregate purchase price of $9.8
million. We cancelled these treasury shares, and allocated their cost
to common stock at par value, additional paid-in capital and retained
earnings. At September 30, 2007, approximately 4.1 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 September 30, 2007.
Note
10 - Other income, net:
|
|
Nine
months ended
September
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
Securities
earnings:
|
|
|
|
|
|
|
Dividends and interest
|
|
$ |
30.8
|
|
|
$ |
23.4
|
|
Securities transactions, net
|
|
|
.4
|
|
|
|
.5
|
|
|
|
|
|
|
|
|
|
|
Total securities earnings
|
|
|
31.2
|
|
|
|
23.9
|
|
|
|
|
|
|
|
|
|
|
Currency transactions, net
|
|
|
(3.0 |
) |
|
|
(.3 |
) |
Insurance recoveries
|
|
|
2.9
|
|
|
|
4.2
|
|
Other, net
|
|
|
3.5
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
$ |
34.6
|
|
|
$ |
32.5
|
|
Note
11 - Provision for income taxes:
|
|
Nine
months ended
September30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(as
adjusted)
|
|
|
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
Expected
tax expense, at U.S. federal statutory
income
tax rate of 35%
|
|
$ |
38.2
|
|
|
$ |
23.7
|
|
Incremental
U.S. tax and rate differences on
equity
in earnings
|
|
|
8.2
|
|
|
|
(15.9 |
) |
Non-U.S.
tax rates
|
|
|
(1.3 |
) |
|
|
(.2 |
) |
German
tax rate change
|
|
|
-
|
|
|
|
87.5
|
|
Nondeductible
expenses
|
|
|
3.0
|
|
|
|
2.6
|
|
Change
in reserve for uncertain tax positions
|
|
|
(7.1 |
) |
|
|
(4.7 |
) |
Canadian
tax rate change
|
|
|
(1.3 |
) |
|
|
-
|
|
German
tax attribute adjustment
|
|
|
-
|
|
|
|
8.7
|
|
U.S.
state income taxes, net
|
|
|
1.2
|
|
|
|
1.0
|
|
Other,
net
|
|
|
(.3 |
) |
|
|
(.5 |
) |
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
$ |
40.6
|
|
|
$ |
102.2
|
|
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.
In
August
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
are reporting a decrease in our net deferred tax asset in Germany of $87.5
million in the third quarter of 2007, which is recognized as a component of
our
provision for income taxes.
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.
Note
12 - Minority interest:
|
|
December
31,
2006
|
|
|
September
30,
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
Minority
interest in net assets:
|
|
|
|
|
|
|
NL Industries
|
|
$ |
56.0
|
|
|
$ |
59.7
|
|
CompX International
|
|
|
45.4
|
|
|
|
46.6
|
|
Kronos Worldwide
|
|
|
22.3
|
|
|
|
18.7
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
123.7
|
|
|
$ |
125.0
|
|
|
|
Nine
months ended
September
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
Minority interest in net earnings
(losses):
|
|
|
|
|
|
|
NL Industries
|
|
$ |
2.2
|
|
|
$ |
(2.0 |
) |
CompX International
|
|
|
3.0
|
|
|
|
2.5
|
|
Kronos Worldwide
|
|
|
2.1
|
|
|
|
(3.4 |
) |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
7.3
|
|
|
$ |
(2.9 |
) |
CompX
stock repurchase program -
In August 2007, CompX’s board of directors authorized the repurchase
of up to 500,000 shares of its Class A common stock in open market transactions,
including block purchases, or in privately-negotiated transactions at
unspecified prices and over an unspecified period of time. This
authorization is in addition to the 467,000 shares of Class A common stock
that
remained available for repurchase under prior authorizations of CompX’s board of
directors. CompX may repurchase its 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, CompX may terminate the program
prior to its completion. CompX will use cash on hand to acquire the
shares. Repurchased shares will be added to CompX’s treasury and
cancelled. During the first nine months of 2007, CompX purchased 114,000 shares
of its Class A common stock in market transactions for an aggregate of $2.2
million. At September 30, 2007 approximately 869,500 shares were
available for purchase under these repurchase authorizations.
In
October 2007, the independent members of CompX’s board of directors authorized
the repurchase or cancellation of 2.7 million shares of its Class A common
stock
held by TIMET, including the Class A shares held indirectly by TIMET through
its
ownership interest in CompX Group. CompX purchased or cancelled these
shares for $19.50 per share, or aggregate consideration of $52.6 million, which
it paid in the form of a consolidated promissory note. The price per share
was determined based on CompX’s open market repurchases of its Class A common
stock around the time the repurchase from TIMET was approved. The
consolidated promissory note bears interest at LIBOR plus 1% and provides for
quarterly principal repayments of $250,000 commencing in September 2008, with
the balance due at maturity in September 2014. CompX may make prepayments
on the promissory note at any time, in any amount, without penalty. The
promissory note is subordinated to CompX’s U.S. revolving bank credit
agreement.
As
a
result of CompX’s repurchase and/or cancellation of its Class A shares owned
directly or indirectly by TIMET, TIMET no longer has any direct or indirect
ownership in CompX or CompX Group, CompX’s outstanding Class A shares were
reduced by 2.7 million shares and our ownership interest in CompX increased
to
approximately 86%. As part of the purchase and/or cancellation of CompX
shares from TIMET, NL also ceased to have an ownership interest in CompX Group,
and our ownership interest in CompX is now held directly through
NL.
Note
13 - Commitments and contingencies:
Lead
pigment litigation - NL
NL's
former operations included the manufacture of lead pigments for use in paint
and
lead-based paint. NL, other former manufacturers of lead pigments for
use in paint and lead-based paint (together, the “former pigment
manufacturers”), and the Lead Industries Association (“LIA”), which discontinued
business operations in 2002, have been named as defendants in various legal
proceedings seeking damages for personal injury, property damage and
governmental expenditures allegedly caused by the use of lead-based
paints. Certain of these actions have been filed by or on behalf of
states, counties, cities or their public housing authorities and school
districts, and certain others have been asserted as class
actions. These lawsuits seek recovery under a variety of theories,
including public and private nuisance, negligent product design, negligent
failure to warn, strict liability, breach of warranty, conspiracy/concert of
action, aiding and abetting, enterprise liability, market share or risk
contribution liability, intentional tort, fraud and misrepresentation,
violations of state consumer protection statutes, supplier negligence and
similar claims.
The
plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and health concerns associated with
the
use of lead-based paints, including damages for personal injury, contribution
and/or indemnification for medical expenses, medical monitoring expenses and
costs for educational programs. A number of cases are inactive or
have been dismissed or withdrawn. Most of the remaining cases are in
various pre-trial stages. Some are on appeal following dismissal or
summary judgment rulings in favor of either the defendants or the
plaintiffs. In addition, various other cases are pending (in which we
are not a defendant) seeking recovery for injury allegedly caused by lead
pigment and lead-based paint. Although we are not a defendant in these cases,
the outcome of these cases may have an impact on cases that might be filed
against us in the future.
We
believe 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
conducted special master interviews in October 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 trial court’s
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 that future developments, such as stricter
requirements of environmental laws and enforcement policies, could adversely
affect our production, handling, use, storage, transportation, sale or disposal
of such substances. We believe that all of our facilities are in
substantial compliance with applicable environmental laws.
Certain
properties and facilities used in our former operations, including divested
primary and secondary lead smelters and former mining locations of NL, are
the
subject of civil litigation, administrative proceedings or investigations
arising under federal and state environmental laws. Additionally, in
connection with past 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 were used by us or our subsidiaries,
or their predecessors, certain of which are on the United States Environmental
Protection Agency’s (“EPA”) Superfund National Priorities List or similar state
lists. These proceedings seek cleanup costs, damages for personal
injury or property damage and/or damages for injury to natural
resources. Certain of these proceedings involve claims for
substantial amounts. Although we may be jointly and severally liable
for these costs, in most cases we are only one of a number of PRPs who may
also
be jointly and severally liable. In addition, we are a party to a
number of personal injury lawsuits filed in various jurisdictions alleging
claims related to environmental conditions alleged to have resulted from our
operations.
Environmental
obligations are difficult to assess and estimate for numerous reasons
including:
|
·
|
complexity
and differing interpretations of governmental
regulations;
|
|
·
|
number
of PRPs and their ability or willingness to fund such allocation
of
costs;
|
|
·
|
financial
capabilities of the PRPs and the allocation of costs among
them;
|
|
·
|
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 for which 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
September 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
expect to pay within the next twelve months, and we classify this estimate
as a
current liability. We classify the remaining accrued
environmental costs as a noncurrent liability.
Changes
in our accrued environmental costs during the first nine months of 2007 are
as
follows:
|
|
Amount
|
|
|
|
(In
millions)
|
|
|
|
|
|
Balance
at the beginning of the period
|
|
$ |
59.7
|
|
Reductions
credited to income, net
|
|
|
(.1 |
) |
Payments,
net
|
|
|
(6.4 |
) |
|
|
|
|
|
Balance
at the end of the period
|
|
$ |
53.2
|
|
|
|
|
|
|
Amounts recognized in the Consolidated Balance Sheet at the
end of the period:
|
|
|
|
|
Current liability
|
|
$ |
13.0
|
|
Noncurrent liability
|
|
|
40.2
|
|
|
|
|
|
|
Total
|
|
$ |
53.2
|
|
NL
- On a quarterly basis, we evaluate the potential
range of our liability at sites where NL, its present or former subsidiaries
have been named as a PRP or defendant. At September 30, 2007, we
accrued $47 million for those environmental matters which we believe are
reasonably estimable. We believe that it is not possible to estimate
the range of costs for certain sites. The upper end of the range of
reasonably possible costs to us for sites for which we believe it is currently
possible to estimate costs is approximately $71 million, including the amount
currently accrued. We have not discounted these estimates to present
value.
At
September 30, 2007, there were approximately 20 sites for which we are not
currently able to 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 NL 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 our control, such
as when the party alleging liability provides information to us. At
certain previously inactive sites, we have received general and special notices
of liability from the EPA alleging that we, along with other PRPs, are liable
for past and future costs of remediating environmental contamination allegedly
caused by former operations conducted at the sites. These
notifications may assert that NL, along with other PRPs, are liable for past
clean-up costs that could be material to us if we are 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, which provides for, among
other things, the interim sharing of remediation costs associated with the
site
pending a final allocation of costs through an agreed-upon procedure in
arbitration, as further discussed below.
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 has agreed to stay the
plaintiffs claims against Tremont and its subsidiaries, but denied Tremont’s
motions to dismiss and to stay the claims made by M-I, Milwhite and Georgia
Pacific.
In
June and September, 2007 the arbitration panel chosen by the parties to address
the issues noted above returned decisions favorable to NL, Tremont and its
affiliates. Among other things, the panel found that Halliburton is
obligated to indemnify Tremont and its affiliates (including NL) against all
costs and expenses, including attorney fees, associated with any environmental
remediation at the site, and ordered Halliburton to pay Tremont approximately
$10.0 million in cash in recovery of past remediation and legal expenses
incurred by Tremont related to the site, plus any future remediation and legal
expenses incurred after specified dates, together with post-judgment interest
accruing after September 1, 2007. In October 2007 Tremont filed a
motion with the court in the Houston litigation to confirm the
arbitration panel’s decisions, and Halliburton filed a motion to vacate such
decisions. Pending a final confirmation of the arbitration panel’s decisions,
Tremont has accrued for this site based upon the agreed-upon interim cost
sharing allocation. Tremont has $.8 million accrued at September 30,
2007 for this matter.
Other
- We have also
accrued approximately $5.2 million at September 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 that 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 that 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 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 will ultimately 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 September 30,
2007 we had an aggregate of $5.4 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, from $55.3 million to $56.9 million, which was accounted
for as a decrease in our retained earnings in accordance with the transition
provisions of the new standard. During the first nine months of 2007,
our reserve for uncertain tax positions increased by a net amount of $.2
million, which includes (i) a decrease of approximately $6.5 million due to
the
lapse of applicable statutes of limitation, (ii) a decrease of approximately
$.8
million due to the change in German tax rates and (iii) an increase of
approximately $6.8 million due to the recognition of new uncertain tax positions
(substantially all of this increase had previously been recognized as a
component of our deferred income taxes). At September 30, 2007 we had
approximately $57.1 million accrued for uncertain tax positions (including
$.8
million classified as a current liability). In addition, the benefits
associated with approximately $52.7 million of our reserves for uncertain tax
positions at September 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 2004 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; 2002 for Belgium and 1997 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 No. 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 the 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
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 (Loss) Overview
Quarter
Ended September 30, 2006 Compared to the Quarter Ended September 30, 2007
-
We
reported a net loss of $52.7 million, or $.46 per diluted share, in the third
quarter of 2007 compared to net income of $20.1 million, or $.17 per diluted
share, in the third 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;
|
|
·
|
the
elimination of equity in earnings from TIMET due to the distribution
of
our TIMET shares in the first quarter of
2007;
|
|
·
|
a
charge in 2006 from the redemption of our 8.875% Senior Secured
Notes;
|
|
·
|
an
income tax benefit due to a decrease in our reserve for uncertain
tax
positions in 2007;
|
|
·
|
certain
income tax benefits recognized by our Chemicals Segment in
2006;
|
|
·
|
lower
operating income from each of our Chemicals, Component Products and
Waste
Management Segments; and
|
|
·
|
lower
dividend income from Amalgamated Sugar Company in 2007 as they completed
the additional dividend they owed to us during
2006.
|
Our
net
income in 2006 includes (net of tax and minority interest):
|
·
|
income
tax expense of $.02 per diluted share related to the unfavorable
resolution of certain income tax items related to our Chemicals Segments’
German Operations.
|
Our
net
loss in 2007 includes (net of tax and minority interest):
|
·
|
a
charge of $.52 per diluted share as a result of the effect of a reduction
of the German income tax rates in 2007;
and
|
|
·
|
an
income tax benefit of $.04 per diluted share due to a net decrease
in our
reserve for uncertain tax
positions.
|
Nine
Months Ended September 30, 2006 Compared to the Nine Months Ended September
30,
2007
We
reported a net loss of $31.5 million, or $.27 per diluted share, in the first
nine months of 2007 compared to net income of $61.2 million, or $.52 per diluted
share, in the first nine 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;
|
|
·
|
lower
equity in earnings from TIMET due to the distribution of our TIMET
shares
in the first quarter of 2007;
|
|
·
|
a
charge in 2006 from the redemption of our 8.875% Senior Secured
Notes;
|
|
·
|
an
income tax benefit due to a decrease in our reserve for uncertain
tax
positions in 2007;
|
|
·
|
certain
income tax benefits recognized by our Chemicals Segment in
2006;
|
|
·
|
lower
operating income from each of our Chemicals, Component Products and
Waste
Management Segments;
|
|
·
|
lower
interest expense in 2007 resulting from the April 2006 refinancing
of our
Senior Secured Notes; and
|
|
·
|
lower
dividend income from Amalgamated Sugar Company in 2007 as they completed
the additional dividend they owed to us during
2006.
|
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;
|
|
·
|
net
income tax benefit of $.05 per diluted share related to the net effect
of
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 offset
by
the unfavorable resolution of certain other income tax issues related
to
our German operations; and
|
|
·
|
income
of $.01 per diluted share related to certain insurance recoveries
recognized by NL.
|
Our
net
loss in 2007 includes (net of tax and minority interest):
|
·
|
a
charge of $.52 per diluted share as a result of the effect of a reduction
of the German income tax rates in
2007;
|
|
·
|
a
charge of $.05 per diluted share related to the adjustment of certain
German tax attributes within our Chemicals
Segment;
|
|
·
|
an
income tax benefit of $.04 per diluted share due to a net decrease
in our
reserve for uncertain tax positions;
and
|
|
·
|
income
of $.02 per diluted share related to certain insurance recoveries
recognized by NL.
|
Current
Forecast for 2007 –
We
expect
to report a net loss for the full year 2007 primarily due to German tax law
changes enacted in August of 2007 (more fully discussed below) which created
additional tax expense of
approximately $87.5 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
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 our TiO2 average
selling
prices, and our levels of TiO2 sales and
production volumes.
|
|
Three
months ended Sept. 30,
|
|
|
Nine
months ended Sept. 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
%
Change
|
|
|
2006
|
|
|
2007
|
|
|
%
Change
|
|
|
|
(Dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
331.6
|
|
|
$ |
343.3
|
|
|
|
4 |
% |
|
$ |
981.0
|
|
|
$ |
999.9
|
|
|
|
2 |
% |
Cost
of sales
|
|
|
259.1
|
|
|
|
277.3
|
|
|
|
7
|
|
|
|
759.1
|
|
|
|
801.4
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
$ |
72.5
|
|
|
$ |
66.0
|
|
|
|
(9 |
)% |
|
$ |
221.9
|
|
|
$ |
198.5
|
|
|
|
(11 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$ |
32.9
|
|
|
$ |
23.4
|
|
|
|
(29 |
)% |
|
$ |
99.4
|
|
|
$ |
78.3
|
|
|
|
(21 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
78 |
% |
|
|
81 |
% |
|
|
|
|
|
|
77 |
% |
|
|
80 |
% |
|
|
|
|
Gross
margin
|
|
|
22
|
|
|
|
19
|
|
|
|
|
|
|
|
23
|
|
|
|
20
|
|
|
|
|
|
Operating
income
|
|
|
10
|
|
|
|
7
|
|
|
|
|
|
|
|
10
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ti02
operating
statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
volumes*
|
|
|
132
|
|
|
|
138
|
|
|
|
5 |
% |
|
|
396
|
|
|
|
400
|
|
|
|
1 |
% |
Production
volumes*
|
|
|
126
|
|
|
|
126
|
|
|
|
-
|
|
|
|
383
|
|
|
|
386
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
change in net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ti02
product
pricing
|
|
|
|
|
|
|
|
|
|
|
(5 |
)% |
|
|
|
|
|
|
|
|
|
|
(4 |
)% |
Ti02
sales
volumes
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Ti02
product
mix
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Changes
in currency exchange rates
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
2 |
% |
*
Thousands of metric tons
Net
Sales - Our Chemicals Segment’s sales increased 4% in the third quarter of
2007 compared to the third quarter of 2006 due to the impact of favorable
changes in currency exchange rates, which increased sales by approximately
$13
million, or 4% in the quarter as increases in sales volumes were completely
offset by decreased average Ti02 selling
prices. Sales for the first nine months of 2007 increased 2% over the
same period in 2006 due to increases in sales volumes and a more favorable
product mix. The impact of favorable changes in currency exchange
rates, which increased sales by approximately $44 million, or 4%, offset the
decline in selling prices in the period. We expect average
selling prices in the fourth quarter of 2007 to be consistent with the average
selling prices in the third quarter of 2007.
Sales
volumes in the third quarter and first nine months of 2007 were higher compared
to 2006 primarily due to higher sales volumes in export markets and the third
quarter also benefited from increased sales volumes in North
America. Sales volumes for the third quarter of 2007 were a third
quarter record for us. We expect overall demand will continue to
remain strong for the remainder of the year in Europe and export markets, and
will be somewhat weaker in North America.
Cost
of Sales - Our Chemicals Segment’s cost of sales increased in third quarter
and first nine months of 2007 compared to the same periods last year primarily
due to the impact of higher sales volumes, an increase in raw material costs
(which increased 1% in the first nine 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 nine months of 2007 compared
to
2006 due to the unfavorable effects of lower average TiO2 selling
prices and
higher manufacturing costs. TiO2 production
volumes
were comparable in both the three month and nine month periods. Our
operating rates were near full capacity in both periods.
Operating
Income - Our Chemicals Segment’s operating income declined in both the
third quarter and the first nine 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 manufacturing costs
and
the effect of decreased pricing is amplified by increased sales
volumes. Changes in currency rates positively affected our gross
margin and operating income in the third quarter but negatively affected our
gross margin and operating income for the first nine months. We
estimate the effect of changes in foreign currency exchange rates decreased
operating income by $3 million in the third quarter of 2007 and increased
operating income by $4 million in the first nine months of 2007, 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
$12.3 million and $2.7 million in the first nine months of 2006 and 2007,
respectively. These amounts reduced our reported Chemicals Segment operating
income as compared to amounts reported separately 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 sales and operating income in
2007 as compared to 2006.
|
|
Increase (decrease)
|
|
|
|
Three
months ended
September
30, 2007
vs.
2006
|
|
|
Nine
months ended
September
30, 2007
vs.
2006
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
Impact
on:
|
|
|
|
|
|
|
Net
sales
|
|
$ |
13
|
|
|
$ |
44
|
|
Operating
income
|
|
|
(3 |
) |
|
|
4
|
|
Outlook
- Through our
debottlenecking program, we have added capacity to our 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 Segment’s
income from operations for in the fourth quarter 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 Sept. 30,
|
|
|
Nine
months ended Sept. 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
%
Change
|
|
|
2006
|
|
|
2007
|
|
|
%
Change
|
|
|
|
(Dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
48.8
|
|
|
$ |
46.4
|
|
|
|
(5 |
)% |
|
$ |
146.0
|
|
|
$ |
135.2
|
|
|
|
(7 |
)% |
Cost
of sales
|
|
|
36.0
|
|
|
|
35.1
|
|
|
|
(2 |
) |
|
|
109.2
|
|
|
|
99.9
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
$ |
12.8
|
|
|
$ |
11.3
|
|
|
|
(12 |
)% |
|
$ |
36.8
|
|
|
$ |
35.3
|
|
|
|
(4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$ |
6.2
|
|
|
$ |
4.3
|
|
|
|
(31 |
)% |
|
$ |
17.0
|
|
|
$ |
14.7
|
|
|
|
(14 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
74 |
% |
|
|
76 |
% |
|
|
|
|
|
|
75 |
% |
|
|
74 |
% |
|
|
|
|
Gross
margin
|
|
|
26
|
|
|
|
24
|
|
|
|
|
|
|
|
25
|
|
|
|
26
|
|
|
|
|
|
Operating
income
|
|
|
13
|
|
|
|
9
|
|
|
|
|
|
|
|
12
|
|
|
|
11
|
|
|
|
|
|
Net
Sales - Our Component Products Segment’s sales decreased in the third
quarter and first nine months of 2007 as compared to the third quarter and
first
nine 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 as well as
lower order rates from many of our customers due to unfavorable economic
conditions, offset in part by the effects of sales price increases for certain
products to mitigate the effect of higher raw material costs. For the
first nine 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, cost of goods sold was higher in the third quarter of 2007 compared
to
2006 as the effect of higher raw materials costs, lower sales volumes and
unfavorable exchange rates impacted the quarter more than the year to date
period. In the year to date period the costs of sales percentage was
lower in 2007 as compared to 2006 as improvements in product mix and the full
realization in 2007 of certain cost reductions implemented during 2006 offset
these increases.
Operating
Income – Our Component Products Segment’s operating income
declined in the third quarter and first nine months of 2007 compared to 2006
due
to the decline in sales and foreign currency expense which negatively impacted
operating income by $.7 million in the third quarter and $1.2 million in the
first nine months of 2007. Operating income as a percentage of sales
decreased in the third quarter primarily due to the decline in gross margin
during the quarter as a result of the effect of higher commodity raw materials
prices and unfavorable exchange rates. In the first nine months of
2007 gross margin improved slightly compared to 2006 primarily due to a more
favorable product mix as well as decreased operating costs as a result of our
continuous focus on reducing costs across all product lines. However,
operating income as a percentage of sales declined due to increased operating
expenses associated with the consolidation of three of our Illinois
manufacturing operations into one facility, these additional costs were $.6
million in the third quarter of 2007. We expect to incur a similar
amount to complete the move in the fourth quarter of
2007. While we have experienced higher raw material costs, we
have partially mitigated the unfavorable impact to gross margin and operating
income through the implementation of sales price increases across most of the
products that were affected. Although sales declined for the year to date period
in 2007 compared to the same period in 2006, operating income as a percentage
of
net sales in 2007 declined at a lower rate than 2006 due to a more favorable
product mix as well as the favorable impact of our continuous focus on reducing
costs across all segments.
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
September
30, 2007
vs.
2006
|
|
|
Nine
months ended
September
30, 2007
vs.
2006
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
Impact
on:
|
|
|
|
|
|
|
Net
sales
|
|
$ |
.3
|
|
|
$ |
.3
|
|
Operating
income
|
|
|
(.7 |
) |
|
|
(1.2 |
) |
Outlook
- Demand is slowing across most product segments as customers react to the
condition of the overall economy which we currently expect to result in lower
sales and operating income at our Component Products Segment for the year as
compared to 2006. 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 costs through product reengineering,
improving 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 forego 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
|
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
2.7
|
|
|
$ |
.9
|
|
|
$ |
10.0
|
|
|
$ |
3.5
|
|
Cost
of goods sold
|
|
|
3.4
|
|
|
|
2.6
|
|
|
|
11.3
|
|
|
|
8.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
$ |
(.7 |
) |
|
$ |
(1.7 |
) |
|
$ |
(1.3 |
) |
|
$ |
(5.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
$ |
(2.4 |
) |
|
$ |
(3.5 |
) |
|
$ |
(6.1 |
) |
|
$ |
(9.7 |
) |
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, and in October 2007 we received notification that the
Texas Commission on Environmental Quality has prepared a draft license for
the
disposal of byproduct material at our facility and made the preliminary decision
that this license meets all statutory and regulatory requirements. We
are uncertain as to the length of time it will take for the draft byproduct
waste material license to become final and for agencies to complete their
reviews and act upon our other 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, and 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 third quarter and first nine 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 was 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 $3.1 million in the first nine months of 2006 and $.6
million in the first nine months of 2007. The percentage increases in
our equity in earnings of TIMET in 2007 as compared to the same period in 2006
was 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 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 $8.1 and $22.5 million in the third quarter and first nine months of
2006, respectively, compared to $6.3 million and $19.0 million in the third
quarter and first nine 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 $3.5 million which the LLC paid us during
the
first nine 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 25% lower at $7.8 million in the
third quarter of 2007 compared $10.5 million in the same period in 2006 and
3%
lower at $24.8 million in the first nine months of 2007 compared to $25.5
million in the first nine months of 2006. Corporate expenses were
lower in both periods primarily due to lower environmental and pension expenses
partially offset by higher litigation and related expenses at NL. 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 increased slightly to $16.0 million in the third quarter of 2007 from
$15.8 million in the third quarter of 2006. Interest expense
decreased $4.3 million from $51.8 million in the first nine months of 2006
to
$47.5 million in the first nine months of 2007. Interest expense was lower
in
the first nine months 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. We expect interest expense to be higher in the
fourth quarter due to the increase in the exchange rate of the euro and the
addition of $52.6 million in debt from CompX. See Note 9 to our Condensed
Consolidated Financial Statements.
Provision
for Income Taxes– Our income tax expense was $69.1 million in the third
quarter of 2007 compared to $22.6 million in the third quarter of 2006. Our
income tax expense for the first nine months of 2007 was $102.2 million compared
to $40.6 million in the first nine months of 2006. The unusually low
overall effective income tax rate we recognized in the first nine months of
2006
is primarily due to:
·
|
an
income tax benefit of $9.2 million resulting from the reduction in
our
income tax contingency reserves related to favorable developments
of
income tax audit issues in Belgium and
Norway;
|
·
|
a
$2.1 million provision for income taxes resulting from the increase
in our
income tax contingency reserve principally related to our ongoing
income
tax audits, in Germany;
|
·
|
an
income tax benefit of $2.0 million related to the favorable resolution
of
certain income tax audit issues in Germany and
Belgium;
|
·
|
a
$2.0 million provision for income taxes related to the unfavorable
resolution of certain income tax audit issues in Germany;
and
|
·
|
a
$1.3 million benefit resulting from the enactment of a reduction
in
Canadian income tax rates.
|
Our
provision for income taxes in 2007 includes a third quarter charge of $87.5
million related to the reduction of our net deferred income tax asset in Germany
resulting from the reduction in its income tax rates, and a second quarter
charge of $8.7 million related to the adjustment of certain German tax
attributes somewhat offset by a $4.7 million benefit due to a decrease in our
reserve for uncertain tax positions.
See
Note
11 to the Condensed Consolidated Financial Statements for more information
about
our 2007 income tax items and a tabular reconciliation of our statutory tax
expense to our actual tax expense.
Minority
Interest – Minority interest in earnings (losses)
declined from a cost of $2.3 million in the third quarter of 2006 to a benefit
of $5.9 million in the third quarter of 2007 and declined from a cost of $7.3
million in the first nine months of 2006 to a benefit of $2.9 million in the
first nine months of 2007, due to a loss at Kronos and lower income at NL and
CompX. During October 2007, our ownership interest in CompX increased
to approximately 86%. As a result, minority interest in CompX’s
earnings will decrease beginning in the fourth quarter of 2007. See
Notes 9 and 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 provided by our operating activities decreased from $58.9 million in
the
first nine months of 2006 to $56.4 million in the first nine months of
2007. This decrease in cash provided was due primarily to the net
effects of the following items:
|
·
|
lower
consolidated operating income in 2007 of $26.9 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;
|
|
·
|
lower
cash paid for income taxes in 2007 of $10.9 million due in part to
the
2006 payment of certain income taxes associated with the settlement
of
prior year income tax audits; and
|
|
·
|
higher
net cash used by changes in receivables, inventories, payables and
accrued
liabilities in 2007 of $6.3 million, due primarily to relative changes
in
Kronos’ inventory levels.
|
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 69 days at September 30, 2007 due to the
timing of collection on higher accounts receivable balances at the end of
September. CompX’s average DSO decreased from 41 days at December 31,
2006 to 40 days at September 30, 2007 due to timing of collections on higher
accounts receivable balance at the end of September. For comparative
purposes, Kronos’ average DSO increased from 55 days at December 31, 2005 to 65
days at September 30, 2006, and CompX’s average DSO increased from 40 days to 43
days.
Kronos’
average days sales in inventory (“DSI”) decreased from 68 days at December 31,
2006 to 50 days at September 30, 2007, as Kronos’ sales volumes exceeded its
Ti02 production
volumes during the period, decreasing its finished goods
inventory. CompX’s average DSI increased from 57 days at
December 31, 2006 to 69 days at September 30, 2007 primarily due to the higher
cost of commodity raw materials at September 30, 2007 combined with lower than
expected sales and the need to carry higher inventory balances to maintain
service levels during the consolidation of three of its
facilities. For comparative purposes, Kronos’ average DSI decreased
from 59 days at December 31, 2005 to 46 days at September 30, 2006 and CompX’s
average DSI increased from 59 days, at December 31, 2005 to 60 days at
September 30, 2006 primarily as a result of higher costs of commodity raw
materials at September 30, 2006.
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.
|
|
Nine
months ended
September
30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
Cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
Kronos
|
|
$ |
50.3
|
|
|
$ |
69.0
|
|
CompX
|
|
|
19.7
|
|
|
|
9.5
|
|
Waste Control Specialists
|
|
|
(1.5 |
) |
|
|
(8.6 |
) |
NL Parent
|
|
|
(1.7 |
) |
|
|
(4.8 |
) |
Tremont
|
|
|
(1.7 |
) |
|
|
(2.8 |
) |
Valhi Parent
|
|
|
48.6
|
|
|
|
48.4
|
|
Other
|
|
|
(.8 |
) |
|
|
(.2 |
) |
Eliminations
|
|
|
(54.0 |
) |
|
|
(54.1 |
) |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
58.9
|
|
|
$ |
56.4
|
|
Investing
and Financing Activities–
Our
Chemicals Segment accounted for approximately $29.4 million of our consolidated
capital expenditures in the first nine months of 2007, $9.8 million for our
Component Products Segment with the remainder of capital expenditures and the
entire $5.5 million in capitalized permit costs for our Waste Management
Segment.
We
purchased the following securities in market transactions during the first
nine
months of 2007:
|
·
|
other
marketable securities for a net of $19.1
million;
|
|
·
|
CompX
common stock for $2.2 million; and
|
|
·
|
TIMET
common stock for $.7 million.
|
We
paid
aggregate cash dividends of $34.2 million ($.10 per share per quarter) on our
common stock in the first nine months of 2007 to our
shareholders. Distributions to minority interest in the first nine
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 521,400 shares of our common stock in market transactions for $9.8
million during the first nine 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
September 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 ($563.6 million at September 30, 2007) due in
2013;
|
|
·
|
our
$250
million loan from Snake River Sugar Company due in
2027;
|
|
·
|
Kronos’
U.S. revolving bank credit facility ($22.4 million outstanding) due
in
2008; and
|
|
·
|
approximately
$5.7 million of other indebtedness.
|
We
and
all of our subsidiaries are in compliance with all of our debt covenants at
September 30, 2007. See Note 7 to the Condensed Consolidated
Financial Statements. At September 30, 2007 $23.6 million of our
indebtedness is due within the next twelve months, primarily Kronos’ U.S.
revolving bank credit facility. We expect to obtain an extension of
this credit facility prior to its current maturity in September
2008. 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 September
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
September 30, 2007, we had credit available under existing facilities of $297
million, which was comprised of:
|
·
|
$148
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
September 30, 2007, we had an aggregate of $279.3 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
|
|
$ |
54.2
|
|
Kronos
|
|
|
91.2
|
|
NL parent
|
|
|
94.3
|
|
CompX
|
|
|
25.2
|
|
Tremont
|
|
|
10.7
|
|
Waste Control Specialists
|
|
|
3.7
|
|
|
|
|
|
|
Total cash, cash equivalents and marketable
Securities
|
|
$ |
279.3
|
|
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 $41.0 million though
September 30, 2007.
Repurchases
of 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 October 31, 2007 we
had approximately 4.1 million shares available for repurchase of our common
stock under the authorizations described in Note 9 to the Condensed Consolidated
Financial Statements.
In
August
2007, CompX’s board of directors authorized the repurchase of up to 500,000
shares of its Class A common stock in open market transactions, including block
purchases, or in privately-negotiated transactions at unspecified prices and
over an unspecified period of time. This authorization is in addition
to the 467,000 shares of Class A common stock that remained available for
repurchase under a prior authorizations of CompX’s board of
directors. At September 30, 2007 approximately 869,500 shares were
available for purchase under these repurchase authorizations. In
addition, in October 2007 CompX’s board of directors approved CompX’s purchase
of 2.7 million shares of its Class A common stock from TIMET for an aggregate
of
$52.6 million, which was paid in the form of a subordinated consolidated
promissory note. See Note 12 to our 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 September 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 September
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 $4.4 million. Such obligations
would arise only upon a closure of the facility and WCS’ failure to perform such
activities. We do not currently expect we will have to perform under
this guarantee for the foreseeable future.
WCS’
primary source of liquidity currently consists of intercompany borrowings from
one of our subsidiaries under the terms of a revolving credit facility that
matures in March 2008. WCS borrowed a net $15.3 million from our
subsidiary during the first nine months of 2007. The outstanding
amount of this intercompany borrowing, which is eliminated in our Condensed
Consolidated Financial Statements, was $19.9 million at September 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
Contractual
obligations
With
the
exception of the subordinated consolidated promissory note issued in October
2007 by CompX to TIMET discussed above there have been no material changes
in
our contractual obligations since we filed our 2006 Annual
Report. The following table summarizes (i) the amounts shown as our
contractual commitments, as reflected in our 2006 Annual Report, (ii) the effect
on such contractual commitments due to the consolidated promissory note and
(iii) such contractual commitments, as adjusted.
|
|
Payment
due date
|
|
Contractual
commitments
|
|
2007
|
|
|
|
2008/2009
|
|
|
|
2010/2011
|
|
|
2012
and
after
|
|
|
Total
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reflected in the 2006
Annual
Report
|
|
$ |
336.9
|
|
|
$ |
549.9
|
|
|
$ |
267.5
|
|
|
$ |
1,193.6
|
|
|
$ |
2,347.9
|
|
Consolidated
promissory
note
issued in October
2007
|
|
|
-
|
|
|
|
1.5
|
|
|
|
2.0
|
|
|
|
49.1
|
|
|
|
52.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total,
as adjusted
|
|
$ |
336.9
|
|
|
$ |
551.4
|
|
|
$ |
269.5
|
|
|
$ |
1,242.7
|
|
|
$ |
2,400.5
|
|
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 nine 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 nine 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
exchange rate risk, at September 30, 2007 our Chemicals Segment held a series
of
contracts, with expiration dates ranging from October to December 2007, to
exchange an aggregate of U.S. $15.0 million for an equivalent amount of Canadian
dollars at exchange rates ranging from Cdn. $1.163 to Cdn. $1.165 per U.S.
dollar. At September 30, 2007, the actual exchange rate was Cdn.
$.996 per U.S. dollar. The estimated fair value of such foreign
currency forward contracts at September 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 September 30, 2007. Based
upon their evaluation, these executive officers have concluded that our
disclosure controls and procedures were effective as of September 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:
|
·
|
pertain
to the maintenance of records that in reasonable detail accurately
and
fairly reflect our transactions and dispositions of our
assets,
|
|
·
|
provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with GAAP, and
that our
receipts and expenditures are made only in accordance with authorizations
of our management and directors,
and
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could
have
a material effect on our Condensed Consolidated Financial
Statements.
|
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 September 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 Reports on Form 10-Q for the quarters ended March 31, 2007 and June
30, 2007.
Thomas
v. Lead Industries Association, et al. (Circuit Court, Milwaukee,
Wisconsin, Case No. 99-CV-6411). Trial began before a Wisconsin state
court jury in October 2007, and in November 2007 the jury returned a verdict
in
favor of all defendants.
State
of Rhode Island v. Lead Industries Association, et al. (Superior Court of
Rhode Island, No. 99-5226). See Note 10 to our Condensed Consolidated
Financial Statements.
Smith,
et al. v. Lead Industries Association, et al. (Circuit Court for Baltimore
City, Maryland, Case No. 24-C-99-004490). In August 2007, the intermediate
court dismissed the appeal, and in October 2007, the plaintiff requested review
by the Maryland Court of Appeals.
City
of Milwaukee v. NL Industries, Inc. and Mautz Paint (Circuit Court, Civil
Division, Milwaukee County, Wisconsin, Case No. 01CV003066). In September
2007, the judge denied the City’s motion to set aside the verdict, and in
October 2007, the judge denied the City’s motion for a new trial and signed an
order for judgment. The time for appeal has not yet run.
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 August
2007, plaintiff dismissed the case without prejudice.
Evans
v. Atlantic Richfield Company, et al. (Circuit Court, Milwaukee, Wisconsin,
Case No. 05-CV-9281). In July 2007, the judge signed an agreed order to
stay all activity until after the Thomas trial.
Hurkmans
v. Salczenko, et al. (Circuit Court, Marinette County, Wisconsin, Case No.
05-CV-418). In August 2007, a stipulation to dismiss with prejudice was
signed by plaintiffs and the judge. This concludes the case in our
favor.
City
of Canton, Ohio v. Sherwin-Williams Company et. al. (Court of Common Pleas,
Stark County, Ohio, Case No. 2006CV05048). In November 2007, the Cities
(Canton and Massillon) voluntarily dismissed the case without
prejudice.
Columbus
City, Ohio v. Sherwin-Williams Company et al. (Court of Common Pleas,
Franklin County, Ohio, Case No. 06CVH-12-16480). In October 2007, the
court lifted the stay of the consolidated Columbus and State of Ohio case,
which
is now proceeding in the trial court.
Circuit
Court cases in Milwaukee County, Wisconsin. In September 2007, one
case was dismissed without prejudice by the plaintiff. Of the 29 remaining
cases, 6 have been removed to Federal court.
Smith
et al. v. 2328 University Avenue Corp. et al. (Supreme Court, State of New
York, Case No. 13470/02). In October 2007, the trial judge denied our
motion to dismiss.
In
October 2007, we were served with a complaint in Jones v. Joaquin Coe et
al. (Superior Court of New Jersey, Essex County, Case No.
ESX-L-9900-06). Plaintiff seeks compensatory and punitive damages for
injuries purportedly caused by lead paint on the surfaces of the apartments
in
which he resided as a minor. Other defendants include three former owners
of the apartment building at issue in this case. We intend to deny all
liability and to defend against all of the claims vigorously.
Brown
et al. v. NL Industries, Inc. et al. (Circuit Court Wayne County, Michigan,
Case No. 06-602096 CZ). In August 2007, the case was remanded to state
court.
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 nine months of
2007.
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds; 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. 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 the third quarter of 2007. All of these
purchases were made under the repurchase program in open market
transactions.
Period
|
|
Total
number of shares purchased
|
|
|
Average
price
paid
per
share, including
commissions
|
|
|
Total
number of shares purchased as part of a publicly-announced
plan
|
|
|
Maximum
number of shares that may yet be purchased under the publicly-announced
plan at end of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
1, 2007
to July
31,
2007
|
|
|
87,300
|
|
|
$ |
17.20
|
|
|
|
87,300
|
|
|
|
4,326,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August
1, 2007
to
August 31,
2007
|
|
|
248,700
|
|
|
$ |
20.04
|
|
|
|
248,700
|
|
|
|
4,077,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
1, 2007
to
September 30
2007
|
|
|
10,000
|
|
|
$ |
22.38
|
|
|
|
10,000
|
|
|
|
4,067,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
346,000
|
|
|
|
|
|
|
|
346,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
6. Exhibits.
|
|
|
|
|
|
|
|
|
31.1
|
|
Certification
|
|
|
|
|
|
31.2
|
|
Certification
|
|
|
|
|
|
32.1
|
|
Certification
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
VALHI,
INC.
(Registrant)
|
|
|
|
|
|
|
|
|
|
Date
November 6,
2007
|
|
/s/
Bobby D.
O’Brien
|
|
|
Bobby
D. O’Brien
(Vice
President and Chief
Financial
Officer)
|
|
|
|
Date November
6, 2007
|
|
/s/
Gregory M.
Swalwell
|
|
|
Gregory
M. Swalwell
(Vice
President and Controller,
Principal
Accounting Officer)
|
|
|
|