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 March 31, 2006 Commission file number 1-5467
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VALHI, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 87-0110150
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
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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 April 28, 2006:
115,703,678.
VALHI, INC. AND SUBSIDIARIES
INDEX
Page
number
------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets -
December 31, 2005;
March 31, 2006 (Unaudited) 3
Condensed Consolidated Statements of Income -
Three months ended March 31, 2005 and 2006
(Unaudited) 5
Condensed Consolidated Statements of Comprehensive Income -
Three months ended March 31, 2005 and 2006
(Unaudited) 6
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 2005 and 2006
(Unaudited) 7
Condensed Consolidated Statement of Stockholders' Equity -
Three months ended March 31, 2006
(Unaudited) 9
Notes to Condensed Consolidated Financial Statements
(Unaudited) 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 26
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 45
Item 4. Controls and Procedures 45
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 47
Item 1A. Risk Factors. 47
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds; Share Repurchases 47
Item 6. Exhibits. 48
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 thousands)
ASSETS December 31, March 31,
2005 2006
---------- -----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 274,963 $ 232,424
Restricted cash equivalents 6,007 5,111
Marketable securities 11,755 11,620
Accounts and other receivables, net 218,766 259,333
Refundable income taxes 1,489 1,715
Receivable from affiliates 34 34
Inventories, net 283,157 276,450
Prepaid expenses 9,981 9,401
Deferred income taxes 10,502 9,861
---------- ----------
Total current assets 816,654 805,949
---------- ----------
Other assets:
Marketable securities 258,705 259,280
Investment in affiliates 270,632 294,341
Unrecognized net pension obligations 11,916 11,979
Prepaid pension cost 3,529 4,083
Goodwill 361,783 377,388
Other intangible assets 3,432 3,243
Deferred income taxes 213,726 213,083
Other 61,639 63,187
---------- ----------
Total other assets 1,185,362 1,226,584
---------- ----------
Property and equipment:
Land 37,876 38,933
Buildings 220,110 224,333
Equipment 827,690 844,197
Mining properties 19,969 20,632
Construction in progress 15,771 11,328
---------- ----------
1,121,416 1,139,423
Less accumulated depreciation 545,055 568,557
---------- ----------
Net property and equipment 576,361 570,866
---------- ----------
Total assets $2,578,377 $2,603,399
========== ==========
VALHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, March 31,
2005 2006
----------- ----------
(Unaudited)
Current liabilities:
Current maturities of long-term debt $ 1,615 $ 1,464
Accounts payable 105,650 90,880
Accrued liabilities 129,429 132,205
Payable to affiliates 13,754 13,832
Income taxes 24,680 24,948
Deferred income taxes 4,313 781
---------- ----------
Total current liabilities 279,441 264,110
---------- ----------
Noncurrent liabilities:
Long-term debt 715,820 743,375
Accrued pension costs 140,742 138,369
Accrued OPEB costs 32,279 31,322
Accrued environmental costs 49,161 48,385
Deferred income taxes 400,964 414,737
Other 39,328 40,199
---------- ----------
Total noncurrent liabilities 1,378,294 1,416,387
---------- ----------
Minority interest 125,049 118,188
---------- ----------
Stockholders' equity:
Common stock 1,207 1,205
Additional paid-in capital 108,810 108,579
Retained earnings 786,268 792,421
Accumulated other comprehensive income:
Marketable securities 4,194 4,081
Currency translation 11,157 14,471
Pension liabilities (78,101) (78,101)
Treasury stock (37,942) (37,942)
---------- ----------
Total stockholders' equity 795,593 804,714
---------- ----------
Total liabilities, minority interest and
stockholders' equity $2,578,377 $2,603,399
========== ==========
Commitments and contingencies (Notes 11 and 13)
See accompanying Notes to Condensed Consolidated Financial Statements.
VALHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, 2005 and 2006
(In thousands, except per share data)
(Unaudited)
2005 2006
---- ----
Revenues and other income:
Net sales $341,247 $354,320
Other income, net 26,637 12,840
Equity in earnings of:
Titanium Metals Corporation ("TIMET") 16,801 22,135
Other 112 (1,731)
-------- --------
Total revenues and other income 384,797 387,564
-------- --------
Costs and expenses:
Cost of sales 251,982 272,562
Selling, general and administrative 54,431 54,092
Interest 17,879 16,803
-------- --------
Total costs and expenses 324,292 343,457
-------- --------
Income before income taxes 60,505 44,107
Provision for income taxes 29,946 18,613
Minority interest in after-tax earnings 5,497 2,630
-------- --------
Income from continuing operations 25,062 22,864
Discontinued operations, net of tax (272) -
-------- --------
Net income $ 24,790 $ 22,864
======== ========
Basic and diluted earnings per share:
Income from continuing operations $ .21 $ .20
Discontinued operations - -
-------- --------
Net income $ .21 $ .20
======== ========
Cash dividends per share $ .10 $ .10
======== ========
Shares used in the calculation of per share amounts:
Basic earnings per common share 120,223 116,668
Dilutive impact of outstanding stock options 349 366
-------- --------
Diluted earnings per share 120,572 117,034
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
VALHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended March 31, 2005 and 2006
(In thousands)
(Unaudited)
2005 2006
---- ----
Net income $24,790 $22,864
------- -------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment (168) (113)
Currency translation adjustment (11) 3,314
------- -------
Total other comprehensive income (loss), net (179) 3,201
------- -------
Comprehensive income $24,611 $26,065
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
VALHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2005 and 2006
(In thousands)
(Unaudited)
2005 2006
---- ----
Cash flows from operating activities:
Net income $ 24,790 $ 22,864
Depreciation and amortization 19,024 18,116
Goodwill impairment 864 -
Securities transactions, net (14,607) (170)
Benefit plan expense less then cash funding:
Defined benefit pension expense (1,956) (2,717)
Other postretirement benefit expense (965) (935)
Deferred income taxes:
Continuing operations 20,872 12,407
Discontinued operations (334) -
Minority interest:
Continuing operations 5,497 2,630
Discontinued operations (205) -
Other, net 867 1,083
Equity in:
TIMET (16,801) (22,135)
Other (112) 1,731
Net distributions from (contributions to):
Manufacturing joint venture (850) (2,750)
Other 109 -
Change in assets and liabilities:
Accounts and other receivables (44,760) (40,683)
Inventories (14,278) 8,873
Accounts payable and accrued liabilities 12,779 (13,053)
Accounts with affiliates 190 137
Income taxes 7,513 (266)
Other, net (8,144) 465
-------- --------
Net cash used in operating activities (10,507) (14,403)
-------- --------
Cash flows from investing activities:
Capital expenditures (12,155) (6,847)
Purchases of:
Kronos common stock - (22,355)
CompX common stock - (404)
TIMET common stock (11,450) -
Marketable securities (12,645) (12,910)
Proceeds from disposal of:
Business unit 18,094 -
Kronos common stock 19,047 -
Marketable securities 2,911 12,427
Loans to affiliate:
Loans (11,000) -
Collections 10,068 -
Cash of disposed business unit (4,006) -
Change in restricted cash equivalents, net 2,659 955
Other, net (108) (1,629)
-------- --------
Net cash provided by (used in) investing activities 1,415 (30,763)
-------- --------
VALHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three months ended March 31, 2005 and 2006
(In thousands)
(Unaudited)
2005 2006
---- ----
Cash flows from financing activities:
Indebtedness:
Borrowings $ - $ 72,635
Principal payments (82) (51,553)
Deferred financing costs paid (28) (105)
Valhi dividends paid (12,424) (12,060)
Distributions to minority interest (1,477) (2,248)
Treasury stock acquired - (4,902)
NL common stock issued 2,413 9
Issuance of Valhi common stock and other, net 742 17
-------- --------
Net cash provided by (used in) financing
activities (10,856) 1,793
-------- --------
Cash and cash equivalents - net change from:
Operating, investing and financing activities (19,948) (43,373)
Currency translation (280) 834
Cash and equivalents at beginning of period 267,829 274,963
-------- --------
Cash and equivalents at end of period $247,601 $232,424
======== ========
Supplemental disclosures:
Cash paid (received) for:
Interest, net of amounts capitalized $ 6,224 $ 7,070
Income taxes, net 6,117 6,742
Noncash investing activity - note receivable
received upon disposal of business unit $ 4,179 $ -
See accompanying Notes to Condensed Consolidated Financial Statements.
VALHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three months ended March 31, 2006
(In thousands)
(Unaudited)
Accumulated other comprehensive income
Additional -------------------------------------- Total
Common paid-in Retained Marketable Currency Pension Treasury stockholders'
stock capital earnings securities translation liabilities stock equity
------ --------- -------- ---------- ----------- ----------- -------- -------------
Balance at December 31, 2005 $1,207 $108,810 $786,268 $4,194 $11,157 $(78,101) $(37,942) $795,593
Net income - - 22,864 - - - - 22,864
Dividends - - (12,060) - - - - (12,060)
Other comprehensive income
(loss), net - - - (113) 3,314 - - 3,201
Treasury stock:
Acquired - - - - - - (4,902) (4,902)
Retired (3) (248) (4,651) - - - 4,902 -
Other, net 1 17 - - - - - 18
------ -------- -------- ------- ------- -------- -------- --------
Balance at March 31, 2006 $1,205 $108,579 $792,421 $ 4,081 $14,471 $(78,101) $(37,942) $804,714
====== ======== ======== ======= ======= ======== ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(Unaudited)
Note 1 - Organization and basis of presentation:
The Condensed Consolidated Balance Sheet of Valhi, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 2005 has been derived from the
Company's audited Condensed Consolidated Financial Statements at that date. The
Consolidated Balance Sheet at March 31, 2006, and the Condensed Consolidated
Statements of Income, Comprehensive Income, Stockholders' Equity and Cash Flows
for the interim periods ended March 31, 2005 and 2006, have been prepared by the
Company, without audit, in accordance with accounting principles generally
accepted in the United States of America ("GAAP"). In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
state fairly the consolidated financial position, results of operations and cash
flows have been made. As permitted by regulations of the SEC, the Condensed
Consolidated Balance Sheet data as of December 31, 2005 does not include all
disclosures required by GAAP.
The results of operations for the interim periods are not necessarily
indicative of the operating results for a full year or of future operations.
Certain information normally included in financial statements prepared in
accordance with GAAP has been condensed or omitted. The accompanying Condensed
Consolidated Financial Statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 2005, as
filed with the Securities and Exchange Commission on March 24, 2006 (the "2005
Annual Report").
Contran Corporation holds, directly or through subsidiaries, approximately
92% of Valhi's outstanding common stock at March 31, 2006. Substantially all of
Contran's outstanding voting stock is held by trusts established for the benefit
of certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons
is sole trustee, or is held by Mr. Simmons or persons or other entities related
to Mr. Simmons. Consequently, Mr. Simmons, may be deemed to control such
companies.
Note 2 - Business segment information:
% owned by Valhi at
Business segment Entity March 31, 2006
Chemicals Kronos Worldwide, Inc. 95%
Component products CompX International Inc. 70%
Waste management Waste Control Specialists LLC 100%
Titanium metals TIMET 37%
The Company's ownership of Kronos includes 59% held directly by Valhi and
36% held directly by NL Industries, Inc., an 83%-owned subsidiary of Valhi.
During the first quarter of 2006, Valhi purchased approximately 829,000 shares
of Kronos common stock in market transactions for an aggregate of $22.4 million.
The acquisition of these shares of common stock were accounted for by the
purchase method (step acquisition).
The Company's ownership of CompX is principally held directly by CompX
Group, Inc, a majority-owned subsidiary of NL. NL owns 82.4% of CompX Group, and
TIMET owns the remaining 17.6% of CompX Group. CompX Group's sole asset consists
of shares of CompX common stock representing approximately 83% of the total
number of CompX shares outstanding, and the percentage ownership of CompX shown
above includes NL's ownership interest in CompX Group multiplied by CompX
Group's ownership interest in CompX, or 68%. NL also owns an additional 2% of
CompX directly. During the first quarter of 2006, NL purchased approximately
26,500 shares of CompX common stock in market transactions for an aggregate of
$404,000. The acquisition of these shares of common stock were accounted for by
the purchase method (step acquisition).
The company's ownership of TIMET includes 33% owned directly by Tremont
LLC, a wholly-owned subsidiary of the Company, and 4% owned directly by Valhi.
In addition, TIMET owns directly an additional 3% of CompX, .5% of NL and less
than .1% of Kronos, and TIMET accounts for such CompX, NL and Kronos shares, as
well as its shares of CompX Group, as available-for-sale marketable securities
carried at fair value. The Combined Master Retirement Trust ("CMRT"), a
collective investment trust sponsored by Contran to permit the collective
investment by certain master trusts which fund certain employee benefits plans
sponsored by Contran and certain of its affiliates, owned an additional 10% of
TIMET's outstanding common stock at March 31, 2006. Because the Company does not
consolidate either TIMET or the CMRT, the shares of CompX Group, CompX, NL and
Kronos owned by TIMET, and the shares of TIMET held by the CMRT, are not
considered as part of the Company's investments in such companies.
Kronos (NYSE: KRO), NL (NYSE: NL), CompX (NYSE: CIX) and TIMET (NYSE: TIE)
each file periodic reports with the Securities and Exchange Commission ("SEC")
pursuant to the Securities Exchange Act of 1934, as amended.
Three months ended
March 31,
2005 2006
---- ----
(In millions)
Net sales:
Chemicals $291.9 $304.3
Component products 46.8 47.0
Waste management 2.5 3.0
------ ------
Total net sales $341.2 $354.3
====== ======
Operating income:
Chemicals $ 43.6 $ 32.2
Component products 4.1 5.1
Waste management (2.8) (2.6)
------ ------
Total operating income 44.9 34.7
Equity in:
TIMET 16.8 22.1
Other .1 (1.7)
General corporate items:
Interest and dividend income 10.2 9.8
Securities transaction gains, net 14.6 .2
Insurance recoveries - 2.2
General expenses, net (8.2) (6.4)
Interest expense (17.9) (16.8)
------ ------
Income before income taxes $ 60.5 $ 44.1
====== ======
Segment results reported herein may differ from amounts separately reported
by the Company's various subsidiaries and affiliates due to purchase accounting
adjustments and related amortization or differences in the way the Company
defines operating income.
Note 3 - Marketable securities:
December 31, March 31,
2005 2006
------------ ---------
(In thousands)
Current assets (available for sale):
Restricted debt securities $ 9,265 $ 9,405
Other debt securities 2,490 2,215
-------- --------
Total $ 11,755 $ 11,620
======== ========
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC $250,000 $250,000
Restricted debt securities 2,572 2,635
Other debt securities and common stocks 6,133 6,645
-------- --------
Total $258,705 $259,280
======== ========
Note 4 - Accounts and other receivables, net:
December 31, March 31,
2005 2006
------------ ----------
(In thousands)
Accounts receivable $211,156 $257,703
Notes receivable 4,267 4,372
Accrued interest and dividends receivable 6,158 80
Allowance for doubtful accounts (2,815) (2,822)
-------- --------
Total $218,766 $259,333
======== ========
Note 5 - Inventories, net:
December 31, March 31,
2005 2006
------------ ---------
(In thousands)
Raw materials:
Chemicals $ 52,343 $ 39,649
Component products 7,022 6,343
-------- --------
Total raw materials 59,365 45,992
-------- --------
In-process products:
Chemicals 17,959 19,483
Component products 9,898 9,876
-------- --------
Total in-process products 27,857 29,359
-------- --------
Finished products:
Chemicals 150,675 153,137
Component products 5,542 5,706
-------- --------
Total finished products 156,217 158,843
-------- --------
Supplies (primarily chemicals) 39,718 42,256
-------- --------
Total inventories, net $283,157 $276,450
======== ========
Note 6 - Accrued liabilities:
December 31, March 31,
2005 2006
------------ ---------
(In thousands)
Current:
Employee benefits $ 48,341 $ 40,928
Environmental costs 16,565 15,588
Deferred income 5,101 4,213
Interest 1,067 10,572
Other 58,355 60,904
-------- --------
Total $129,429 $132,205
======== ========
Noncurrent:
Insurance claims and expenses $ 24,257 $ 23,690
Employee benefits 4,998 6,223
Asset retirement obligations 1,381 1,429
Deferred income 573 545
Other 8,119 8,312
-------- --------
Total $ 39,328 $ 40,199
======== ========
Note 7 - Other assets:
December 31, March 31,
2005 2006
------------ ---------
(In thousands)
Investment in affiliates:
TIMET:
Common stock $138,677 $161,367
Preferred stock 183 183
-------- --------
138,860 161,550
TiO2 manufacturing joint venture 115,308 118,058
Other 16,464 14,733
-------- --------
Total $270,632 $294,341
======== ========
Other noncurrent assets:
IBNR receivables $ 16,735 $ 16,950
Deferred financing costs 8,278 7,762
Waste disposal site operating permits, net 14,133 16,157
Loans and other receivables 2,502 2,955
Restricted cash equivalents 382 388
Other 19,609 18,975
-------- --------
Total $ 61,639 $ 63,187
======== ========
At March 31, 2006, the Company held 28.0 million shares of TIMET with a
quoted market price of $48.55 per share, or an aggregate market value of $1.4
billion. In February 2006, TIMET effected a 2:1 split of its common stock. Such
stock split had no financial statement impact to the Company, and the Company's
ownership interest in TIMET did not change as a result of such split.
At March 31, 2006, TIMET reported total assets of $989.9 million and
stockholders' equity of $639.2 million. TIMET's total assets at March 31, 2006
include current assets of $619.7 million, property and equipment of $262.9
million, marketable securities of $46.1 million and investment in joint ventures
of $28.6 million. TIMET's total liabilities at March 31, 2006 include current
liabilities of $180.2 million, accrued OPEB and pension costs aggregating $74.9
million and long-term debt of $48.8 million. During the first quarter of 2006,
TIMET reported net sales of $286.9 million, operating income of $95.1 million
and net income attributable to common stockholders of $56.8 million (2005 - net
sales of $155.2 million, operating income of $19.4 million and net income
attributable to common stockholders of $38.1 million).
Note 8 - Other income, net:
Three months ended
March 31,
2005 2006
---- ----
(In thousands)
Securities earnings:
Dividends and interest $10,175 $ 9,813
Securities transactions, net 14,607 170
------- -------
Total securities earnings 24,782 9,983
Currency transactions, net 874 (881)
Insurance recoveries - 2,236
Other, net 981 1,502
------- -------
Total other income, net $26,637 $12,840
======= =======
Note 9 - Long-term debt:
December 31, March 31,
2005 2006
------------ ---------
(In thousands)
Valhi - Snake River Sugar Company $250,000 $250,000
-------- --------
Subsidiaries:
Kronos International 8.875% Senior Secured Notes 449,298 455,609
Kronos U.S. bank credit facility 11,500 29,800
Kronos Canadian bank credit facility - 4,264
Other 6,637 5,166
-------- --------
Total debt of subsidiaries 467,435 494,839
-------- --------
Total debt 717,435 744,839
Less current maturities 1,615 1,464
-------- --------
Total long-term debt $715,820 $743,375
======== ========
During the first quarter of 2006, Kronos borrowed an aggregate of Cdn. $5.0
million ($4.3 million) under its Canadian revolving credit facility, and also
borrowed an additional net $18.3 million under its U.S. bank credit facility.
In April 2006, Kronos' wholly owned subsidiary, Kronos International,
called all of its 8.875% Senior Secured Notes for redemption on May 11, 2006 at
104.437%% of their aggregate principal amount of euro 375 million (including
such call premium, an aggregate of $470.2 million at March 31, 2006 exchange
rates). Funds for such redemption were provided by Kronos International's
issuance of an aggregate of euro 400 million principal amount of 6.5% Senior
Secured Notes due April 2013, issued on April 11, 2006 at 99.306% of their
principal amount. The new Senior Secured Notes were issued pursuant to an
indenture that contains covenants, restrictions and collateral substantially
identical to the covenants, restrictions and collateral of the 8.875% Senior
Secured Notes. The Company expects to recognize a $21 million pre-tax charge in
the second quarter of 2006 related to the early extinguishment of KII's 8.875%
Senior Secured Notes, consisting of the call premium on such Notes and the net
write-off of deferred financing costs and existing unamortized premium related
to such Notes.
Note 10 - Accounts with affiliates:
December 31, March 31,
2005 2006
------------ ---------
(In thousands)
Current receivables from affiliates:
Contran - income taxes, net $ 33 $ 33
Other 1 1
------- -------
Total $ 34 $ 34
======= =======
Payables to affiliates:
Louisiana Pigment Company $ 9,803 $ 9,482
Contran - trade items 3,940 4,340
Other, net 11 10
------- -------
Total $13,754 $13,832
======= =======
Note 11 - Provision for income taxes:
Three months ended
March 31,
2005 2006
---- ----
(In millions)
Expected tax expense $21.2 $15.4
Incremental U.S. tax and rate differences on
equity in earnings 4.8 2.6
Non-U.S. tax rates - (.4)
Nondeductible expenses 1.2 1.3
Adjustment of prior year income taxes, net - (.9)
Income tax on distribution of shares of
Kronos common stock .7 -
Excess of book basis over tax basis of shares of
Kronos common stock sold 1.6 -
U.S. state income taxes, net .3 .5
Other, net .1 .1
----- -----
$29.9 $18.6
===== =====
Comprehensive provision for income taxes (benefit) allocated to:
Income from continuing operations $29.9 $18.6
Discontinued operations (.4) -
Other comprehensive income:
Marketable securities .9 (.3)
Currency translation (.2) 1.1
----- -----
$30.2 $19.4
===== =====
Certain of the Company's U.S. and non-U.S. tax returns are being examined
and tax authorities have or may propose tax deficiencies, including penalties
and interest. For example:
o Kronos received a preliminary tax assessment related to 1993 from the
Belgian tax authorities proposing tax deficiencies, including related
interest, of approximately euro 6 million ($7 million at March 31,
2006). Kronos filed a protest to this assessment, and believes that a
significant portion of the assessment is without merit. The Belgian
tax authorities have filed a lien on the fixed assets of Kronos'
Belgian TiO2 operations in connection with this assessment.
o The Norwegian tax authorities have notified Kronos of their intent to
assess tax deficiencies of approximately kroner 12 million ($2
million) relating to the years 1998 through 2000. Kronos has objected
to this proposed assessment.
No assurance can be given that these tax matters will be resolved in the
Company's favor in view of the inherent uncertainties involved in settlement
initiatives and court and tax proceedings. The Company believes that it has
provided adequate accruals for additional taxes and related interest expense
which may ultimately result from all such examinations and believes that the
ultimate disposition of such examinations should not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity.
Note 12 - Minority interest:
December 31, March 31,
2005 2006
------------- ----------
(In thousands)
Minority interest in net assets:
NL Industries $ 51,177 $ 50,955
Kronos Worldwide 28,167 21,577
CompX International 45,630 45,578
Subsidiary of Kronos 75 78
-------- --------
Total $125,049 $118,188
======== ========
Three months ended
March 31,
2005 2006
---- ----
(In thousands)
Minority interest in net earnings - Continuing operations:
NL Industries $3,228 $1,098
Kronos Worldwide 1,534 779
CompX International 701 751
Subsidiary of Kronos 4 2
Subsidiary of NL 30 -
------ ------
Total $5,497 $2,630
====== ======
Note 13 - Commitments and contingencies:
Lead pigment litigation - NL.
NL's former operations included the manufacture of lead pigments for use in
paint and lead-based paint. NL, other former manufacturers of lead pigments for
use in paint and lead-based paint, and the Lead Industries Association (which
discontinued business operations prior to 2005) have been named as defendants in
various legal proceedings seeking damages for personal injury, property damage
and governmental expenditures allegedly caused by the use of lead-based paints.
Certain of these actions have been filed by or on behalf of states, large U.S.
cities or their public housing authorities and school districts, and certain
others have been asserted as class actions. These lawsuits seek recovery under a
variety of theories, including public and private nuisance, negligent product
design, negligent failure to warn, strict liability, breach of warranty,
conspiracy/concert of action, aiding and abetting, enterprise liability, market
share or risk contribution liability, intentional tort, fraud and
misrepresentation, violations of state consumer protection statutes, supplier
negligence and similar claims.
The plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and health concerns associated with the
use of lead-based paints, including damages for personal injury, contribution
and/or indemnification for medical expenses, medical monitoring expenses and
costs for educational programs. A number of cases are inactive or have been
dismissed or withdrawn. Most of the remaining cases are in various pre-trial
stages. Some are on appeal following dismissal or summary judgment rulings in
favor of either the defendants or the plaintiffs. In addition, various other
cases are pending (in which NL is not a defendant) seeking recovery for injuries
allegedly caused by lead pigment and lead-based paint. Although NL is not a
defendant in these cases, the outcome of these cases may have an impact on
additional cases being filed against NL in the future.
NL believes these actions are without merit, intends to continue to deny
all allegations of wrongdoing and liability and to defend against all actions
vigorously. NL has never settled any of these cases, nor have any final adverse
judgments against NL been entered. NL has not accrued any amounts for pending
lead pigment and lead-based paint litigation. Liability that may result, if any,
cannot currently be reasonably estimated. There can be no assurance that NL will
not incur liability in the future in respect of this pending litigation in view
of the inherent uncertainties involved in court and jury rulings in pending and
possible future cases. If any such future liability were to be incurred, it
could have a material adverse effect on the Company's consolidated financial
statements, results of operations and liquidity.
In one of these lead pigment cases (State of Rhode Island v. Lead
Industries Association), a trial before a Rhode Island state court jury began in
September 2002 on the question of whether lead pigment in paint on Rhode Island
buildings is a public nuisance. In October 2002, the trial judge declared a
mistrial in the case when the jury was unable to reach a verdict on the
question, with the jury reportedly deadlocked 4-2 in the defendants' favor. In
November 2005, the State of Rhode Island began a retrial of the case on the
State's claims of public nuisance, indemnity and unjust enrichment against NL
and three other defendants. Following the State's presentation of its case, the
trial court dismissed the State's claims of indemnity and unjust enrichment. The
public nuisance claim was sent to the jury in February 2006, and the jury found
that NL and two other defendants substantially contributed to the creation of a
public nuisance as a result of the collective presence of lead pigments in
paints and coatings on buildings in Rhode Island. The jury also found that NL
and the two other defendants should be ordered to abate the public nuisance.
Following the jury verdict, the trial court dismissed the State's claim for
punitive damages. A hearing on the abatement remedy will be held before the
judge. The extent, nature and cost of such remedy is not currently known, and
will be determined only following additional preceedings. Various matters remain
pending before the trial court, including NL's motion to dismiss. NL intends to
appeal any adverse judgment which the trial court may enter against NL.
The Rhode Island case is unique in that this is the first time that an
adverse verdict has been entered against NL. Given the number of meritorious
issues which NL believes can be appealed in this case, NL currently believes
that it is not probable that NL will ultimately be found liable in this matter.
In addition, liability that might result to NL, if any, with respect to this and
the other lead pigment litigation can not currently be reasonably estimated.
However, legal proceedings are subject to inherent uncertainties, and there is
no assurance that any appeal would be successful. Therefore, it is reasonably
possible that NL would in the near term conclude that it was probable NL had
incurred some liability in this Rhode Island matter that would result in the
recognition of a loss contingency accrual. Such potential liability could have a
material adverse impact on net income for the interim or annual period during
which such liability is recognized, and a material adverse impact on the
Company's financial condition and liquidity. Various other cases in which NL is
a defendant are also pending in other jurisdictions, and new cases could be
filed against NL, the resolution of which could also result in recognition of a
loss contingency accrual that could have a material adverse impact on net income
for the interim or annual period during which such liability is recognized, and
a material adverse impact on the Company's financial condition and liquidity. An
estimate of the potential impact on the Company's results of operations,
financial condition or liquidity related to these matters can not currently be
reasonably estimated.
Environmental matters and litigation.
General. The Company's operations are governed by various environmental
laws and regulations. Certain of the Company's businesses are and have been
engaged in the handling, manufacture or use of substances or compounds that may
be considered toxic or hazardous within the meaning of applicable environmental
laws and regulations. As with other companies engaged in similar businesses,
certain past and current operations and products of the Company have the
potential to cause environmental or other damage. The Company has implemented
and continues to implement various policies and programs in an effort to
minimize these risks. The Company's policy is to maintain compliance with
applicable environmental laws and regulations at all of its plants and to strive
to improve its environmental performance. From time to time, the Company may be
subject to environmental regulatory enforcement under U.S. and foreign statutes,
resolution of which typically involves the establishment of compliance programs.
It is possible that future developments, such as stricter requirements of
environmental laws and enforcement policies thereunder, could adversely affect
the Company's production, handling, use, storage, transportation, sale or
disposal of such substances. The Company believes all of its plants are in
substantial compliance with applicable environmental laws.
Certain properties and facilities used in the Company's former businesses,
including divested primary and secondary lead smelters and former mining
locations of NL, are the subject of civil litigation, administrative proceedings
or investigations arising under federal and state environmental laws.
Additionally, in connection with past disposal practices, the Company has been
named as a defendant, potentially responsible party ("PRP") or both, pursuant to
the Comprehensive Environmental Response, Compensation and Liability Act, as
amended by the Superfund Amendments and Reauthorization Act ("CERCLA"), and
similar state laws in various governmental and private actions associated with
waste disposal sites, mining locations, and facilities currently or previously
owned, operated or used by the Company or its subsidiaries, or their
predecessors, certain of which are on the U.S. EPA's Superfund National
Priorities List or similar state lists. These proceedings seek cleanup costs,
damages for personal injury or property damage and/or damages for injury to
natural resources. Certain of these proceedings involve claims for substantial
amounts. Although the Company may be jointly and severally liable for such
costs, in most cases it is only one of a number of PRPs who may also be jointly
and severally liable.
Environmental obligations are difficult to assess and estimate for numerous
reasons including the complexity and differing interpretations of governmental
regulations, the number of PRPs and the PRPs' ability or willingness to fund
such allocation of costs, their financial capabilities and the allocation of
costs among PRPs, the solvency of other PRPs, the multiplicity of possible
solutions, and the years of investigatory, remedial and monitoring activity
required. In addition, the imposition of more stringent standards or
requirements under environmental laws or regulations, new developments or
changes respecting site cleanup costs or allocation of such costs among PRPs,
solvency of other PRPs, the results of future testing and analysis undertaken
with respect to certain sites or a determination that the Company is potentially
responsible for the release of hazardous substances at other sites, could result
in expenditures in excess of amounts currently estimated by the Company to be
required for such matters. In addition, with respect to other PRPs and the fact
that the Company may be jointly and severally liable for the total remediation
cost at certain sites, the Company could ultimately be liable for amounts in
excess of its accruals due to, among other things, reallocation of costs among
PRPs or the insolvency of one or more PRPs. No assurance can be given that
actual costs will not exceed accrued amounts or the upper end of the range for
sites for which estimates have been made, and no assurance can be given that
costs will not be incurred with respect to sites as to which no estimate
presently can be made. Further, there can be no assurance that additional
environmental matters will not arise in the future. If any such future liability
were to be incurred, it could have a material adverse effect on the Company's
consolidated financial statements, results of operations and liquidity.
The Company records liabilities related to environmental remediation
obligations when estimated future expenditures are probable and reasonably
estimable. Such accruals are adjusted as further information becomes available
or circumstances change. Estimated future expenditures are generally not
discounted to their present value. Recoveries of remediation costs from other
parties, if any, are recognized as assets when their receipt is deemed probable.
At March 31, 2006, no receivables for such recoveries had been recognized.
The exact time frame over which the Company makes payments with respect to
its accrued environmental costs is unknown and is dependent upon, among other
things, the timing of the actual remediation process that in part depends on
factors outside the control of the Company. At each balance sheet date, the
Company makes an estimate of the amount of its accrued environmental costs that
will be paid out over the subsequent 12 months, and the Company classifies such
amount as a current liability. The remainder of the accrued environmental costs
is classified as a noncurrent liability.
A summary of the activity in the Company's accrued environmental costs
during the first quarter of 2006 is presented in the table below.
Amount
--------------
(In thousands)
Balance at the beginning of the period $65,726
Additions charged to expense, net 381
Payments, net (2,134)
-------
Balance at the end of the period $63,973
=======
Amounts recognized in the balance sheet at the end of the period:
Current liability $15,588
Noncurrent liability 48,385
-------
Total $63,973
=======
NL. On a quarterly basis, NL evaluates the potential range of its liability
at sites where it has been named as a PRP or defendant. At March 31, 2006, NL
had accrued $52.9 million for those environmental matters which NL believes are
reasonably estimable. NL believes it is not possible to estimate the range of
costs for certain sites. The upper end of the range of reasonably possible costs
to NL for sites for which NL believes it is possible to estimate costs is
approximately $79 million. NL's estimates of such liabilities have not been
discounted to present value.
At March 31, 2006, there are approximately 20 sites for which NL is unable
to estimate a range of costs. For these sites, generally the investigation is in
the early stages, and it is either unknown as to whether or not NL actually had
any association with the site, or if NL had association with the site, the
nature of its responsibility, if any, for the contamination at the site and the
extent of contamination. The timing on when information would become available
to NL to allow NL to estimate a range of loss is unknown and dependent on events
outside the control of NL, such as when the party alleging liability provides
information to NL. On certain of these sites that had previously been inactive,
NL has received general and special notices of liability from the EPA alleging
that NL, along with other PRPs, is liable for past and future costs of
remediating environmental contamination allegedly caused by former operations
conducted at such sites. These notifications may assert that NL, along with
other PRPs, is liable for past clean-up costs that could be material to NL if
liability for such amounts ultimately were determined against NL.
Tremont. Prior to 2005, Tremont, entered into a voluntary settlement
agreement with the Arkansas Department of Environmental Quality and certain
other PRPs pursuant to which Tremont and the other PRPs will undertake certain
investigatory and interim remedial activities at a former mining site located in
Hot Springs County, Arkansas. Tremont had entered into an agreement with another
PRP for this site, Halliburton Energy Services, Inc., that provides for, among
other things, the interim sharing of remediation costs associated with the site
pending a final allocation of costs and an agreed-upon procedure through
arbitration to determine such final allocation of costs. On December 9, 2005,
Halliburton and DII Industries, LLC, another PRP of this site, filed suit in the
United States District Court for the Southern District of Texas, Houston
Division, Case No. H-05-4160, against NL, Tremont and certain of its
subsidiaries, M-I, L.L.C., Milwhite, Inc. and Georgia-Pacific Corporation
seeking (i) to recover response and remediation costs incurred at the site, (ii)
a declaration of the parties' liability for response and remediation costs
incurred at the site, (iii) a declaration of the parties' liability for response
and remediation costs to be incurred in the future at the site and (iv) a
declaration regarding the obligation of Tremont to indemnify Halliburton and DII
for costs and expenses attributable to the site. On December 27, 2005, a
subsidiary of Tremont filed suit in the United States District Court for the
Western District of Arkansas, Hot Springs Division, Case No. 05-6089, against
Georgia-Pacific, seeking to recover response costs it has incurred and will
incur at the site. Subsequently, plaintiffs in the Houston litigation agreed to
stay that litigation by entering into with NL, Tremont and its affiliates an
amendment to the arbitration agreement previously agreed upon for resolving the
allocation of costs at the site. Tremont has also agreed with Georgia Pacific to
stay the Arkansas litigation pending further developments in the Houston
litigation. Tremont has based its accrual for this site based upon the
agreed-upon interim cost sharing allocation. Tremont currently expects that the
nature and extent of any final remediation measures that might be imposed with
respect to this site will not be known until 2008. Currently, no reasonable
estimate can be made of the cost of any such final remediation measures, and
accordingly Tremont has accrued no amounts at March 31, 2006 for any such cost.
The amount accrued at March 31, 2006 ($3.6 million) represents Tremont's
estimate of the probable and reasonably estimable costs to be incurred through
2008 with respect to the interim remediation measures.
TIMET. At March 31, 2006, TIMET had accrued approximately $3.0 million for
environmental cleanup matters, principally related to TIMET's facility in
Nevada. The upper end of the range of reasonably possible costs related to these
matters is approximately $5.2 million.
Other. The Company has also accrued approximately $7.5 million at March 31,
2006 in respect of other environmental cleanup matters. Such accrual is near the
upper end of the range of the Company's estimate of reasonably possible costs
for such matters.
Other litigation.
Reference is made to the 2005 Annual Report for a discussion of certain
other legal proceedings to which the Company is a party.
NL has been named as a defendant in various lawsuits in a variety of
jurisdictions, alleging personal injuries as a result of occupational exposure
primarily to products manufactured by formerly-owned operations of NL containing
asbestos, silica and/or mixed dust. Approximately 500 of these types of cases
remain pending, involving a total of approximately 10,600 plaintiffs and their
spouses following the administrative dismissal by a trial court in Ohio of
approximately 1,500 plaintiffs in March 2006. NL has not accrued any amounts for
this litigation because liability that NL might incur, if any, cannot currently
be reasonably estimated. To date, NL has not been adjudicated liable in any of
these matters. Based on information available to NL, including facts concerning
its historical operations, the rate of new claims, the number of claims from
which NL has been dismissed and NL's prior experience in the defense of these
matters, NL believes that the range of reasonably possible outcomes of these
matters will be consistent with NL's historical costs with respect to these
matters (which are not material), and no reasonably possible outcome is expected
to involve amounts that are material to NL. NL has and will continue to
vigorously seek dismissal from each claim and/or a finding of no liability by NL
in each case. In addition, from time to time, NL has received notices regarding
asbestos or silica claims purporting to be brought against former subsidiaries
of NL, including notices provided to insurers with which NL has entered into
settlements extinguishing certain insurance policies. These insurers may seek
indemnification from NL.
In April 2006, NL was served with a complaint in Murphy, et al. v. NL
Industries, Inc., et al. (United States District Court, District of New Jersey,
Case No. 2:06-cv-01535-WHW-SDW). The plaintiffs, three former minority
shareholders of NL Environmental Management Services, Inc. ("EMS"), seek damages
related to their equity investment in EMS. The defendants named in the complaint
are Contran, Valhi, NL, EMS and certain current or former officers or directors
of NL or EMS. EMS was formed in 1988 as a majority-owned environmental
management subsidiary that contractually assumed certain of NL's environmental
liabilities. In June 2005, EMS received notices from the three minority
shareholders indicating that they were exercising their right, which became
exercisable on June 1, 2005, to require EMS to purchase their preferred shares
in EMS as of June 30, 2005 for a formula-determined amount as provided in EMS'
certificate of incorporation. In accordance with the certificate of
incorporation, EMS made a determination in good faith of the amount payable to
the three former minority shareholders to purchase their shares of EMS stock. In
June 2005 EMS set aside funds as payment for the shares of EMS. As of March
2006, however, the shareholders had not tendered their shares or received any of
such funds. The plaintiffs claim that, in preparing the valuation of the
plaintiffs' preferred shares for purchase by EMS, the defendants engaged in a
pattern of racketeering activity and conspired to conduct a pattern of
racketeering in violation of United States and New Jersey laws. In addition, the
plaintiffs allege that the defendants have committed minority shareholder
oppression, fraud, breach of fiduciary duty, civil conspiracy, aiding and
abetting fraud, aiding and abetting breach of fiduciary duty, breach of contract
and tortuous interference with economic relations under New Jersey laws. The
defendants believe that these claims are without merit and intend to deny all
allegations of wrongdoing and liability and to defend against all such claims
vigorously.
In addition to the litigation described above, the Company and its
affiliates are also involved in various other environmental, contractual,
product liability, patent (or intellectual property), employment and other
claims and disputes incidental to its present and former businesses. In certain
cases, the Company has insurance coverage for such items, although the Company
does not currently expect any additional material insurance coverage for its
environmental claims.
The Company currently believes that the disposition of all claims and
disputes, individually or in the aggregate, should not have a material adverse
effect on its consolidated financial position, results of operations and
liquidity beyond the accruals already provided for.
Insurance coverage claims.
Reference is made to the 2005 Annual Report for a discussion of certain
litigation involving NL and certain of its former insurance carriers. Additional
information regarding such litigation, or new litigation, is below.
OneBeacon American Insurance Company v. NL Industries, Inc., et. al.
(Supreme Court of the State of New York, County of New York, Index No.
603429-05). In March 2006, NL's motion to dismiss was denied by the trial court.
In April 2006, NL filed a notice of appeal of the trial court's ruling.
NL Industries, Inc. v. OneBeacon America Insurance Company, et. al.
(District Court for Dallas County, Texas, Case No. 05-11347). In December 2005,
NL filed a motion to remand the case to state court.
In February 2006, NL was served with a complaint in Certain Underwriters at
Lloyds, London v. Millennium Holdings LLC et. al. (Supreme Court of the State of
New York, County of New York, Index No. 06/60026). The plaintiff, a former
insurance carrier of NL, seeks a declaratory judgment of its obligations to NL
under insurance policies issued to NL by plaintiff with respect to certain lead
pigment lawsuits. In April 2006, NL filed a motion to dismiss.
In April 2006, NL filed an action against American Re Insurance Company and
certain other former insurance companies, captioned NL Industries, Inc. v.
American Re Insurance Company, et. al. (Dallas County Court at Law, Texas, Case
No. CC-06-04523-E) asserting that American Re Insurance and the other named
defendants have breached their obligations to NL under such insurance policies
and seeking a declaratory judgment of each defendant's obligations to NL under
such policies.
The issue of whether insurance coverage for defense costs or indemnity or
both will be found to exist for NL's lead pigment litigation depends upon a
variety of factors, and there can be no assurance that such insurance coverage
will be available. NL has not considered any potential insurance revoceries for
lead pigment or environmental litigation matters in determining related
accruals.
Note 14 - Employee benefit plans:
Defined benefit plans. The components of net periodic defined benefit
pension cost are presented in the table below.
Three months ended
March 31,
2005 2006
---- ----
(In thousands)
Service cost $ 1,987 $ 1,844
Interest cost 5,803 5,814
Expected return on plan assets (5,744) (6,266)
Amortization of prior service cost 154 112
Amortization of net transition obligations 140 123
Recognized actuarial losses 1,150 2,172
------- -------
Total $ 3,490 $ 3,799
======= =======
Postretirement benefits other than pensions. The components of net periodic
OPEB cost are presented in the table below.
Three months ended
March 31,
2005 2006
---- ----
(In thousands)
Service cost $ 55 $ 71
Interest cost 483 473
Amortization of prior service credit (232) (91)
Recognized actuarial losses (gains) (142) 28
------- -------
Total $ 164 $ 481
======= =======
Contributions. Contributions the Company expects to contribute to its
various defined benefit pension and OPEB plans in 2006 are disclosed in the 2005
Annual Report.
Note 15 - Discontinued operations, net of tax:
Discontinued operations relates to CompX's former Thomas Regout operations
in The Netherlands. In January 2005, CompX completed the sale of such operations
for net proceeds that were approximately $860,000 less than previously estimated
(primarily due to higher expenses associated with the disposal of the Thomas
Regout operations).Discontinued operations in the first quarter of 2005 includes
a charge related to such higher expenses($272,000, net of income tax benefit and
minority interest).
Note 16 - Accounting principles newly adopted in 2006:
Inventory costs. The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter
4, on January 1, 2006 for inventory costs incurred on or after such date. SFAS
No. 151 requires that the allocation of fixed production overhead costs to
inventory shall be based on normal capacity. Normal capacity is not defined as a
fixed amount; rather, normal capacity refers to a range of production levels
expected to be achieved over a number of periods under normal circumstances,
taking into account the loss of capacity resulting from planned maintenance
shutdowns. The amount of fixed overhead allocated to each unit of production is
not increased as a consequence of idle plant or production levels below the low
end of normal capacity, but instead a portion of fixed overhead costs is charged
to expense as incurred. Alternatively, in periods of production above the high
end of normal capacity, the amount of fixed overhead costs allocated to each
unit of production is decreased so that inventories are not measured above cost.
SFAS No. 151 also clarifies existing GAAP to require that abnormal freight and
wasted materials (spoilage) are to be expensed as incurred. The Company's
production cost accounting had already complied with the requirements of SFAS
No. 151, and therefore adoption of SFAS No. 151 did not have an effect on its
consolidated financial statements.
Stock options. As permitted by regulations of the SEC, the Company adopted
SFAS No. 123R, Share-Based Payment, as of January 1, 2006. SFAS No. 123R, among
other things, eliminates the alternative in existing GAAP to use the intrinsic
value method of accounting for stock-based employee compensation under
Accounting Principles Board Opinion ("APBO") No. 25, Accounting for Stock Issued
to Employees. The Company is now generally required to recognize the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award, with the cost recognized over the
period during which an employee is required to provide services in exchange for
the award (generally, the vesting period of the award). No compensation cost
will be recognized in the aggregate for equity instruments for which the
employee does not render the requisite service (generally, if the instrument is
forfeited before it has vested). The grant-date fair value will be estimated
using option-pricing models (e.g. Black-Sholes or a lattice model). Under the
transition alternatives permitted under SFAS No. 123R, the Company will apply
the new standard to all new awards granted on or after January 1, 2006, and to
all awards existing as of December 31, 2005 which are subsequently modified,
repurchased or cancelled (referred to as the modified prospective method in SFAS
No. 123R). Additionally, as of January 1, 2006, the Company recognizes
compensation cost previously measured under SFAS No. 123 for the portion of any
non-vested award existing as of December 31, 2005 over the remaining vesting
period. The number of non-vested awards as of December 31, 2005 with respect to
options granted by Valhi and its subsidiaries and affiliates is not material,
and therefore the effect of adopting SFAS No. 123R, in so far as it relates to
the recognition of compensation cost for existing stock options in the Company's
consolidated statements of income, did not have a material effect on the
Company's Consolidated Financial Statements. Should Valhi or its subsidiaries
and affiliates, however, either grant a significant number of options or modify,
repurchase or cancel existing options in the future, the Company could in the
future recognize material amounts of compensation cost related to such options
in its consolidated financial statements.
Also upon adoption of SFAS No. 123R, the cash income tax benefit resulting
from the exercise of stock options in excess of the cumulative income tax
benefit related to such options previously recognized for GAAP financial
reporting purposes in the Company's consolidated statements of income, if any,
will be reflected as a cash inflow from financing activities in the Company's
consolidated statements of cash flows, and the Company's cash flows from
operating activities will reflect the effect of cash paid for income taxes
exclusive of such cash income tax benefit. The aggregate amount of such income
tax benefits recognized as a component of cash flows from financing activities
was not significant in the first quarter of 2006.
SFAS No. 123R also requires certain expanded disclosures regarding the
Company's stock options, and such expanded disclosures were provided in the 2005
Annual Report.
Prior to January 1, 2006, the Company accounted for stock-based employee
compensation in accordance with APBO No. 25 and its various interpretations.
Under APBO No. 25, no compensation cost was generally recognized for fixed stock
options in which the exercise price was greater than or equal to the market
price on the grant date. Prior to 2005, and following the cash settlement of
certain stock options held by employees of NL, NL and the Company commenced
accounting for NL's remaining stock options using the variable accounting method
because NL could not overcome the presumption that it would not similarly cash
settle its remaining stock options. Under the variable accounting method, the
intrinsic value of all unexercised stock options (including those with an
exercise price at least equal to the market price on the date of grant) are
accrued as an expense over their vesting period, with subsequent increases
(decreases) in the market price of the underlying common stock resulting in
additional compensation expense (income). Following adoption of SFAS No. 123R
effective January 1, 2006, the Company will continue to account for NL's
remaining stock options in a manner similar to the variable accounting method of
APBO No. 25, as required by the guidance of SFAS No. 123R.
Net compensation expense related to stock-based employee compensation
recognized by the Company was approximately $120,000 in the first quarter of
2005, and net compensation income was approximately $600,000 in the first
quarter of 2006. Had Valhi and its subsidiaries and affiliates accounted for
their respective stock-based employee compensation related to stock options in
accordance with the fair value-based recognition provisions of SFAS No. 123R for
all awards granted subsequent to January 1, 1995, the effect on the Company's
results of operations in the first quarter of 2005 there would not have been a
material effect on the Company's results of operations in the first quarter of
2005.
Note 17 - Stockholders' equity:
In March 2005, the Company's board of directors authorized the repurchase
of up to 5.0 million shares of Valhi's common stock in open market transactions,
including block purchases, or in privately negotiated transactions, which may
include transactions with affiliates of Valhi. The stock may be purchased from
time to time as market conditions permit. The stock repurchase program does not
include specific price targets or timetables and may be suspended at any time.
Depending on market conditions, the program could be terminated prior to
completion. The Company will use its cash on hand to acquire the shares.
Repurchased shares will be retired and cancelled or may be added to Valhi's
treasury and used for employee benefit plans, future acquisitions or other
corporate purposes.
During the first quarter of 2006, the Company purchased an aggregate of
275,000 shares of its common stock in market transactions for an aggregate of
$4.9 million. At March 31, 2006, these treasury shares had been cancelled, and
the aggregate $4.9 million cost of such treasury shares cancelled was allocated
to common stock at par value, additional paid-in capital and retained earnings
in accordance with GAAP. As of March 31, 2006, 1.2 million shares were available
for purchases under such authorization.
--------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
General
The Company reported income from continuing operations of $22.9 million, or
$.20 per diluted share, in the first quarter of 2006 compared to income of $25.1
million, or $.21 per diluted share, in the first quarter of 2005.
The decrease in the Company's diluted earnings per share from the first
quarter of 2005 to the first quarter of 2006 is due primarily to the net effects
of (i) lower chemicals operating income at Kronos in 2006, (ii) higher component
products operating income at CompX in 2006, (iii) certain securities transaction
gains realized in the first quarter of 2005, (iv) certain income tax benefits
recognized by TIMET in 2005 and (v) higher operating income for TIMET in 2006.
The Company currently believes its net income in calendar 2006 will be lower
than 2005 due primarily to lower expected chemicals operating income.
Income from continuing operations in the first quarter of 2006 includes
income of $.01 per diluted share related to certain insurance recoveries of NL.
Income from continuing operations in the first quarter of 2005 include (i)
certain securities transaction gains of NL of $.05 per diluted share and (ii)
income related to certain income benefits recognized by TIMET of $.07 per
diluted share. Such amounts are more fully described below or in the 2005 Annual
Report.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts,
including, but not limited to, statements found in Item 2 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations," are
forward-looking statements that represent management's beliefs and assumptions
based on currently available information. Forward-looking statements can be
identified by the use of words such as "believes," "intends," "may," "should,"
"could," "anticipates," "expected" or comparable terminology, or by discussions
of strategies or trends. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it cannot give any
assurances that these expectations will prove to be correct. Such statements by
their nature involve substantial risks and uncertainties that could
significantly impact expected results, and actual future results could differ
materially from those described in such forward-looking statements. While it is
not possible to identify all factors, the Company continues to face many risks
and uncertainties. Among the factors that could cause actual future results to
differ materially from those described herein are the risks and uncertainties
discussed in this Quarterly Report and those described from time to time in the
Company's other filings with the SEC including, but not limited to, the
following:
o Future supply and demand for the Company's products,
o The extent of the dependence of certain of the Company's businesses on
certain market sectors (such as the dependence of TIMET's titanium
metals business on the commercial aerospace industry),
o The cyclicality of certain of the Company's businesses (such as
Kronos' TiO2 operations and TIMET's titanium metals operations),
o The impact of certain long-term contracts on certain of the Company's
businesses (such as the impact of TIMET's long-term contracts with
certain of its customers and such customers' performance thereunder
and the impact of TIMET's long-term contracts with certain of its
vendors on its ability to reduce or increase supply or achieve lower
costs),
o Customer inventory levels (such as the extent to which Kronos'
customers may, from time to time, accelerate purchases of TiO2 in
advance of anticipated price increases or defer purchases of TiO2 in
advance of anticipated price decreases, or the relationship between
inventory levels of TIMET's customers and such customers' current
inventory requirements and the impact of such relationship on their
purchases from TIMET),
o Changes in raw material and other operating costs (such as energy
costs),
o The possibility of labor disruptions,
o General global economic and political conditions (such as changes in
the level of gross domestic product in various regions of the world
and the impact of such changes on demand for, among other things,
TiO2),
o Competitive products and substitute products,
o Possible disruption of business or increases in the cost of doing
business resulting from terrorist activities or global conflicts,
o Customer and competitor strategies,
o The impact of pricing and production decisions,
o Competitive technology positions,
o The introduction of trade barriers,
o Fluctuations in currency exchange rates (such as changes in the
exchange rate between the U.S. dollar and each of the euro, the
Norwegian kroner and the Canadian dollar),
o Operating interruptions (including, but not limited to, labor
disputes, leaks, natural disasters, fires, explosions, unscheduled or
unplanned downtime and transportation interruptions),
o The timing and amounts of insurance recoveries,
o The ability of the Company to renew or refinance credit facilities,
o Uncertainties associated with new product development (such as TIMET's
ability to develop new end-uses for its titanium products),
o The ultimate outcome of income tax audits, tax settlement initiatives
or other tax matters,
o The ultimate ability to utilize income tax attributes, the benefit of
which has been recognized under the "more-likely-than-not" recognition
criteria (such as Kronos' ability to utilize its German net operating
loss carryforwards),
o Environmental matters (such as those requiring compliance with
emission and discharge standards for existing and new facilities, or
new developments regarding environmental remediation at sites related
to former operation of the Company),
o Government laws and regulations and possible changes therein (such as
changes in government regulations which might impose various
obligations on present and former manufacturers of lead pigment and
lead-based paint, including NL, with respect to asserted health
concerns associated with the use of such products),
o The ultimate resolution of pending litigation (such as NL's lead
pigment litigation and litigation surrounding environmental matters of
NL and Tremont), and
o Possible future litigation.
Should one or more of these risks materialize (or the consequences of such a
development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those currently forecasted or
expected. The Company disclaims any intention or obligation to update or revise
any forward-looking statement whether as a result of changes in information,
future events or otherwise.
Chemicals
Relative changes in Kronos' TiO2 sales and operating income during the 2005
and 2006 periods presented are primarily due to (i) relative changes in TiO2
sales and production volumes, (ii) relative changes in TiO2 average selling
prices and (iii) relative changes in foreign currency exchange rates. Selling
prices (in billing currencies) for TiO2, Kronos' principal product, were
generally: increasing in the first six months of 2005, decreasing during the
second half of 2005 and increasing during the first quarter of 2006.
Three months ended
March 31,
---------------------- %
2005 2006 Change
------- -------- ------
(In $ millions)
Net sales $291.9 $304.3 +4%
Operating income 43.6 32.2 -26%
Ti02 operating statistics:
Sales volumes* 114 124 +9%
Production volumes* 122 127 +4%
Percent change in Ti02 average selling prices:
Using actual foreign currency exchange rates -3% Impact of changes in
foreign currency
exchange rates +5%
---
In billing currencies +2%
===
* Thousands of metric tons
Kronos' sales increased $12.4 million (4%) in the first quarter of 2006 as
compared to the first quarter of 2005 due to the net effects of higher average
TiO2 selling prices, higher TiO2 sales volumes and the unfavorable net effect of
fluctuations in foreign currency exchange rates, which decreased chemicals sales
by approximately $16 million, as further discussed below. Excluding the effect
of fluctuations in the value of the U.S. dollar relative to other currencies,
Kronos' average TiO2 selling prices in billing currencies in the first quarter
of 2006 were 2% higher as compared to the first quarter of 2005. When translated
from billing currencies to U.S. dollars using actual foreign currency exchange
rates prevailing during the respective periods, Kronos' average TiO2 selling
prices in the first quarter of 2006 were 3% lower compared to the first quarter
of 2005.
Kronos' sales are denominated in various currencies, including the U.S.
dollar, the euro, other major European currencies and the Canadian dollar. The
disclosure of the percentage change in Kronos' average TiO2 selling prices in
billing currencies (which excludes the effects of fluctuations in the value of
the U.S. dollar relative to other currencies) is considered a "non-GAAP"
financial measure under regulations of the SEC. The disclosure of the percentage
change in Kronos' average TiO2 selling prices using actual foreign currency
exchange rates prevailing during the respective periods is considered the most
directly comparable financial measure presented in accordance with GAAP ("GAAP
measure"). Kronos discloses percentage changes in its average TiO2 prices in
billing currencies because Kronos believes such disclosure provides useful
information to investors to allow them to analyze such changes without the
impact of changes in foreign currency exchange rates, thereby facilitating
period-to-period comparisons of the relative changes in average selling prices
in the actual various billing currencies. Generally, when the U.S. dollar either
strengthens or weakens against other currencies, the percentage change in
average selling prices in billing currencies will be higher or lower,
respectively, than such percentage changes would be using actual exchange rates
prevailing during the respective periods. The difference between the 3% decrease
in Kronos' average TiO2 selling prices during the first quarter of 2006 as
compared to the first quarter of 2005 using actual foreign currency exchange
rates prevailing during the respective periods (the GAAP measure), and the 2%
increase in Kronos' average TiO2 selling prices in billing currencies (the
non-GAAP measure) during such periods is due to the effect of changes in foreign
currency exchange rates. The above table presents in a tabular format (i) the
percentage change in Kronos' average TiO2 selling prices using actual foreign
currency exchange rates prevailing during the respective periods (the GAAP
measure), (ii) the percentage change in Kronos' average TiO2 selling prices in
billing currencies (the non-GAAP measure) and (iii) the percentage change due to
changes in foreign currency exchange rates (or the reconciling item between the
non-GAAP measure and the GAAP measure).
Kronos' TiO2 sales volumes in the first quarter of 2005 increased 9%
compared to the first quarter of 2005, due primarily to higher sales volumes in
the United States and slightly higher sales volumes in Europe and in export
markets offsetting the effect of lower sales volumes in Canada. Demand for TiO2
has remained strong in the first quarter of 2006, and while Kronos believes that
the strong demand is largely attributable to the end-use demand of its
customers, it is possible that some portion of the strong demand resulted from
customers increasing their inventory levels in advance of implementation of
announced or anticipated price increases. Kronos' operating income comparisons
were favorably impacted by higher production levels, which increased 4% in the
first quarter of 2006 as compared to the same period in 2005. Kronos' operating
rates were near full capacity in both periods, and Kronos' sales and production
volumes in the first quarter of 2006 were new records for Kronos for a first
quarter. Kronos' operating income comparisons were negatively impacted by higher
raw material and other operating costs (including energy).
Kronos has substantial operations and assets located outside the United
States (primarily in Germany, Belgium, Norway and Canada). A significant amount
of Kronos' sales generated from its non-U.S. operations are denominated in
currencies other than the U.S. dollar, principally the euro, other major
European currencies and the Canadian dollar. A portion of Kronos' sales
generated from its non-U.S. operations are denominated in the U.S. dollar.
Certain raw materials, primarily titanium-containing feedstocks, are purchased
in U.S. dollars, while labor and other production costs are denominated
primarily in local currencies. Consequently, the translated U.S. dollar value of
Kronos' foreign sales and operating results are subject to currency exchange
rate fluctuations which may favorably or adversely impact reported earnings and
may affect the comparability of period-to-period operating results. Overall,
fluctuations in the value of the U.S. dollar relative to other currencies,
primarily the euro, decreased TiO2 sales by a net $16 million in the first
quarter of 2006 as compared to the first quarter of 2005. Fluctuations in the
value of the U.S. dollar relative to other currencies similarly impacted Kronos'
foreign currency-denominated operating expenses. Kronos' operating costs that
are not denominated in the U.S. dollar, when translated into U.S. dollars, were
lower in the first quarter of 2006 as compared to the same period in 2005.
Overall, currency exchange rate fluctuations resulted in a net $5 million
decrease in Kronos' operating income in the first quarter of 2006 as compared to
the first quarter of 2005.
On September 22, 2005, the chloride-process TiO2 facility operated by
Kronos' 50%-owned joint venture, Louisiana Pigment Company ("LPC"), temporarily
halted production due to Hurricane Rita. Although storm damage to core
processing facilities was not extensive, a variety of factors, including loss of
utilities, limited access and availability of employees and raw materials,
prevented the resumption of partial operations until October 9, 2005 and full
operations until late 2005. The joint venture expects the majority of its
property damage and unabsorbed fixed costs for periods in which normal
production levels were not achieved will be covered by insurance, and Kronos
believes insurance will cover its lost profits (subject to applicable
deductibles) resulting from its share of the lost production from LPC. Insurance
proceeds from the lost profit for product that Kronos was not able to sell as a
result of the loss of production from LPC are expected to be recognized by
Kronos during the remainder of 2006, although the amount and timing of such
insurance recoveries is not presently determinable. The effect on Kronos'
financial results will depend on the timing and amount of insurance recoveries.
Kronos' efforts to debottleneck its production facilities to meet long-term
demand continue to prove successful. Such debottlenecking efforts included,
among other things, the addition of finishing capacity in the German
chloride-process facility and equipment upgrades and enhancements in several
locations to allow for reduced downtime for maintenance activities. Kronos'
production capacity has increased by approximately 30% over the past ten years
due to debottlenecking programs, with only moderate capital expenditures. Kronos
believes its annual attainable production capacity for 2006 is approximately
510,000 metric tons, with some additional capacity expected to be available in
2007 through its continued debottlenecking efforts.
Kronos expects its operating income in 2006 will continue to be somewhat
lower than 2005. Kronos' expectations as to the future prospects of Kronos and
the TiO2 industry are based upon a number of factors beyond Kronos' control,
including worldwide growth of gross domestic product, competition in the
marketplace, unexpected or earlier-than-expected capacity additions and
technological advances. If actual developments differ from Kronos' expectations,
Kronos' results of operations could be unfavorably affected.
Chemicals operating income, as presented above, is stated net of
amortization of Valhi's purchase accounting adjustments made in conjunction with
its acquisitions of its interest in NL and Kronos. Such adjustments result in
additional depreciation and amortization expense beyond amounts separately
reported by Kronos. Such additional non-cash expenses reduced chemicals
operating income, as reported by Valhi, by $4.4 million in the first quarter of
2005 and $4.0 million in the first quarter of 2006.
Component products
Three months ended
March 31,
-------------------- %
2005 2006 Change
---- ---- ------
(In millions)
Net sales $46.8 $47.0 - %
Operating income 4.1 5.1 +23%
Component product sales increased slightly in the first quarter of 2006 as
compared to the same quarter of 2005 as higher volumes of security product sales
were offset by decreases in sales for certain other products resulting from
increased competition. Sales comparisons were also positively impacted by
volumes associated with an acquisition of a small components products business
in August 2005. Component products operating income increased due to the
favorable impact of CompX's continued focus on reducing costs across all
segments and a favorable change in product mix resulting from increases in sales
of certain higher margin security products.
CompX has substantial operations and assets located outside the United
States in Canada and Taiwan. A portion of CompX's sales generated from its
non-U.S. operations are denominated in currencies other than the U.S. dollar,
principally the Canadian dollar and the New Taiwan dollar. In addition, a
portion of CompX's sales generated from its non-U.S. operations (principally in
Canada) are denominated in the U.S. dollar. Most raw materials, labor and other
production costs for such non-U.S. operations are denominated primarily in local
currencies. Consequently, the translated U.S. dollar values of CompX's foreign
sales and operating results are subject to currency exchange rate fluctuations
which may favorably or unfavorably impact reported earnings and may affect
comparability of period-to-period operating results. During the first quarter of
2006, currency exchange rate fluctuations did not have a significant effect on
component products sales or operating income as compared to the first quarter of
2005.
The component product areas where CompX operates are highly competitive in
terms of product pricing and features. CompX's strategy is to focus on areas
where it can provide products that have value-added, user-oriented-features
which enable its customers to compete more effectively in their markets. One of
the focal points of this strategy is to replace low margin, commodity type
products with higher margin user-oriented feature products. Additionally, CompX
believes that its focus on collaborating with customers to identify solutions
and its ability to provide a high level of customer service enable it to compete
effectively. In response to competitive pricing pressure, CompX continuously
focuses on reducing production cost through product reengineering, improvement
in manufacturing processes or moving production to lower-cost facilities.
Raw material prices, especially steel, zinc and copper, continue to be
volatile putting pressure on CompX's margins. CompX actively seeks to mitigate
the margin impact by entering into raw material supply agreements in order to
stabilize the cost for a period of time, execute larger volume tactical spot
purchases at prices that are expected to be favorable compared to future prices
and, if necessary, pass on the cost increases to customers through surcharges
and price increases.
Waste management
Three months ended
March 31,
--------------------
2005 2006
---- ----
(In millions)
Net sales $ 2.5 $ 3.0
Operating loss (2.8) (2.6)
Waste management sales increased, and its operating loss declined, in the
first quarter of 2006 as compared to the first quarter of 2005 due to higher
utilization of waste management services. Waste Control Specialists also
continues to explore opportunities to obtain certain types of new business
(including disposal and storage of certain types of waste) that, if obtained,
could help to further increase its sales, and decrease its operating loss, in
the remainder of 2006.
Waste Control Specialists currently has permits which allow it to treat,
store and dispose of a broad range of hazardous and toxic wastes, and to treat
and store a broad range of low-level and mixed low-level radioactive wastes.
Certain sectors of the waste management industry are experiencing a relative
improvement in the number of environmental remediation projects generating
wastes. However, efforts on the part of generators to reduce the volume of waste
and/or manage waste onsite at their facilities may result in weaker demand for
Waste Control Specialists' waste management services. Although Waste Control
Specialists believes demand appears to be improving, there is continuing price
pressure for waste management services. While Waste Control Specialists believes
its broad range of authorizations for the treatment and storage of low-level and
mixed low-level radioactive waste streams provides certain competitive
advantages, a key element of Waste Control Specialists' long-term strategy to
provide "one-stop shopping" for hazardous, low-level and mixed low-level
radioactive wastes includes obtaining additional regulatory authorizations for
the disposal of low-level and mixed low-level radioactive wastes.
Prior to June 2003, the state law in Texas (where Waste Control
Specialists' disposal facility is located) prohibited the applicable Texas
regulatory agency from issuing a license for the disposal of a broad range of
low-level and mixed low-level radioactive waste to a private enterprise
operating a disposal facility in Texas. In June 2003, a new Texas state law was
enacted that allows the Texas Commission on Environmental Quality ("TCEQ") to
issue a low-level radioactive waste disposal license to a private entity, such
as Waste Control Specialists. Waste Control Specialists has applied for such a
disposal license with the TCEQ, and Waste Control Specialists was the only
entity to submit an application for such a disposal license. The application was
declared administratively complete by the TCEQ in February 2005. The
regulatorially required merit review has been completed, and the TCEQ began its
technical review of the application in May 2005. The length of time that it will
take to complete the review and act upon the license application is uncertain,
although Waste Control Specialists does not currently expect the agency will
issue any final decision on the license application before late 2007. There can
be no assurance that Waste Control Specialists will be successful in obtaining
any such license.
Waste Control Specialists applied to the Texas Department of State Health
Services ("TDSHS") for a license to dispose of byproduct 11.e(2) waste material
in June 2004. Waste Control Specialists can currently treat and store byproduct
material, but may not dispose of it. The length of time that TDSHS will take to
review and act upon the license application is uncertain, but Waste Control
Specialists currently expects the TDSHS will issue a final decision on the
license application sometime during 2006. There can be no assurance that Waste
Control Specialists will be successful in obtaining any such license.
Waste Control Specialists is continuing its efforts to increase its sales
volumes from waste streams that conform to authorizations it currently has in
place. Waste Control Specialists is also continuing to identify certain waste
streams, and attempting to obtain modifications to its current permits, that
would allow for treatment, storage and disposal of additional types of wastes.
The ability of Waste Control Specialists to achieve increased sales volumes of
these waste streams, together with improved operating efficiencies through
further cost reductions and increased capacity utilization, are important
factors in Waste Control Specialists' ability to achieve improved cash flows.
The Company currently believes Waste Control Specialists can become a viable,
profitable operation, even if Waste Control Specialists is unsuccessful in
obtaining a license for the disposal of a broad range of low-level and mixed
low-level radioactive wastes. However, there can be no assurance that Waste
Control Specialists' efforts will prove successful in improving its cash flows.
Valhi has in the past, and may in the future, consider strategic alternatives
with respect to Waste Control Specialists. There can be no assurance that the
Company would not report a loss with respect to any such strategic transaction.
Equity in earnings of TIMET
Three months ended
March 31,
---------------------
2005 2006
---- ----
(In millions)
TIMET historical:
Net sales $155.2 $286.9
====== ======
Operating income $ 19.4 $ 95.1
Other general corporate, net .7 .3
Interest expense (.7) (1.0)
------ ------
19.4 94.4
Income tax benefit (expense) 22.9 (33.2)
Minority interest (.9) (2.3)
Dividends on preferred stock (3.3) (2.1)
------ ------
Net income $ 38.1 $ 56.8
====== ======
Equity in earnings of TIMET $ 16.8 $ 22.1
====== ======
TIMET reported higher sales and operating income in the first quarter of
2006 as compared to the first quarter of 2005, due in part to a 3% increase in
sales volumes of melted products (ingot and slab), a 19% increase in sales
volumes of mill products and 107% and 52% increases in average selling prices
for melted and mill products, respectively. The increased sales volumes were
driven by increased demand across all of TIMET's market sectors. TIMET's melted
products are generally sold in U.S. dollars. Average selling prices for TIMET's
melted and mill products were both positively affected by current market
conditions and changes in customer and product mix. TIMET's mill products
average selling prices were negatively affected by the strengthening of the U.S.
dollar as compared to both the British pound sterling and the euro.
TIMET's operating results comparisons were negatively impacted by higher
costs for raw materials and energy. TIMET's operating results comparisons were
favorably impacted by improved plant operating rates, which increased from 80%
in the first quarter of 2005 to 88% in the first quarter of 2006. TIMET's
operating results in 2006 include an additional $7.1 million resulting primarily
from the sale of other non-mill products as compared to the 2005 period.
TIMET currently expects its full-year 2006 sales revenue will increase to
between $1.1 billion and $1.2 billion. TIMET's cost of sales is affected by a
number of factors including customer and product mix, material yields, plant
operating rates, raw material costs, labor costs and energy costs. Raw material
costs, which include sponge, scrap and alloys, represent the largest portion of
its manufacturing cost structure, and TIMET currently expects it will continue
to experience increases in raw material costs during 2006. TIMET currently
expects its operating income for 2006 will increase to between $297 million and
$322 million, primarily related to the effects of the higher average selling
prices, offset in part by higher raw material costs.
The Company accounts for its interest in TIMET by the equity method. The
Company's equity in earnings of TIMET differs from the amounts that would be
expected by applying the Company's ownership percentage to TIMET's
separately-reported earnings because of the effect of amortization of purchase
accounting adjustments made by the Company in conjunction with the Company's
acquisitions of its interests in TIMET. Amortization of such basis differences
generally increases earnings (or reduces losses) attributable to TIMET as
reported by the Company, and aggregated $1.3 million in the first quarter of
2005 and $1.1 million in the first quarter of 2006.
General corporate and other items
General corporate interest and dividend income. General corporate interest
and dividend income in the first quarter of 2006 was comparable to the first
quarter of 2005. A significant portion of the Company's general corporate
interest and dividend income in both the first quarter of 2005 and 2006 relates
to distributions received from The Amalgamated Sugar Company LLC and, in the
first quarter of 2005, from interest income on the Company's $80 million loan to
Snake River Sugar Company that was prepaid in October 2005.
In October 2005, the Company and Snake River Sugar Company amended the
Company Agreement of the LLC pursuant to which, among other things, the LLC is
required to make higher minimum levels of distributions to its members
(including the Company) as compared to levels required under the prior Company
Agreement, which would result in the Company receiving annual distributions from
the LLC in aggregate amounts of approximately $25.4 million. In addition,
assuming certain specified conditions are met (which conditions the Company were
met during the fourth quarter of 2005 and which are currently expected to be met
during 2006), the LLC would be required to distribute, in addition to the
distributions noted in the preceding sentence, additional amounts that would
result in the Company receiving at least an additional $25 million during the
15-month period ending December 31, 2006 (with approximately $19 received in the
fourth quarter of 2005 and the remaining $6 million expected to be paid during
2006). Consequently, general corporate dividend and interest income for all of
2006 is expected to be lower than 2005, principally due to a significantly lower
amount expected in the fourth quarter of 2006 as compared to the same quarter of
2005.
Insurance recoveries. NL has reached an agreement with a former insurance
carrier in which such carrier would reimburse NL for a portion of its past and
future lead pigment litigation defense costs. NL received approximately $750,000
during the first quarter of 2006 under such agreement. The aggregate amount that
NL will ultimately recover from such carrier with respect to such defense costs
incurred by NL is not yet determinable.
Insurance recoveries in the first quarter of 2006 also include
approximately $1.5 million in settlements NL received from certain of its former
insurance carriers. These settlements, as well as similar prior settlements NL
reached in the past few years, resolved court proceedings in which NL had sought
reimbursement from carriers for legal defense costs and indemnity coverage for
certain of NL's environmental remediation expenditures. No further material
settlements relating to litigation concerning environmental remediation
coverages are expected.
While NL continues to seek additional insurance recoveries, there can be no
assurance that NL will be successful in obtaining reimbursement for either
defense costs or indemnity. NL has not considered any potential insurance
recoveries in determining related accruals for lead pigment litigation matters.
Any such additional insurance recoveries would be recognized when their receipt
is deemed probable and the amount is determinable.
General corporate expenses. Net general corporate expenses in the first
quarter of 2006 were $1.8 million lower than the first quarter of 2005 due
primarily to lower environmental remediation and legal expenses of NL. Net
general corporate expenses in calendar 2006 are currently expected to be higher
as compared to calendar 2005, in part due to higher expected litigation and
related expenses of NL. However, obligations for environmental remediation
obligations are difficult to assess and estimate, and no assurance can be given
that actual costs for environmental remediation will not exceed accrued amounts
or that costs will not be incurred in the future with respect to sites for which
no estimate of liability can presently be made. See Note 13 to the Condensed
Consolidated Financial Statements.
Interest expense. The Company has a significant amount of indebtedness
denominated in the euro, primarily Kronos International's ("KII")
euro-denominated 8.875% Senior Secured Notes (euro 375 million outstanding at
March 31, 2009). Accordingly, the reported amount of interest expense will vary
depending on relative changes in foreign currency exchange rates. Interest
expense in the first quarter of 2006 was lower than the same period of 2005 due
primarily to relative changes in foreign currency exchange rates, which
decreased the U.S. dollar equivalent of interest expense on the euro 375 million
principal amount of KII's Senior Secured Notes outstanding by approximately $1.1
million in the first quarter of 2006 as compared to the first quarter of 2005.
As a result of the April 2006 issuance of a euro 400 million principal
amount of KII's 6.5% Senior Secured Notes due 2013, the proceeds of which will
be used to redeem KII's existing 8.875% Senior Secured Notes due 2009 (euro 375
million outstanding at March 31, 2006), annual interest expense associated with
the new Senior Secured Notes due 2013 will be less than annual interest expense
associated with the existing Senior Secured Notes due 2009, as the impact of a
higher principal amount outstanding will be more than offset by the lower coupon
rate on the new Senior Secured Notes. As a result of KII's redemption of its
8.875% Senior Secured Notes, the Company expects to recognize a $21 million
pre-tax charge in the second quarter of 2006 related to the early extinguishment
of such indebtedness, consisting of the call premium on such Notes and the net
write-off of deferred financing costs and existing unamortized premium related
to such Notes. Such charge will be classified as part of interest expense. See
Note 9 to the Condensed Consolidated Financial Statements. Assuming interest
rates and foreign currency exchange rates do not change significantly from
current levels, and ignoring the impact of the $21 million charge related to the
redemption of KII's 8.875% Senior Secured Notes, interest expense in the
remainder of 2006 is currently expected to be less than the same periods of 2005
due primarily to the effect of the redemption of the existing Senior Secured
Notes due 2009 with the new issue of KII Senior Secured Notes due 2013.
Provision for income taxes. The principal reasons for the difference
between the Company's effective income tax rates and the U.S. federal statutory
income tax rates are explained in Note 11 to the Condensed Consolidated
Financial Statements.
At March 31, 2006, Kronos has the equivalent of $597 million and $93
million of income tax loss carryforwards for German corporate and trade tax
purposes, respectively, all of which have no expiration date. Kronos has
currently concluded that the benefit of such net carryforwards meet the
more-likely-than-not recognition criteria of GAAP, and accordingly Kronos has no
deferred income tax asset valuation allowance related to such German
carryforwards and other net deductible temporary differences related to Germany.
Prior to the complete utilization of such carryforwards, it is possible that
Kronos might conclude in the future that the benefit of such carryforwards would
no longer meet the more-likely-than-not recognition criteria, at which point
Kronos would be required to recognize a valuation allowance against the
then-remaining tax benefit associated with the carryforwards.
Minority interest. See Note 12 to the Condensed Consolidated Financial
Statements.
Discontinued operations. See Note 15 to the Condensed Consolidated
Financial Statements.
Accounting principles newly adopted in 2006. See Note 16 to the Condensed
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Summary
The Company's primary source of liquidity on an ongoing basis is its cash
flows from operating activities, which is generally used to (i) fund capital
expenditures, (ii) repay short-term indebtedness incurred primarily for working
capital purposes and (iii) provide for the payment of dividends (including
dividends paid to Valhi by its subsidiaries). In addition, from time-to-time the
Company will incur indebtedness, generally to (i) fund short-term working
capital needs, (ii) refinance existing indebtedness, (iii) make investments in
marketable and other securities (including the acquisition of securities issued
by subsidiaries and affiliates of the Company) or (iv) fund major capital
expenditures or the acquisition of other assets outside the ordinary course of
business. Also, the Company will from time-to-time sell assets outside the
ordinary course of business, the proceeds of which are generally used to (i)
repay existing indebtedness (including indebtedness which may have been
collateralized by the assets sold), (ii) make investments in marketable and
other securities, (iii) fund major capital expenditures or the acquisition of
other assets outside the ordinary course of business or (iv) pay dividends.
At March 31, 2006, the Company's third-party indebtedness was substantially
comprised of (i) Valhi's $250 million of loans from Snake River Sugar Company
due in 2027, (ii) KII's euro-denominated 8.875% Senior Secured Notes (equivalent
of $455.6 million principal amount outstanding) due in 2009 (which, as noted
above, have been called for redemption, with the redemption price being funded
by KII's new issue of Senior Secured Notes due 2013), (iii) Kronos' U.S.
revolving bank credit facility ($29.8 million outstanding) due in 2008 and (iv)
Kronos' Canadian bank credit facility ($4.3 million outstanding) due in 2009.
Accordingly, since none of such indebtedness comes due in 2006, the Company does
not currently expect that a significant amount of its cash flows from operating
activities generated during 2006 will be required to be used to repay
indebtedness during 2006.
Based upon the Company's expectations for the industries in which its
subsidiaries and affiliates operate, and the anticipated demands on the
Company's cash resources as discussed herein (including debt refinancing
expectations), the Company expects to have sufficient liquidity to meet its
short-term obligations (defined as the twelve-month period ending March 31,
2007) and its long-term obligations (defined as the five-year period ending
December 31, 2010, the time period for which the Company generally does
long-term budgeting), including operations, capital expenditures, debt service
current dividend policy and repurchases of its common stock. To the extent that
actual developments differ from the Company's expectations, the Company's
liquidity could be adversely affected.
Consolidated cash flows
Operating activities. Trends in cash flows from operating activities
(excluding the impact of significant asset dispositions and relative changes in
assets and liabilities) are generally similar to trends in the Company's
earnings. However, certain items included in the determination of net income are
non-cash, and therefore such items have no impact on cash flows from operating
activities. Non-cash items included in the determination of net income include
depreciation and amortization expense, non-cash interest expense, deferred
income taxes, asset impairment charges and unrealized securities transactions
gains and losses. Non-cash interest expense relates principally to Kronos and
consists of amortization of original issue discount or premium on certain
indebtedness and amortization of deferred financing costs.
Certain other items included in the determination of net income may have an
impact on cash flows from operating activities, but the impact of such items on
cash flows from operating activities will differ from their impact on net
income. For example, equity in earnings of affiliates will generally differ from
the amount of distributions received from such affiliates, and equity in losses
of affiliates does not necessarily result in current cash outlays paid to such
affiliates. The amount of periodic defined benefit pension plan expense and
periodic OPEB expense depends upon a number of factors, including certain
actuarial assumptions, and changes in such actuarial assumptions will result in
a change in the reported expense. In addition, the amount of such periodic
expense generally differs from the outflows of cash required to currently pay
for such benefits. Also, proceeds from the disposal of marketable securities
classified as trading securities are reported as a component of cash flows from
operating activities, and such proceeds will generally differ from the amount of
the related gain or loss on disposal.
Certain other items included in the determination of net income have no
impact on cash flows from operating activities, but such items do impact cash
flows from investing activities (although their impact on such cash flows
differs from their impact on net income). For example, realized gains and losses
from the disposal of available-for-sale marketable securities and long-lived
assets are included in the determination of net income, although the proceeds
from any such disposal are shown as part of cash flows from investing
activities.
Changes in product pricing, production volumes and customer demand, among
other things, can significantly affect the liquidity of the Company. Relative
changes in assets and liabilities generally result from the timing of
production, sales, purchases and income tax payments. Such relative changes can
significantly impact the comparability of cash flows from operations from period
to period, as the income statement impact of such items may occur in a different
period from when the underlying cash transaction occurs. Relative changes in
accounts receivable are affected by, among other things, the timing of sales and
the collection of the resulting receivable. Relative changes in inventories,
accounts payable and accrued liabilities are affected by, among other things,
the timing of raw material purchases and the payment for such purchases and the
relative difference between production volumes and sales volumes. Relative
changes in accrued environmental costs are affected by, among other things, the
period in which the environmental accrual is recognized and the period in which
the remediation expenditure is actually made.
Cash flows from operating activities changed from a use of cash of $10.5
million in the first quarter of 2005 to a use of cash of $14.4 million in the
first quarter of 2006. This $3.9 million net decrease is due primarily to the
net effects of (i) lower net income of $1.9 million, (ii) lower net securities
transaction gains of $14.4 million, (iii) a lower provision for deferred income
taxes of $8.1 million, (iv) lower minority interest of $2.7 million, (v) higher
equity in earnings of TIMET of $5.3 million, (vi) higher net cash contributions
to the TiO2 manufacturing joint venture of $1.9 million and (vii) $9.9 million
higher net cash provided related to relative changes in asset and liabilities
(principally accounts receivable, inventories, payables and accruals and
accounts with affiliates).
Kronos' average days sales outstanding ("DSO") increased from 55 days at
December 31, 2005 to 68 days at March 31, 2006 due to the timing of collection
on the higher accounts receivable balance at the end of March. CompX's average
DSO increased from 40 days to 44 days, also due to the timing of collection on
the higher accounts receivable balance at the end of March. Kronos' average days
sales in inventory ("DSI") decreased from 102 days at December 31, 2005 to 100
days at March 31, 2006 due to the effects of higher sales volumes. CompX's DSI
decreased from 59 days to 57 days due primarily to lower raw material
inventories.
Valhi does not have complete access to the cash flows of certain of its
subsidiaries and affiliates, in part due to limitations contained in certain
credit agreements as well as the fact that such subsidiaries and affiliates are
not 100% owned by Valhi. A detail of Valhi's consolidated cash flows from
operating activities is presented in the table below. Eliminations consist of
intercompany dividends (most of which are paid to Valhi Parent and NL Parent).
Three months ended
March 31,
--------------------
2005 2006
---- ----
(In millions)
Cash provided by (used in) operating activities:
Kronos $ (5.0) $(17.8)
CompX 1.9 4.0
Waste Control Specialists (2.5) (.7)
NL Parent (4.5) (.6)
Tremont (.7) .3
Valhi Parent 13.4 18.6
Other - (.2)
Eliminations (13.1) (18.0)
------ ------
$(10.5) $(14.4)
====== ======
Investing and financing activities. Approximately 60% of the Company's
consolidated capital expenditures in the first quarter of 2006 relate to Kronos,
38% relate to CompX and substantially all of the remainder relate to Waste
Control Specialists. During the first quarter of 2006, (i) Valhi purchased
shares of Kronos common stock in market transactions for $22.4 million, (ii) NL
purchased shares of CompX common stock in market transactions for $404,000, and
(iii) the Company made net purchases of marketable securities of $483,000. See
Note 2 to the Condensed Consolidated Financial Statements.
During the first quarter of 2006, (i) Kronos borrowed an aggregate of $18.3
million under its U.S. bank credit facility and an aggregate of Cdn. $5.0
million ($4.3 million when borrowed) under its Canadian bank credit facility and
(ii) CompX prepaid certain industrial revenue bond indebtedness of $1.5 million.
Valhi paid aggregate cash dividends of $12.1 million ($.10 per share) in the
first quarter of 2006. Distributions to minority interest in the first quarter
of 2006 are primarily comprised of Kronos cash dividends paid to shareholders
other than Valhi and NL, and CompX dividends paid to shareholders other than NL.
In addition, Valhi purchased approximately 275,000 shares of its common stock in
market transactions for an aggregate of $4.9 million, and other cash flows from
financing activities relate primarily to proceeds from the issuance of NL and
Valhi common stock issued upon exercise of stock options.
At March 31, 2006, unused credit available under existing credit facilities
approximated $272.7 million, which was comprised of: CompX - $50.0 million under
its revolving credit facility; Kronos - $94.0 million under its European credit
facility, $15.0 million under its U.S. credit facility, $11.0 million under its
Canadian credit facility and $4.0 million under other non-U.S. facilities; and
Valhi - $98.7 million under its revolving bank credit facility.
Provisions contained in certain of the Company's credit agreements could
result in the acceleration of the applicable indebtedness prior to its stated
maturity for reasons other than defaults from failing to comply with typical
financial covenants. For example, certain credit agreements allow the lender to
accelerate the maturity of the indebtedness upon a change of control (as
defined) of the borrower. The terms of Valhi's revolving bank credit facility
could require Valhi to either reduce outstanding borrowings or pledge additional
collateral in the event the fair value of the existing pledged collateral falls
below specified levels. In addition, certain credit agreements could result in
the acceleration of all or a portion of the indebtedness following a sale of
assets outside the ordinary course of business. See Note 9 to the Condensed
Consolidated Financial Statements.
Off-balance sheet financing arrangements. Other than the operating leases
discussed in the 2005 Annual Report, neither Valhi nor any of its subsidiaries
or affiliates are parties to any off-balance sheet financing arrangements.
Chemicals - Kronos
At March 31, 2006, Kronos had cash, cash equivalents and marketable debt
securities of $65.2 million, including restricted balances of $3.6 million, and
Kronos had approximately $124 million available for borrowing under its U.S.,
Canadian and European credit facilities. Based upon Kronos' expectations for the
TiO2 industry, Kronos expects to have sufficient liquidity to meet its future
obligations including operations, capital expenditures, debt service and current
dividend policy. To the extent that actual developments differ from Kronos'
expectations, Kronos' liquidity could be adversely affected.
At March 31, 2006, Kronos' outstanding debt was comprised primarily of
$455.6 million related to KII's 8.875% Senior Secured Notes, $29.8 million
outstanding under Kronos' U.S. revolving credit facility and approximately $4.3
million related to is Canadian bank credit facility. In April 2006, KII called
all of its 8.875% Senior Secured Notes due 2009 for redemption, which redemption
was funded by KII's issue of 6.5% Senior Secured Notes due 2013 issued in April
2006. See Note 9 to the Condensed Consolidated Financial Statements.
See Note 11 to the Condensed Consolidated Financial Statements for certain
income tax examinations currently underway with respect to certain of Kronos'
income tax returns in various U.S. and non-U.S. jurisdictions, and see Note 13
to the Condensed Consolidated Financial Statements with respect to certain legal
proceedings with respect to Kronos.
KII's assets consist primarily of investments in its operating
subsidiaries, and its ability to service its parent level obligations, including
the Senior Secured Notes, depends in large part upon the distribution of
earnings of its subsidiaries, whether in the form of dividends, advances or
payments on account of intercompany obligation, or otherwise. None of its
subsidiaries have guaranteed the Senior Secured Notes due 2009 (or the new issue
of Senior Secured Notes due 2013 issued in April 2006), although KII has pledged
65% of the common stock or other ownership interest of certain of its first-tier
operating subsidiaries as collateral of such Senior Secured Notes.
Kronos periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and availability of resources in view of, among other
things, its dividend policy, its debt service and capital expenditure
requirements and estimated future operating cash flows. As a result of this
process, Kronos in the past has sought and may in the future seek to reduce,
refinance, repurchase or restructure indebtedness, raise additional capital,
repurchase shares of its common stock, modify its dividend policy, restructure
ownership interests, sell interests in subsidiaries or other assets, or take a
combination of such steps or other steps to manage its liquidity and capital
resources. In the normal course of its business, Kronos may review opportunities
for the acquisition, divestiture, joint venture or other business combinations
in the chemicals or other industries, as well as the acquisition of interests in
related entities. In the event of any such transaction, Kronos may consider
using available cash, issuing equity securities or increasing its indebtedness
to the extent permitted by the agreements governing Kronos' existing debt.
Kronos has substantial operations located outside the United States for
which the functional currency is not the U.S. dollar. As a result, the reported
amounts of Kronos' assets and liabilities related to its non-U.S. operations,
and therefore Kronos' consolidated net assets, will fluctuate based upon changes
in currency exchange rates.
NL Industries
At March 31, 2006, NL (exclusive of CompX) had cash, cash equivalents and
marketable debt securities of $52.8 million, including restricted balances of
$13.2 million.
See Note 11 to the Condensed Consolidated Financial Statements for certain
income tax examinations currently underway with respect to certain of NL's
income tax returns, and see Note 13 to the Condensed Consolidated Financial
Statements and Part II, Item 1, "Legal Proceedings" with respect to certain
legal proceedings and environmental matters with respect to NL.
In addition to those legal proceedings described in Note 13 to the
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 with respect to asserted health concerns associated
with the use of such products and (ii) effectively overturn court decisions in
which NL and other pigment manufacturers have been successful. Examples of such
proposed legislation include bills which would permit civil liability for
damages on the basis of market share, rather than requiring plaintiffs to prove
that the defendant's product caused the alleged damage, and bills which would
revive actions barred by the statute of limitations. While no legislation or
regulations have been enacted to date that are expected to have a material
adverse effect on NL's consolidated financial position, results of operations or
liquidity, enactment of such legislation could have such an effect.
NL periodically evaluates its liquidity requirements, alternative uses of
capital, capital needs and availability of resources in view of, among other
things, its dividend policy, its debt service and capital expenditure
requirements and estimated future operating cash flows. As a result of this
process, NL has in the past and may in the future seek to reduce, refinance,
repurchase or restructure indebtedness, raise additional capital, repurchase
shares of its common stock, modify its dividend policy, restructure ownership
interests, sell interests in subsidiaries or other assets, or take a combination
of such steps or other steps to manage its liquidity and capital resources. In
the normal course of its business, NL may review opportunities for the
acquisition, divestiture, joint venture or other business combinations in the
component products or other industries, as well as the acquisition of interests
in, and loans to, related entities.
Component products - CompX International
CompX periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements, dividend policy and estimated
future operating cash flows. As a result of this process, CompX has in the past
and may in the future seek to raise additional capital, refinance or restructure
indebtedness, issue additional securities, modify its dividend policy,
repurchase shares of its common stock or take a combination of such steps or
other steps to manage its liquidity and capital resources. In the normal course
of business, CompX may review opportunities for acquisitions, divestitures,
joint ventures or other business combinations in the component products
industry. In the event of any such transaction, CompX may consider using cash,
issuing additional equity securities or increasing the indebtedness of CompX or
its subsidiaries.
Waste management - Waste Control Specialists
At March 31, 2006, Waste Control Specialists' indebtedness consisted
principally of $6.9 million of borrowings owed to a wholly-owned subsidiary of
Valhi (December 31, 2005 intercompany indebtedness - $4.6 million). During the
first quarter of 2006, this subsidiary of Valhi loaned an additional net $2.3
million to Waste Control Specialists, which were used by Waste Control
Specialists primarily to fund its operating loss and its capital expenditures.
Such indebtedness is eliminated in the Company's Condensed Consolidated
Financial Statements. Waste Control Specialists will likely borrow additional
amounts during the remainder of 2006 from such Valhi subsidiary under the terms
of its revolving credit facility that has a maturity date of March 2007 and
provides for an aggregate line of credit of up to $19.0 million as of March 31,
2006.
TIMET
At March 31, 2006, TIMET had $176 million of borrowing availability under
its various U.S. and European credit agreements.
In May 2005, TIMET announced it plans to expand its existing titanium
sponge facility in Nevada. This expansion, which TIMET currently expects to
complete by the first quarter of 2007 and cost an aggregate of $38 million, will
provide the capacity to produce an additional 4,000 metric tons of sponge
annually, an increase of approximately 42% over the current sponge production
capacity levels at its Nevada facility.
See Note 13 to the Condensed Consolidated Financial Statements for certain
legal proceedings, environmental matters and other contingencies associated with
TIMET. While TIMET currently believes that the outcome of these matters,
individually and in the aggregate, will not have a material adverse effect on
TIMET's consolidated financial position, liquidity or overall trends in results
of operations, all such matters are subject to inherent uncertainties. Were an
unfavorable outcome to occur in any given period, it is possible that it could
have a material adverse impact on TIMET's consolidated results of operations or
cash flows in a particular period.
TIMET periodically evaluates its liquidity requirements, capital needs and
availability of resources in view of, among other things, its alternative uses
of capital, debt service requirements, the cost of debt and equity capital, and
estimated future operating cash flows. As a result of this process, TIMET has in
the past, or in light of its current outlook, may in the future seek to raise
additional capital, modify its common and preferred dividend policies,
restructure ownership interests, incur, refinance or restructure indebtedness,
repurchase or redeem of shares of capital stock or debt securities, sell assets,
or take a combination of such steps or other steps to increase or manage its
liquidity and capital resources. In the normal course of business, TIMET
investigates, evaluates, discusses and engages in acquisition, joint venture,
strategic relationship and other business combination opportunities in the
titanium, specialty metal and other industries. In the event of any future
acquisition or joint venture opportunities, TIMET may consider using
then-available liquidity, issuing equity securities or incurring additional
indebtedness.
Tremont LLC
See Note 13 to the Condensed Consolidated Financial Statements for certain
legal proceedings and environmental matters with respect to Tremont.
General corporate - Valhi
Because Valhi's operations are conducted primarily through its subsidiaries
and affiliates, Valhi's long-term ability to meet its parent company level
corporate obligations is dependent in large measure on the receipt of dividends
or other distributions from its subsidiaries and affiliates. Based on the 28.9
million shares of Kronos held by Valhi at March 31, 2006 and Kronos' current
quarterly dividend rate of $.25 per share, Valhi would receive aggregate annual
dividends from Kronos of $28.9 million. NL, which paid its 2004 regular
quarterly dividends of $.20 per share in the form of shares of Kronos common
stock, increased its regular quarterly dividend in the first quarter of 2005 to
$.25 per share, which also was in the form of shares of Kronos common stock. In
the second, third and fourth quarters of 2005, NL paid its regular quarterly
dividend in the form of cash. NL's dividend for the first quarter of 2006 was
$.125 per share, also paid in cash. Assuming NL paid its regular quarterly
dividends in the form of cash, and based on the 40.4 million shares of NL common
stock held by Valhi at March 31, 2006, Valhi would receive aggregate annual
dividends from NL of $20.2 million at such $.125 per share quarterly dividend
rate. The Company does not currently expect to receive any distributions from
Waste Control Specialists or TIMET during 2006. CompX dividends are paid to NL.
Various credit agreements to which certain subsidiaries or affiliates are
parties contain customary limitations on the payment of dividends, typically a
percentage of net income or cash flow; however, such restrictions in the past
have not significantly impacted Valhi's ability to service its parent company
level obligations. Valhi generally does not guarantee any indebtedness or other
obligations of its subsidiaries or affiliates. To the extent that one or more of
Valhi's subsidiaries were to become unable to maintain its current level of
dividends, either due to restrictions contained in the applicable subsidiary's
credit agreements, to satisfy their liabilities or otherwise, Valhi parent
company's ability to service its liabilities or to pay dividends on its common
stock could be adversely impacted. In such an event, Valhi might consider
reducing or eliminating its dividends or selling interests in subsidiaries or
other assets. If we were required to liquidate any of such assets in order to
generate funds to satisfy our liabilities, we may be required to sell such
assets at a time or times at which we would not be able to realize what we
believe to be the actual value of such assets.
Waste Control Specialists is required to provide certain financial
assurances to Texas government agencies with respect to certain decommissioning
obligations related to its facility in West Texas. Such financial assurances may
be provided by various means, including a parent company guarantee assuming the
parent meets specified financial tests. In March 2005, Valhi agreed to guarantee
certain specified decommissioning obligations of Waste Control Specialists,
currently estimated by Waste Control Specialists at approximately $3.5 million.
Such obligations would arise only upon a closure of the facility and Waste
Control Specialists' failure to perform such activities. The Company does not
currently expect that it will have to perform under such guarantee for the
foreseeable future.
In March 2005, the Company's board of directors authorized the repurchase
of up to 5.0 million shares of Valhi's common stock in open market transactions,
including block purchases, or in privately negotiated transactions, which may
include transactions with affiliates of Valhi. The stock may be purchased from
time to time as market conditions permit. The stock repurchase program does not
include specific price targets or timetables and may be suspended at any time.
Depending on market conditions, the program could be terminated prior to
completion. The Company will use its cash on hand to acquire the shares.
Repurchased shares will be retired and cancelled or may be added to Valhi's
treasury and used for employee benefit plans, future acquisitions or other
corporate purposes. During the first quarter of 2006, the Company purchased
275,000 shares of its common stock under the repurchase program in market
transactions for an aggregate of $4.9 million. See Note 17 to the Condensed
Consolidated Financial Statements.
At March 31, 2006, Valhi had $96.2 million of parent level cash and cash
equivalents and had no amounts outstanding under its revolving bank credit
agreement. In addition, Valhi had $98.7 million of borrowing availability under
its revolving bank credit facility.
The terms of The Amalgamated Sugar Company LLC Company Agreement provide
for annual "base level" of cash dividend distributions (sometimes referred to as
distributable cash) by the LLC of $26.7 million, from which the Company is
entitled to a 95% preferential share. Distributions from the LLC are dependent,
in part, upon the operations of the LLC. The Company records dividend
distributions from the LLC as income when they are declared by the LLC, which is
generally the same month in which such distributions are received by the
Company, although such distributions may in certain cases be paid on the fist
business day of the following month. To the extent the LLC's distributable cash
is below this base level in any given year, the Company is entitled to an
additional 95% preferential share of any future annual LLC distributable cash in
excess of the base level until such shortfall is recovered. Based on the LLC's
current projections for 2006, Valhi currently expects that distributions
received from the LLC in 2006 will exceed its debt service requirements under
its $250 million loans from Snake River Sugar Company.
The Company may, at its option, require the LLC to redeem the Company's
interest in the LLC beginning in 2012, and the LLC has the right to redeem the
Company's interest in the LLC beginning in 2027. The redemption price is
generally $250 million plus the amount of certain undistributed income allocable
to the Company, if any. In the event the Company requires the LLC to redeem the
Company's interest in the LLC, Snake River has the right to accelerate the
maturity of and call Valhi's $250 million loans from Snake River. Redemption of
the Company's interest in the LLC would result in the Company reporting income
related to the disposition of its LLC interest for income tax purposes, although
the Company would not be expected to report a gain in earnings for financial
reporting purposes at the time its LLC interest was redeemed. However, because
of Snake River's ability to call its $250 million loans to Valhi upon redemption
of the Company's interest in the LLC, the net cash proceeds (after repayment of
the debt) generated by the redemption of the Company's interest in the LLC could
be less than the income taxes that would become payable as a result of the
disposition.
The Company routinely compares its liquidity requirements and alternative
uses of capital against the estimated future cash flows to be received from its
subsidiaries, and the estimated sales value of those units. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify its dividend policies, consider
the sale of interests in subsidiaries, affiliates, business units, marketable
securities or other assets, or take a combination of such steps or other steps,
to increase liquidity, reduce indebtedness and fund future activities. Such
activities have in the past and may in the future involve related companies.
The Company and related entities routinely evaluate acquisitions of
interests in, or combinations with, companies, including related companies,
perceived by management to be undervalued in the marketplace. These companies
may or may not be engaged in businesses related to the Company's current
businesses. The Company intends to consider such acquisition activities in the
future and, in connection with this activity, may consider issuing additional
equity securities and increasing the indebtedness of the Company, its
subsidiaries and related companies. From time to time, the Company and related
entities also evaluate the restructuring of ownership interests among their
respective subsidiaries and related companies.
Non-GAAP financial measures
In an effort to provide investors with additional information regarding the
Company's results of operations as determined by GAAP, the Company has disclosed
certain non-GAAP information which the Company believes provides useful
information to investors:
o The Company discloses percentage changes in Kronos' average TiO2
selling prices in billing currencies, which excludes the effects of
foreign currency translation. The Company believes disclosure of such
percentage changes allows investors to analyze such changes without
the impact of changes in foreign currency exchange rates, thereby
facilitating period-to-period comparisons of the relative changes in
average TiO2 selling prices in the actual various billing currencies.
Generally, when the U.S. dollar either strengthens or weakens against
other currencies, the percentage change in average TiO2 selling prices
in billing currencies will be higher or lower, respectively, than such
percentage changes would be using actual exchange rates prevailing
during the respective periods.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Reference is made to the 2005 Annual Report for a discussion of the market
risks associated with changes in foreign currency exchange rates, interest rates
and security prices that affect the Company. There have been no material changes
in such market risks since the Company filed the 2005 Annual Report.
Certain of the Kronos' sales generated by its non-U.S. operations are
denominated in U.S. dollars. Kronos periodically uses currency forward contracts
to manage a very nominal portion of foreign exchange rate risk associated with
receivables denominated in a currency other than the holder's functional
currency or similar exchange rate risk associated with future sales. Kronos has
not entered into these contracts for trading or speculative purposes in the
past, nor does Kronos currently anticipate entering into such contracts for
trading or speculative purposes in the future. Derivatives used to hedge
forecasted transactions and specific cash flows associated with foreign currency
denominated financial assets and liabilities which meet the criteria for hedge
accounting are designated as cash flow hedges. Consequently, the effective
portion of gains and losses is deferred as a component of accumulated other
comprehensive income and is recognized in earnings at the time the hedged item
affects earnings. Contracts that do not meet the criteria for hedge accounting
are marked-to-market at each balance sheet date with any resulting gain or loss
recognized in income currently as part of net currency transactions. To manage
such exchange rate risk, at March 31, 2006, Kronos held a series of contracts,
with expiration dates ranging from April to September 2006, to exchange an
aggregate of U.S. $25.5 million for an equivalent amount of Canadian dollars at
exchange rates ranging from Cdn. $1.16 to Cdn. $1.17 per U.S. dollar. At March
31, 2006, the actual exchange rate was Cdn. $1.17 per U.S. dollar. The estimated
fair value of such foreign currency forward contracts at March 31, 2006 is
insignificant.
Certain of the CompX's sales generated by its non-U.S. operations are
denominated in U.S. dollars. CompX periodically uses currency forward contracts
to manage a portion of foreign exchange rate market risk associated with
receivables, or similar exchange rate risk associated with future sales,
denominated in a currency other than the holder's functional currency or similar
exchange rate risk associated with future sales. CompX has not entered into
these contracts for trading or speculative purposes in the past, nor does CompX
currently anticipate entering into such contracts for trading or speculative
purposes in the future. Derivatives used to hedge forecasted transactions and
specific cash flows associated with foreign currency denominated financial
assets and liabilities which meet the criteria for hedge accounting are
designated as cash flow hedges. Consequently, the effective portion of gains and
losses is deferred as a component of accumulated other comprehensive income and
is recognized in earnings at the time the hedged item affects earnings.
Contracts that do not meet the criteria for hedge accounting are
marked-to-market at each balance sheet date with any resulting gain or loss
recognized in income currently as part of net currency transactions. To manage
such exchange rate risk, at March 31, 2006, CompX held a series of contracts
maturing through June 2006 to exchange an aggregate of U.S. $5.2 million for an
equivalent amount of Canadian dollars at an exchange rate of Cdn. $1.16 per U.S.
dollar. At March 31, 2006, the actual exchange rate was Cdn. $1.17 per U.S.
dollar. The estimated fair value of such foreign currency forward contracts at
March 31, 2006 is insignificant.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. The Company maintains a
system of disclosure controls and procedures. The term "disclosure controls and
procedures," as defined by regulations of the SEC, means controls and other
procedures that are designed to ensure that information required to be disclosed
in the reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits to the SEC under the Act is
accumulated and communicated to the Company's management, including its
principal executive officer and its principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions to be
made regarding required disclosure. Each of Steven L. Watson, the Company's
President and Chief Executive Officer, and Bobby D. O'Brien, the Company's Vice
President and Chief Financial Officer, have evaluated the design and operations
effectiveness of the Company's disclosure controls and procedures as of March
31, 2006. Based upon their evaluation, these executive officers have concluded
that the Company's disclosure controls and procedures were effective as of March
31, 2006.
Internal Control Over Financial Reporting. The Company also maintains
internal control over financial reporting. The term "internal control over
financial reporting," as defined by regulations of the SEC, means a process
designed by, or under the supervision of, the Company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the Company's board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with GAAP, and includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company,
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and
directors of the Company, and
o Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the Company's Condensed
Consolidated Financial Statements.
As permitted by the SEC, the Company's assessment of internal control over
financial reporting excludes (i) internal control over financial reporting of
its equity method investees and (ii) internal control over the preparation of
the Company's financial statement schedules required by Article 12 of Regulation
S-X. However, our assessment of internal control over financial reporting with
respect to the Company's equity method investees did include our controls over
the recording of amounts related to our investment that are recorded in our
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 the Company's internal control over financial reporting during the
quarter ended March 31, 2006 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Note 13 to the Condensed Consolidated Financial
Statements and to the 2005 Annual Report for descriptions of certain legal
proceedings.
State of Rhode Island v. Lead Industries Association, et al. (Superior
Court of Rhode Island, No. 99-5226). In April 2006, NL filed a post-trial motion
to dismiss, motion for new trial and motion for judgment notwithstanding the
verdict.
Smith, et al. v. Lead Industries Association, et al. (Circuit Court for
Baltimore City, Maryland, Case No. 24-C-99-004490). In March 2006, defendants
filed a conditional cross-appeal, asserting that there is no final judgment to
be reviewed because the trial court's severance was improper.
County of Santa Clara v. Atlantic Richfield Company, et al. (Superior Court
of the State of California, County of Santa Clara, Case No. CV788657). In March
2006, defendants filed a petition for rehearing with the appellate court. In
April 2006, the defendants filed a petition for review with the California
Supreme Court.
City of Milwaukee v. NL Industries, Inc. and Mautz Paint (Circuit Court,
Civil Division, Milwaukee County, Wisconsin, Case No. 01CV003066). In March
2006, the court denied the defendants' motion to dismiss and set a trial date of
January 2007.
Hess, et. al. v. NL Industries, Inc., et al. (Missouri Circuit Court 22nd
Judicial Circuit, St. Louis City, Cause No. 052-11799). NL has denied all
allegations of liability.
In April 2006, NL and the U.S. EPA entered into an administrative order on
consent to perform an additional removal action with respect to ponds located
within a residential area at the site of a formerly owned lead smelting facility
located in Collinsville, Illinois.
Brown et. al. v. NL Industries, Inc. et. al. (Circuit Court Wayne County,
Michigan, Case No. 06-602096 CZ). In February 2006, NL removed the case to
federal court.
Item 1A. Risk Factors.
Reference is made to the 2005 Annual Report for a discussion of risk
factors related to the Company's businesses. There have been no material changes
in such risk factors since the Company filed the 2005 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds; Share
Repurchases.
In March 2005, the Company's board of directors authorized the repurchase
of up to 5.0 million shares of Valhi's common stock in open market transactions,
including block purchases, or in privately negotiated transactions, which may
include transactions with affiliates of Valhi. The stock may be purchased from
time to time as market conditions permit. The stock repurchase program does not
include specific price targets or timetables and may be suspended at any time.
Depending on market conditions, the program could be terminated prior to
completion. The Company will use its cash on hand to acquire the shares.
Repurchased shares will be retired and cancelled or may be added to Valhi's
treasury and used for employee benefit plans, future acquisitions or other
corporate purposes. See Note 17 to the Condensed Consolidated Financial
Statements.
The following table discloses certain information regarding shares of Valhi
common stock purchased by Valhi during the first quarter of 2006. All of such
purchases were made under the repurchase program discussed above, and all of
such purchases were made in open market transactions.
Maximum number of
Average Total number of sharres that may yet
Total price paid shares purchased be purchased under
number of per share as part of a the publicly-
shares including publicly-announced announced plan at
Period purchased commissions plan end of period
------ --------- ----------- ------------------ ------------------
January 1, 2006
to January 31,
2006 40,500 $18.33 40,500 1,447,200
February 1, 2006
to February 28,
2006 80,500 18.18 80,500 1,366,700
March 1, 2006
to March 31,
2006 153,700 17.54 153,700 1,213,000
------- -------
274,700 274,700
======= =======
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 May 8, 2006 By /s/ Bobby D. O'Brien
--------------- ------------------------------
Bobby D. O'Brien
Vice President and Chief Financial
Officer
(Principal Financial Officer)
Date May 8, 2006 By /s/ Gregory M. Swalwell
-------------- ------------------------------
Gregory M. Swalwell
Vice President and Controller
(Principal Accounting Officer)