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,June 30, 2006 Commission file number 1-5467
----------------------------------- ------
VALHI, INC.
- ------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 87-0110150
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
--------------
Indicate by check mark:
Whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Whether the Registrant is a large accelerated filer, an accelerated filer
or a non-accelerated filer (as defined in Rule 12b-2 of the Act). Large
accelerated filer Accelerated filer X non-accelerated filer .
Whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes No X .
--- ---
Number of shares of the Registrant's common stock outstanding on April 28,July 31, 2006:
115,703,678.115,477,878.
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)Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets -
December 31, 2005;
June 30, 2006 (unaudited) 3
Condensed Consolidated Statements of Income - Three months and
six months ended June 30, 2005 and 2006
(unaudited) 5
Condensed Consolidated Statements of Comprehensive Income - Six
months ended June 30, 2005 and 2006
(unaudited) 6
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 2005 and 2006
(unaudited) 7
Condensed Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 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
Item 4. Controls and Procedures 48
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 50
Item 1A. Risk Factors. 51
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds; Share Repurchases 51
Item 4. Submission of Matters to a Vote of Security Holders 51
Item 6. Exhibits. 52
Items 3 4 and 5 of Part II are omitted because there is no information to report.
VALHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, March 31,June 30,
2005 2006
---------- -----------
(Unaudited)----------
(unaudited)
Current assets:
Cash and cash equivalents $ 274,963 $ 232,424188,733
Restricted cash equivalents 6,007 5,1117,327
Marketable securities 11,755 11,62011,070
Accounts and other receivables, net 218,766 259,333279,999
Refundable income taxes 1,489 1,7153,727
Receivable from affiliates 34 347
Inventories, net 283,157 276,450280,192
Prepaid expenses 9,981 9,4018,639
Deferred income taxes 10,502 9,8619,354
---------- ----------
Total current assets 816,654 805,949789,048
---------- ----------
Other assets:
Marketable securities 258,705 259,280securities:
The Amalgamated Sugar Company LLC 250,000 250,000
Other 8,705 10,303
Investment in affiliates 270,632 294,341332,466
Unrecognized net pension obligations 11,916 11,97912,534
Prepaid pension costcosts 3,529 4,0834,704
Goodwill 361,783 377,388384,196
Other intangible assets 3,432 3,2434,423
Deferred income taxes 213,726 213,083228,003
Other 61,639 63,18769,730
---------- ----------
Total other assets 1,185,362 1,226,5841,296,359
---------- ----------
Property and equipment:
Land 37,876 38,93340,485
Buildings 220,110 224,333233,867
Equipment 827,690 844,197882,028
Mining properties 19,969 20,63222,563
Construction in progress 15,771 11,32817,673
---------- ----------
1,121,416 1,139,4231,196,616
Less accumulated depreciation 545,055 568,557608,990
---------- ----------
Net property and equipment 576,361 570,866587,626
---------- ----------
Total assets $2,578,377 $2,603,399$2,673,033
========== ==========
VALHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, March 31,June 30,
2005 2006
---------- -----------
----------
(Unaudited)(unaudited)
Current liabilities:
Current maturities of long-term debt $ 1,615 $ 1,4641,429
Accounts payable 105,650 90,88093,119
Accrued liabilities 129,429 132,205132,969
Payable to affiliates 13,754 13,83215,685
Income taxes 24,680 24,9486,757
Deferred income taxes 4,313 781877
---------- ----------
Total current liabilities 279,441 264,110250,836
---------- ----------
Noncurrent liabilities:
Long-term debt 715,820 743,375789,904
Accrued pension costs 140,742 138,369138,279
Accrued OPEB costs 32,279 31,32230,732
Accrued environmental costs 49,161 48,38549,591
Deferred income taxes 400,964 414,737430,675
Other 39,328 40,19939,694
---------- ----------
Total noncurrent liabilities 1,378,294 1,416,3871,478,875
---------- ----------
Minority interest 125,049 118,188121,811
---------- ----------
Stockholders' equity:
Common stock 1,207 1,2051,203
Additional paid-in capital 108,810 108,579108,590
Retained earnings 786,268 792,421793,556
Accumulated other comprehensive income:
Marketable securities 4,194 4,0814,675
Currency translation 11,157 14,47129,530
Pension liabilities (78,101) (78,101)
Treasury stock (37,942) (37,942)
---------- ----------
Total stockholders' equity 795,593 804,714821,511
---------- ----------
Total liabilities, minority interest and
stockholders' equity $2,578,377 $2,603,399$2,673,033
========== ==========
Commitments and contingencies (Notes 1112 and 13)15)
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)
Three months ended Six months ended
June 30, June 30,
-------------------- -------------------
2005 2006 2005 2006
---- ---- ---- ----
(unaudited)
Revenues and other income:
Net sales $341,247 $354,320$359,444 $399,552 $700,691 $753,872
Other income, net 26,637 12,84019,408 10,303 46,045 23,143
Equity in earnings of:
Titanium Metals Corporation
("TIMET") 16,801 22,13515,790 20,339 32,591 42,474
Other 112 (1,731)(291) (238) (179) (1,969)
-------- -------- -------- --------
Total revenuesrevenue and other income 384,797 387,564394,351 429,956 779,148 817,520
-------- -------- -------- --------
Costs and expenses:
Cost of sales 251,982 272,562259,903 308,486 511,885 581,048
Selling, general and administrative 54,431 54,09254,192 59,837 108,623 113,929
Loss on prepayment of debt - 22,311 - 22,311
Interest 17,879 16,80317,777 19,176 35,656 35,979
-------- -------- -------- --------
Total costs and expenses 324,292 343,457331,872 409,810 656,164 753,267
-------- -------- -------- --------
Income before income taxes 60,505 44,10762,479 20,146 122,984 64,253
Provision for income taxes 29,946 18,613(benefit) 29,376 (561) 59,322 18,052
Minority interest in after-tax earnings 5,497 2,6304,800 2,315 10,297 4,945
-------- -------- -------- --------
Income from continuing operations 25,062 22,86428,303 18,392 53,365 41,256
Discontinued operations, net of tax - (147) (272) -(147)
-------- -------- -------- --------
Net income $ 24,79028,303 $ 22,86418,245 $ 53,093 $ 41,109
======== ======== ======== ========
Basic and diluted earnings per share:
Income from continuing operations $ .21.24 $ .20.16 $ .45 $ .35
Discontinued operations - - - -
-------- -------- -------- --------
Net income $ .21.24 $ .20.16 $ .45 $ .35
======== ======== ======== ========
Diluted earnings per share:
Income from continuing operations $ .24 $ .16 $ .44 $ .35
Discontinued operations - - - -
-------- -------- -------- --------
Net income $ .24 $ .16 $ .44 $ .35
======== ======== ======== ========
Cash dividends per share $ .10 $ .10 $ .20 $ .20
======== ======== ======== ========
Shares used in the calculation of per share amounts:
Basic earnings per common share 120,223 116,668118,027 116,395 119,125 116,531
Dilutive impact of outstanding
stock options 349382 396 366 381
-------- -------- -------- --------
Diluted earnings per share 120,572 117,034118,409 116,791 119,491 116,912
======== ======== ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
VALHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended March 31,VALHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Six months ended June 30, 2005 and 2006
(In thousands)
(Unaudited)
2005 2006
---- ----
(unaudited)
Net income $24,790 $22,864$53,093 $41,109
------- -------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment (168) (113)(166) 481
Currency translation adjustment (11) 3,314(2,794) 18,373
------- -------
Total other comprehensive income (loss), net (179) 3,201(2,960) 18,854
------- -------
Comprehensive income $24,611 $26,065$50,133 $59,963
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
VALHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
ThreeSix months ended March 31,June 30, 2005 and 2006
(In thousands)
(Unaudited)
2005 2006
---- ----
(unaudited)
Cash flows from operating activities:
Net income $ 24,79053,093 $ 22,86441,109
Depreciation and amortization 19,024 18,11637,725 37,063
Goodwill impairment 864 -
Securities transactions, net (14,607) (170)(20,205) (209)
Loss on prepayment of debt - 22,311
Call premium paid on Senior Secured Notes - (20,898)
Benefit plan expense less then cash funding:
Defined benefit pension expense (1,956) (2,717)(3,079) (2,456)
Other postretirement benefit expense (965) (935)(1,651) (1,738)
Deferred income taxes:
Continuing operations 20,872 12,40719,665 10,784
Discontinued operations (334) -(175)
Minority interest:
Continuing operations 5,497 2,63010,297 4,945
Discontinued operations (205) -(178)
Other, net 867 1,083(146) 1,384
Equity in:
TIMET (16,801) (22,135)(32,591) (42,474)
Other (112) 1,731179 1,969
Net distributions from (contributions to):
Manufacturing joint venture (850) (2,750)650 (250)
Other 109 -339
Change in assets and liabilities:
Accounts and other receivables, (44,760) (40,683)net (54,223) (50,562)
Inventories, (14,278) 8,873net (19,572) 18,584
Accounts payable and accrued liabilities 12,779 (13,053)(15,622) (18,859)
Accounts with affiliates 190 1375,832 3,764
Income taxes 7,513 (266)(1,535) (22,491)
Other, net (8,144) 465(5,968) 3,008
-------- --------
Net cash used in operating activities (10,507) (14,403)(26,717) (15,030)
-------- --------
Cash flows from investing activities:
Capital expenditures (12,155) (6,847)(25,444) (19,168)
Purchases of:
Kronos common stock - (22,355)(3,264) (25,213)
TIMET common stock (17,972) (17,028)
CompX common stock (572) (1,834)
Business unit, net of cash acquired - (404)
TIMET common stock (11,450) -(9,832)
Marketable securities (12,645) (12,910)(16,638) (16,904)
Capitalized permit costs (1,508) (3,737)
Proceeds from disposal of:
Business unit 18,094 -
Kronos common stock 19,04719,176 -
Marketable securities 2,911 12,427
Loans to affiliate:
Loans (11,000) -
Collections 10,0686,012 15,753
Interest in Norwegian smelting operation 3,542 -
Cash of disposed business unit (4,006) -
Loans to affiliate, net 6,929 -
Change in restricted cash equivalents, net 2,659 9553,623 (1,108)
Other, net (108) (1,629)531 1,872
-------- --------
Net cash provided by (used in)used in investing activities 1,415 (30,763)(11,497) (77,199)
-------- --------
VALHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
ThreeSix months ended March 31,June 30, 2005 and 2006
(In thousands)
(Unaudited)
2005 2006
---- ----
(unaudited)
Cash flows from financing activities:
Indebtedness:
Borrowings $ -78 $ 72,635649,159
Principal payments (82) (51,553)(13,134) (597,788)
Deferred financing costs paid (28) (105)(8,894)
Valhi dividends paid (12,424) (12,060)(24,621) (24,110)
Distributions to minority interest (1,477) (2,248)(5,007) (4,456)
Treasury stock acquired - (4,902)(41,822) (10,173)
NL common stock issued 2,4132,693 9
Issuance of Valhi common stock and other, net 742 17
-------- --------1,435 291
--------- ---------
Net cash provided by (used in) financing
activities (10,856) 1,793
-------- --------Activities (80,406) 4,038
--------- ---------
Cash and cash equivalents - net change from:
Operating, investing and financing activities (19,948) (43,373)(118,620) (88,191)
Currency translation (280) 834(1,020) 1,961
Cash and equivalents at beginning of period 267,829 274,963
-------- ----------------- ---------
Cash and equivalents at end of period $247,601 $232,424
======== ========$ 148,189 $ 188,733
========= =========
Supplemental disclosures:
Cash paid (received) for:
Interest, net of amounts capitalized $ 6,22435,559 $ 7,07028,143
Income taxes, net 6,117 6,74236,885 28,125
Noncash investing activity - noteactivities:
Note receivable received upon disposal of
business unit $ 4,179 $ -
Inventories received as partial consideration for
disposal of interest in Norwegian smelting
operation $ 1,897 $ -
See accompanying Notes to Condensed Consolidated Financial Statements.
VALHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
ThreeSix months ended March 31,June 30, 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
----- ------ --------- -------- ---------- ----------- ----------- -------- ------------------ ------
(unaudited)
Balance at December 31, 2005 $1,207 $108,810 $786,268 $4,194 $11,157 $(78,101) $(37,942) $795,593
Net income - - 22,86441,109 - - - - 22,86441,109
Dividends - - (12,060)(24,110) - - - - (12,060)(24,110)
Other comprehensive income,
(loss), net - - - (113) 3,314481 18,373 - - 3,20118,854
Treasury stock:
Acquired - - - - - - (4,902) (4,902)(10,173) (10,173)
Retired (3) (248) (4,651)(5) (457) (9,711) - - - 4,90210,173 -
Other, net 1 17237 - - - - - 18238
------ -------- -------- ------- ------- -------- -------- --------
Balance at March 31,June 30, 2006 $1,205 $108,579 $792,421$1,203 $108,590 $793,556 $ 4,081 $14,4714,675 $29,530 $(78,101) $(37,942) $804,714$821,511
====== ======== ======== ======= ======= ======== ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,June 30, 2006
(Unaudited)(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 preparedOrganization - We are majority owned 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,which directly
or through its subsidiaries owns approximately 92% of Valhi'sour outstanding common
stock at March 31,June 30, 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(for which Mr. Simmons is the sole trustee,trustee)
or is held directly by Mr. Simmons or other persons or other entities related companies to Mr.
Simmons. Consequently, Mr. Simmons may be deemed to control such
companies.Contran and us.
Basis of Presentation - Consolidated in this Quarterly Report are the
results of our majority-owned and wholly-owned subsidiaries, including NL
Industries, Inc., Kronos Worldwide, Inc., CompX International, Inc., Tremont LLC
and Waste Control Specialists LLC ("WCS"). We also own a non-controlling
interest in Titanium Metals Corporation ("TIMET") that we account for by the
equity method. Kronos (NYSE: KRO), NL (NYSE: NL), CompX (NYSE: CIX) and TIMET
(NYSE: TIE) each file periodic reports with the Securities and Exchange
Commission ("SEC").
The unaudited Condensed Consolidated Financial Statements contained in this
Quarterly Report have been prepared on the same basis as the audited
Consolidated Financial Statements included in our Annual Report on Form 10-K for
the year ended December 31, 2005 that we filed with the SEC on March 24, 2006
(the "2005 Annual Report"). In our opinion, we have made all necessary
adjustments (which include only normal recurring adjustments) in order to state
fairly, in all material respects, our consolidated financial position, results
of operations and cash flows as of the dates and for the periods presented. We
have condensed the Consolidated Balance Sheet at December 31, 2005 contained in
this Quarterly Report as compared to our audited Consolidated Financial
Statements at that date, and we have omitted certain information and footnote
disclosures (including those related to the Consolidated Balance Sheet at
December 31, 2005) normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). Our results of operations for the interim periods ended June
30, 2006 may not be indicative of our operating results for the full year. The
Condensed Consolidated Financial Statements contained in this Quarterly Report
should be read in conjunction with our 2005 Consolidated Financial Statements
contained in our 2005 Annual Report.
Unless otherwise indicated, references in this report to "we", "us" or
"our" refer to Valhi, Inc and its subsidiaries, taken as a whole.
Note 2 - Business segment information:
Our
% owned by Valhiownership at
Business segment Entity March 31,June 30, 2006
Chemicals Kronos Worldwide, Inc. 95%
Component products CompX International Inc. 70%
Waste management Waste Control Specialists LLCWCS 100%
Titanium metals TIMET 37%
The Company's35%
Our ownership of Kronos includes 59% heldwe hold directly by Valhi and 36% held directly
by NL Industries, Inc., anNL. We own 83%-owned subsidiary of Valhi.NL. During the first quartersix months of 2006, Valhiwe purchased
approximately 829,000926,000 shares of Kronos common stock in market transactions for
an aggregate purchase price of $22.4$25.2 million. The acquisition of these shares of common stock wereWe accounted for bythis purchase as
a step acquisition under the purchase method (step acquisition).
The Company'sof accounting.
Our ownership of CompX is principally held directly byprimarily through CompX Group, Inc, a
majority-owned subsidiary of NL. NL owns 82.4% of CompX Group, and TIMET owns
the remaining 17.6% of CompX Group. CompX Group's sole asset consists
of shares of CompX common stock representing approximatelyis 83% of the
total
numberoutstanding common stock 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%.CompX. NL also owns an additional 2% of CompX
directly. During the first quartersix months of 2006, NL purchased approximately
26,500117,000 shares of CompX common stock in market transactions for an aggregate
purchase price of $404,000. The acquisition of these shares of common stock were$1.8 million. NL accounted for bythis purchase as a step
acquisition under the purchase method (step acquisition).
The company's ownershipof accounting.
We own 31% of TIMET includes 33% owned directly by Tremont
LLC,through a wholly-owned subsidiary, and we directly own
an additional 4% of TIMET. During the Company, and 4% owned directly by Valhi.
In addition,first six months of 2006, we purchased
approximately 543,000 shares of TIMET common stock for an aggregate purchase
price of $17.0 million. TIMET owns directly an additional 3% of CompX, .5% of NL and less
than .1% of Kronos, andKronos. Because we do not consolidate TIMET, accounts for suchthe shares of CompX
Group, CompX, NL and Kronos shares,held by TIMET are not considered as wellbeing owned by
us for financial reporting purposes.
Three months ended Six months ended
June 30, June 30,
2005 2006 2005 2006
---- ---- ---- ----
(In millions)
Net sales:
Chemicals $311.7 $345.1 $603.6 $649.4
Component products 45.8 50.2 92.6 97.2
Waste management 2.0 4.3 4.5 7.3
------ ------ ------ ------
Total net sales $359.5 $399.6 $700.7 $753.9
====== ====== ====== ======
Cost of goods sold:
Chemicals $220.8 $266.8 $432.4 $499.9
Component products 35.2 37.8 71.8 73.2
Waste management 3.9 3.8 7.7 7.9
------ ------ ------ ------
$259.9 $308.4 $511.9 $581.0
====== ====== ====== ======
Gross margin*:
Chemicals $ 90.9 $ 78.3 $171.2 $149.5
Component products 10.6 12.4 20.8 24.0
Waste management (1.9) .5 (3.2) (.6)
------ ------ ------ ------
$ 99.6 $ 91.2 $188.8 $172.9
====== ====== ====== ======
Operating income:
Chemicals $ 55.1 $ 34.3 $ 98.7 $ 66.5
Component products 4.8 5.7 8.9 10.8
Waste management (3.5) (1.1) (6.3) (3.7)
------ ------ ------ ------
Total operating income 56.4 38.9 101.3 73.6
Equity in:
TIMET 15.8 20.4 32.6 42.5
Other (.3) (.3) (.2) (2.0)
General corporate items:
Interest and dividend income 9.3 10.6 19.5 20.4
Securities transaction gains, net 5.6 - 20.2 .2
Insurance recoveries 1.2 .6 1.2 2.8
General expenses, net (7.7) (8.6) (15.9) (15.0)
Loss on prepayment of debt - (22.3) - (22.3)
Interest expense (17.8) (19.2) (35.7) (36.0)
------ ------ ------ ------
Income before income taxes $ 62.5 $ 20.1 $123.0 $ 64.2
====== ====== ====== ======
*Sales less cost of goods sold.
In April 2006, CompX completed an acquisition of a Marine component
products business for aggregate cash consideration of $9.8 million, net of cash
acquired. We completed this acquisition to expand the Marine component products
business unit of CompX. We have included the results of operations and cash
flows of the acquired business in our Condensed Consolidated Financial
Statements starting in April 2006. The purchase price has been allocated among
the tangible and intangible net assets acquired based upon an estimate of the
fair value of such net assets. The pro forma effect to us, assuming this
immaterial acquisition had been completed as itsof January 1, 2005, is not
material.
Segment results we report may differ from amounts separately reported by
our various subsidiaries and affiliates due to purchase accounting adjustments
and related amortization or differences in the way we define operating income.
Intersegment sales are not material.
Note 3 - Accounts and other receivables, net:
December 31, June 30,
2005 2006
-------- --------
(In thousands)
Accounts receivable $211,156 $279,965
Notes receivable 4,267 3,221
Accrued interest and dividends receivable 6,158 82
Allowance for doubtful accounts (2,815) (3,269)
-------- --------
Total $218,766 $279,999
======== ========
Note 4 - Inventories, net:
December 31, June 30,
2005 2006
-------- ---------
(In thousands)
Raw materials:
Chemicals $ 52,343 $ 46,769
Component products 7,022 8,363
-------- --------
Total raw materials 59,365 55,132
-------- --------
In-process products:
Chemicals 17,959 16,871
Component products 9,898 9,642
-------- --------
Total in-process products 27,857 26,513
-------- --------
Finished products:
Chemicals 150,675 146,709
Component products 5,542 5,401
-------- --------
Total finished products 156,217 152,110
-------- --------
Supplies (primarily chemicals) 39,718 46,437
-------- --------
Total $283,157 $280,192
======== ========
Note 5 - Other assets:
December 31, June 30,
2005 2006
--------- ---------
(In thousands)
Investment in affiliates:
TIMET:
Common stock $138,677 $202,567
Preferred stock 183 183
-------- --------
138,860 202,750
TiO2 manufacturing joint venture 115,308 115,558
Other 16,464 14,158
-------- --------
Total $270,632 $332,466
======== ========
Other noncurrent assets:
IBNR receivables $ 16,735 $ 16,922
Waste disposal site operating permits, net 14,133 17,641
Deferred financing costs 8,278 9,534
Loans and other receivables 2,502 2,990
Restricted cash equivalents 382 393
Other 19,609 22,250
-------- --------
Total $ 61,639 $ 69,730
======== ========
At June 30, 2006, we held 56.5 million shares of CompX Group, as available-for-sale marketable securities
carriedTIMET with a quoted market
price of $34.38 per share, or an aggregate market value of $1.9 billion. The
56.5 million shares of TIMET we held reflect the effects of 2:1 stock splits
TIMET implemented in each of February and May 2006.
Certain selected financial information of TIMET is summarized below:
December 31, June 30,
2005 2006
---------- ----------
(In millions)
Current assets $550.3 $ 662.4
Property and equipment 253.0 276.4
Marketable securities 46.5 50.8
Investment in joint ventures 26.0 32.6
Other noncurrent assets 31.5 34.1
------ --------
Total assets $907.3 $1,056.3
====== ========
Current liabilities $166.9 $ 166.7
Accrued pension and post retirement benefits 74.0 79.3
Long-term debt 51.4 48.4
Other non current liabilities 39.3 34.5
Minority interest 13.5 16.2
Stockholders' equity 562.2 711.2
------ --------
Total liabilities and stockholders' equity $907.3 $1,056.3
====== ========
Three months ended Six months ended
June 30, June 30,
------------------ -------------------
2005 2006 2005 2006
---- ---- ---- ----
(In millions)
Net sales $183.7 $300.9 $339.0 $587.8
Cost of sales 135.8 194.6 262.2 373.2
Operating income 36.9 93.5 56.3 188.7
Net income attributable to common stockholders 33.6 54.3 71.7 111.1
Note 6 - Accrued liabilities:
December 31, June 30,
2005 2006
(In thousands)
Current:
Employee benefits $ 48,341 $ 42,446
Environmental costs 16,565 14,209
Deferred income 5,101 2,588
Interest 1,067 7,729
Other 58,355 65,997
-------- --------
Total $129,429 $132,969
======== ========
Noncurrent:
Insurance claims and expenses $ 24,257 $ 22,685
Employee benefits 4,998 6,457
Asset retirement obligations 1,381 1,507
Deferred income 573 525
Other 8,119 8,520
-------- --------
Total $ 39,328 $ 39,694
======== ========
Note 7 - Long-term debt:
December 31, June 30,
2005 2006
------- ---------
(In thousands)
Valhi - Snake River Sugar Company $250,000 $250,000
-------- --------
Subsidiary debt:
Kronos International:
6.5% Senior Secured Notes - 499,354
8.875% Senior Secured Notes 449,298 -
Kronos U.S. bank credit facility 11,500 32,250
Kronos Canadian bank credit facility - 4,453
Other 6,637 5,276
-------- --------
Total subsidiary debt 467,435 541,333
-------- --------
Total debt 717,435 791,333
Less current maturities 1,615 1,429
-------- --------
Total long-term debt $715,820 $789,904
======== ========
Senior Secured Notes - In May 2006, we redeemed our 8.875% Senior Secured
Notes at fair value.104.437%% of their aggregate principal amount of euro 375 million for
an aggregate of $491.4 million, including the $20.9 million call premium. We
funded the redemption of our 8.875% Notes through our April 2006 issuance of
euro 400 million principal amount of 6.5% Senior Secured Notes due in 2013. Our
6.5% Notes were issued at 99.306% of the principal amount ($498.5 when issued).
The covenants, restrictions and collateral requirements of the new 6.5% Notes
are substantially identical to those of the 8.875% Notes. We recognized a $22.3
million pre-tax interest expense charge in the second quarter of 2006 for the
early extinguishment of the 8.875% Senior Secured Notes. The charge includes the
call premium and the write-off of deferred financing costs and unamortized
premium on the 8.875% Notes.
Revolving Credit Facilities - During the first six months of 2006, we
borrowed a net Cdn. $5.0 million ($4.5 million) under Kronos' Canadian revolving
credit facility and a net $20.8 million under Kronos' U.S. bank credit facility.
The average interest rates on the outstanding balance under these facilities at
June 30, 2006 were 6.75% and 8.25%, respectively.
Note 8 - Employee benefit plans:
Defined Benefit Plans - The components of net periodic defined benefit
pension cost are presented in the table below.
Three months ended Six months ended
June 30, June 30,
-------------------- -----------------------
2005 2006 2005 2006
---- ---- ---- ----
(In thousands)
Service cost $ 1,914 $ 1,991 $ 3,901 $ 3,835
Interest cost 5,675 5,941 11,478 11,755
Expected return on plan assets (5,632) (6,405) (11,376) (12,671)
Amortization of prior service cost 150 114 304 226
Amortization of net transition
obligations 135 127 275 250
Recognized actuarial losses 1,126 2,259 2,276 4,431
------- ------- -------- --------
Total $ 3,368 $ 4,027 $ 6,858 $ 7,826
======= ======= ======== ========
Postretirement Benefits - The components of net periodic postretirement
benefit cost are presented in the table below.
Three months ended Six months ended
June 30, June 30,
------------------ -------------------
2005 2006 2005 2006
---- ---- ---- ----
(In thousands)
Service cost $ 54 $ 71 $ 109 $ 142
Interest cost 483 473 966 946
Amortization of prior service credit (231) (90) (463) (181)
Recognized actuarial losses (gains) (34) 29 (176) 57
----- ----- ----- -----
Total $ 272 $ 483 $ 436 $ 964
===== ===== ===== =====
Plan Assets Invested in Related Parties - The Combined Master Retirement
Trust ("CMRT"), is 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, including
certain plans we maintain. The CMRT owned an additional 10% of TIMET's outstanding common
stock and .1% of our outstanding common stock at March 31,June 30, 2006. Because the Company doeswe do
not consolidate either TIMET or the CMRT, the shares of CompX Group, CompX, NL and
Kronos owned by TIMET and the shares of TIMET heldValhi owned 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)being owned by us for financial reporting purposes.
I Contributions - We expect our 2006 contributions for our pension and
TIMET (NYSE: TIE)
each file periodic reportspost retirement benefit plans to be consistent 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 differencesamount we disclosed in
the way the Company
defines operating income.
our 2005 Annual Report.
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,June 30,
2005 2006
------------ ---------------- --------
(In thousands)
Current receivables from affiliates:
Contran - income taxes, net $ 33 $ 33-
Other 1 17
------- -------
Total $ 34 $ 347
======= =======
Payables to affiliates:
Louisiana Pigment Company $ 9,803 $ 9,4829,791
Contran - trade items 3,940 4,3404,967
Contran - income taxes, net - 899
Other, net 11 1028
------- -------
Total $13,754 $13,832$15,685
======= =======
Note 10 - Stockholders' equity:
In March 2005, our board of directors authorized the repurchase of up to
5.0 million shares of our common stock in open market transactions, including
block purchases, or in privately negotiated transactions, which may include
transactions with our affiliates or subsidiaries. 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, we may terminate the program prior to
completion. We will use cash on hand to acquire the shares. Repurchased shares
could be retired and cancelled or may be added to our treasury stock and used
for employee benefit plans, future acquisitions or other corporate purposes.
During the first six months of 2006, we purchased an aggregate of 506,000
shares of our common stock in market transactions for an aggregate of $10.2
million. At June 30, 2006, these 506,000 treasury shares had been cancelled, and
the aggregate $10.2 million cost was allocated to common stock at par value,
additional paid-in capital and retained earnings in accordance with GAAP. At
June 30, 2006, approximately 982,000 shares were available for purchase under
the repurchase authorization.
Note 11 - Other income, net:
Six months ended
June 30,
--------------------------
2005 2006
---- ----
(In thousands)
Securities earnings:
Dividends and interest $19,503 $19,547
Securities transactions, net 20,205 209
------- -------
Total securities earnings 39,708 19,756
Currency transactions, net 3,307 (2,981)
Insurance recoveries 1,200 2,817
Other, net 1,830 3,551
------- -------
Total other income, net $46,045 $23,143
======= =======
Note 12 - Provision for income taxes:
ThreeSix months ended
March 31,June 30,
------------------------
2005 2006
---- ----
(In millions)
Expected tax expense $21.2 $15.4$43.0 $22.5
Incremental U.S. tax and rate differences on
equity in earnings 4.8 2.611.3 6.9
Non-U.S. tax rates - (.4)(.3) (.9)
Nondeductible expenses 1.2 1.3
Adjustment2.1 1.6
Resolution of prior year income taxes,tax issues, net - (.9)(2.0)
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 1.61.5 -
Contingency reserve adjustment, net .4 (9.2)
Canadian tax rate change - (1.3)
U.S. state income taxes, net .3 .5.9 .8
Other, net .1 .1(.3) (.3)
----- -----
$29.9 $18.6$59.3 $18.1
===== =====
Comprehensive provision for income taxes (benefit) allocated to:
Income from continuing operations $29.9 $18.6$59.3 $18.1
Discontinued operations (.4) -(.2)
Other comprehensive income:
Marketable securities .9 (.3).3 1.9
Currency translation (.2) 1.1(1.5) 6.1
----- -----
$30.2 $19.4$57.7 $25.9
===== =====
CertainIn June 2006, Canada enacted a 2% reduction in the Canadian federal income
tax rate and the elimination of the Company's U.S.federal surtax. The 2% reduction will be
phased in from 2008 to 2010, and the federal surtax will be eliminated in 2008.
As a result, during the second quarter of 2006 we recognized a $1.3 million
income tax benefit related to the effect of such reduction on our
previously-recorded net deferred income tax liability with respect to Kronos'
and CompX's operations in Canada.
Due to the favorable resolution of certain income tax issues related to
Kronos' German and Belgian operations during the first six months of 2006, we
recognized a $2.0 million income tax benefit ($1 million in the second quarter
of 2006) related to adjustments of prior year income taxes.
Tax authorities are examining certain of our non-U.S. tax returns are being examined
and tax authorities have
or may propose tax deficiencies, including penalties and interest. For example:
o KronosWe previously received a preliminary tax assessment related to 1993
from the Belgian tax authorities proposing tax deficiencies for
Kronos, including related interest, of approximately euro 6 million
($77.2 million at March 31,June 30, 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'our Belgian TiO2 operations in connection
with their assessment. This lien does not interfere with on-going
operations at the facility. We filed a protest to this assessment, and
in July 2006 the Belgian tax authorities withdrew the assessment. We
expect the lien will be released by the end of 2006.
o The Norwegian tax authorities havepreviously notified Kronosus of their intent
to assess tax deficiencies of approximately kroner 12 million ($2
million)2.4
million at June 30, 2006) relating to the years 1998 through 2000. Kronos has2000 for
Kronos. We objected to this proposed assessment, and in May 2006 the
Norwegian tax authorities withdrew the assessment.
No assurance can be givenPrincipally as a result of the withdrawal of the Belgian and Norwegian
assessments discussed above, we have recognized a $9.2 million income tax
benefit in the first six months of 2006 (mostly in the second quarter) related
to the total reduction in our income tax contingency reserve. Other income tax
examinations related to our operations continue, and we cannot guarantee that
these tax matters will be resolved in the
Company'sour favor in view ofdue to the inherent
uncertainties involved in settlement initiatives and court and tax proceedings.
The Company believes that it has
providedWe believe we have adequate accruals for additional taxes and related interest
expense which maycould ultimately result from all such examinations and believes thattax examinations. We believe the
ultimate disposition of suchtax examinations should not have a material adverse
effect on itsour consolidated financial position, results of operations or
liquidity.
Note 1213 - Minority interest:
December 31, March 31,June 30,
2005 2006
------------- ------------------ --------
(In thousands)
Minority interest in net assets:
NL Industries $ 51,177 $ 50,95554,733
Kronos Worldwide 28,167 21,57721,686
CompX International 45,630 45,57845,312
Subsidiary of Kronos 75 7880
-------- --------
Total $125,049 $118,188$121,811
======== ========
ThreeSix months ended
March 31,June 30,
----------------------
2005 2006
---- ----
(In thousands)
Minority interest in net earnings - Continuingcontinuing operations:
NL Industries $3,228 $1,098$ 4,898 $1,612
Kronos Worldwide 1,534 7793,877 1,455
CompX International 701 7511,454 1,873
Subsidiary of Kronos 4 27 5
Subsidiary of NL 3061 -
------ ------------- ----
Total $5,497 $2,630
======$10,297 $4,945
======= ======
Note 1314 - Discontinued operations, net of tax:
Discontinued operations relates to CompX's former Thomas Regout operations
in the Netherlands. Prior to December 2004, the Thomas Regout European
operations were classified as held for use. A formal plan of disposal adopted by
CompX's board of directors in December 2004 resulted in the reclassification of
the operations to held for sale. Based upon the estimated realizable value (or
fair value less costs to sell) of the net assets disposed, we determined that
the goodwill associated with the assets held for sale was partially impaired. In
determining the estimated realizable value of the Thomas Regout operations as of
December 31, 2004, when we classified it as held for sale, we used the sales
price inherent in the definitive agreement reached with the purchaser in January
2005 and our estimate of the related transaction costs (or costs to sell). In
January 2005, we completed the sale of Thomas Regout for net proceeds that were
approximately $864,000 less than previously estimated (primarily due to higher
expenses associated with the sale). These additional expenses reflect a
refinement of our previous estimate of the realizable value of the Thomas Regout
operations and accordingly we recognized a further impairment of goodwill. As a
result, discontinued operations for the first six months of 2005 includes a
charge for the additional expenses ($272,000, net of income tax benefit and
minority interest). Discontinued operations in 2006 represents an expense of
$500,000 ($147,000, net of income tax benefit and minority interest) for our
change in estimate of certain indemnification obligations we had to the
purchaser of the Thomas Regout operations.
Note 15 - Commitments and contingencies:
Lead pigment litigation - NL.NL
NL's former operations included the manufacture of lead pigments for use in
paint and lead-based paint. NL,We, 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 iswe are 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 believesWe believe these actions are without merit, intendsand intend to continue to deny
all allegations of wrongdoing and liability and to defend against all actions
vigorously. NL hasWe have never settled any of these cases, nor have any final adverse
judgments against NLus been entered. NL hasWe have not accrued any amounts for pending
lead pigment and lead-based paint litigation. LiabilityWe cannot reasonably estimate
liability, if any, that may result, if any,result. We cannot currently be reasonably estimated. There can be no assuranceassure you that NLwe will not incur
liability in the future in respectas a result of this pending litigation in view
ofdue to the inherent
uncertainties involved in court and jury rulings in pending and possible future
cases. If any such future liability were to beliabilities are incurred, it could have a material adverse
effect on the Company'sour 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.enrichment. Following
the State's presentation of its case, the trial court dismissed the State's
claims of indemnity and unjust enrichment. The public nuisance claim was sent to
the jury in February 2006, and the jury found that 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 onThe scope of the
abatement remedy will be held beforedetermined by the judge. The extent, nature and cost of
suchthe abatement remedy isare not currently known, and will be determined only
following additional preceedings.preceedings before the trial court. Various matters remain
pending before the trial court, including NL's motion to dismiss. NL intendsWe intend to
appeal any adverse judgment which the trial court may enter against NL.us.
The Rhode Island case is unique in thatbecause this is the first time that an
adverse verdict in the lead pigment litigation has been entered against NL. Given theNL
believes there are a number of meritorious issues which NL believes can be appealed in this
case,case; therefore, NL currently believes
that it is not probable that NLit will ultimately be
found liable in this matter. In addition, NL cannot reasonably estimate
potential liability, that might result to NL, if any, with respect to this and the other lead pigment
litigation can not currently be reasonably estimated.litigation. However, legal proceedings are subject to inherent uncertainties,
and there is
no assurancewe cannot assure you that any appeal would be successful. Therefore, it is
reasonably possible that NL wouldcould in the near term conclude that it wasis probable NL hadhas
incurred some liability in this Rhode Island matter that would result in
the
recognition ofrecognizing a loss contingency accrual. SuchThe potential liability could have a
material adverse impact on net income for the interim or annual period during
which suchthe liability is recognized, and a material adverse impact on the
Company'sour
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 our net income
for the interim or annual period during which such liability is recognized, and
a material adverse impact on the Company'sour financial condition and liquidity. AnWe cannot
currently reasonably estimate of the potential impact on the Company'sour results of operations,
financial condition or liquidity related to these matters can not currently be
reasonably estimated.matters.
Environmental matters and litigation.
General. The Company'slitigation
General - Our operations are governed by various environmental laws and
regulations. Certain of the Company'sour 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.laws. As with
other companies engaged in similar businesses, certain of our past and current
operations and products of the Company have the potential to cause environmental or other
damage. The Company hasWe have implemented and continuescontinue to implement various policies and
programs in an effort to minimize these risks. The Company'sOur policy is to maintain
compliance with applicable environmental laws and regulations at all of itsour
plants and to strive to improve itsour environmental performance. From time to
time, the Companywe may be subject to environmental regulatory enforcement under U.S. and
foreign statutes, the resolution of which typically involves the establishment
of compliance programs. It is possible that futureFuture developments, such as stricter requirements of
environmental laws and enforcement policies, thereunder, could adversely affect the Company'sour
production, handling, use, storage, transportation, sale or disposal of such
substances. The Company believesWe believe all of itsour plants are in substantial compliance with
applicable environmental laws.
Certain properties and facilities used in the Company'sour 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 haswe have 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 we or our predecessors 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 Companywe may be jointly and severally liable
for suchthese costs, in most cases it iswe are 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 theincluding:
o complexity and differing interpretations of governmental regulations,
theo number of PRPs and the PRPs'their ability or willingness to fund such
allocation of costs,
theiro financial capabilities of the PRPs and the allocation of costs among
PRPs, thethem,
o solvency of other PRPs,
theo multiplicity of possible solutions,solutions; and
o 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 iswe are potentially responsible for the release of
hazardous substances at other sites, could result
incause our 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 Companyexceed our
current estimates. Because we may be jointly and severally liable for the total
remediation cost at certain sites, the Company couldamount we are ultimately be liable for amounts in
excess of itsmay
exceed our accruals due to, among other things, reallocation of costs among PRPs
or the insolvency of one or more PRPs. No assurance can be givenWe cannot assure you that actual costs
will not exceed accrued amounts or the upper end of the range for sites for
which estimates have been made, and no assurancenor can be givenwe assure you that costs will not be
incurred with respect tofor sites as to whichwhere no estimate presently can be made. Further, there can be no assurance that additional
environmental matters will notmay arise in the future. If we were to incur any such future
liability, were to be incurred, itthis could have a material adverse effect on the Company'sour consolidated
financial statements,position, results of operations and liquidity.
The Company recordsWe record liabilities related to environmental remediation obligations when
estimated future expenditures are probable and reasonably estimable.
SuchEnvironmental accruals are adjusted as further information becomes available or
circumstances change. Estimated future expenditures are generally not discounted
to their present value. Recoveriesvalue due to the uncertainty of the timing of the pay out. We
recognize recoveries of remediation costs from other parties, if any, are recognized as assets when their
receipt is deemed probable. At March 31,June 30, 2006, there were no receivables for
such recoveries had been recognized.
Therecoveries.
We do not know and cannot estimate the exact time frame over which the Company makeswe will
make payments with respect to
itsfor our accrued environmental costs is unknown and is dependentcosts. The timing of payments
depends upon among other
things,a number of factors including the timing of the actual remediation
process thatprocess; this in partturn depends on factors outside the control of the Company.our control. At each balance
sheet date, the
Company makes anwe estimate of the amount of itsour accrued environmental costs thatwe will
be paid out overpay within the subsequentnext 12 months, and the Company classifies such
amountmonths. We classify this estimate as a current liability. The remainder ofliability,
and we classify the remaining accrued environmental costs is classified as a noncurrent
liability.
A summary of the activityliability on our Consolidated Balance Sheet.
Changes in the Company's accrued environmental costs during the first quartersix months of
2006 is presented in the table below.are as follows:
Amount
--------------
(In thousands)
Balance at the beginning of the period $65,726
Additions charged to expense, net 3811,811
Payments, net (2,134)(3,737)
-------
Balance at the end of the period $63,973$63,800
=======
Amounts recognized in the balance sheet at the end of the period:
Current liability $15,588$14,209
Noncurrent liability 48,38549,591
-------
Total $63,973
=======$63,800
NL.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,June 30,
2006, NL had accrued $52.9$52.7 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 currently possible to
estimate costs is approximately $79$78 million. NL'sNL has not discounted these
estimates of such liabilities have not been
discounted to present value.
At March 31,June 30, 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 an association with the site, the nature
of its responsibility, if any, for the contamination at the site and the extent
of contamination. The timing onNL cannot estimate when enough information wouldwill become
available to NL to allow NLit to estimate a range of lossloss. The timing and availability
of information on these sites 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 thesepreviously inactive 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 suchthe sites. These notifications may
assert that NL, along with other PRPs, is liable for past clean-up costs. These
costs that could be material to NLus if liability for such amountsthe costs ultimately were
determined against NL.
Tremont.Tremont - Prior to 2005, Tremont, another of our wholly-owned subsidiaries,
entered into a voluntary settlement agreement with the Arkansas Department of
Environmental Quality and certain other PRPs pursuant to which Tremont and the
other PRPs will undertake certain investigatory and interim remedial activities
at a former mining site located in Hot Springs County, Arkansas. Tremont had
entered into an agreement with Halliburton Energy Services, Inc., another PRP
for this site 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 suchthe 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)seeking:
o to recover response and remediation costs incurred at the site,
(ii)o a declaration of the parties' liability for response and remediation
costs incurred at the site,
(iii)o a declaration of the parties' liability for response and remediation
costs to be incurred in the future at the sitesite; and
(iv)o a declaration regarding the obligation of Tremont to indemnify
Halliburton and DII for costs and expenses attributable to the site.
On December 27, 2005, a subsidiary of Tremont filed suit in the United
States District Court for the Western District of Arkansas, Hot Springs
Division, Case No. 05-6089, against Georgia-Pacific, seeking to recover response
costs it has incurred and will incur at the site. Subsequently, plaintiffs in
the Houston litigation agreed to stay that litigation by entering into an
amendment with NL, Tremont and its affiliates 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.litigation, where the court recently
agreed to stay the plaintiffs claims against Tremont and its subsidiaries, and
denied Tremont's motions to dismiss and to stay the claims made by M-I, Milwhite
and Georgia Pacific. Tremont has based its accrualaccrued 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$3.3 million accrued at
March 31,June 30, 2006 ($3.6 million)which represents Tremont's
estimate of the probable and reasonably estimable costs to be
incurred through 2008 with respect to the interim remediation measures. TIMET.Tremont
currently expects the nature and extent of any final remediation measures for
this site will not be known until 2008. Tremont has not accrued costs for this
site for any final remediation measures since no reasonable estimate can
currently be made of the cost of any final remediation measures.
TIMET - At March 31,June 30, 2006, TIMET had accrued approximately $3.0$2.2 million for
environmental cleanup matters, principally related to TIMET'stheir facility in Nevada.
The upper end of the range of reasonably possible costs related to these
matters, including the current accrual, is approximately $5.2$4.4 million.
Other. The Company hasOther - We have also accrued approximately $7.5$7.8 million at March 31,June 30, 2006
in respect offor other environmental cleanup matters. Suchmatters related to us. This accrual is near the
upper end of the range of the Company'sour 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.litigation
NL has been named as a defendant in various lawsuits in a variety ofseveral
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.spouses. NL has not accrued any amounts for this litigation because of the
uncertainty of liability that NL might incur,and inability to reasonably estimate the liability, if
any, cannot currently
be reasonably estimated.any. To date, NL has not been adjudicated liable in any of these matters. Based
on information available to NL, includingincluding:
o facts concerning its historical operations,
o the rate of new claims,
o the number of claims from which NL has been dismisseddismissed; and
o 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'sits historical costs with respect to these
matters (which are not material), and noNL does not
expect any reasonably possible outcome is expected
towould 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 its 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 from2006,
the three minority
shareholders indicating that they were exercising their right, which became
exercisable on June 1, 2005,plaintiffs filed an amended complaint. In July 2006, defendants filed
motions 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 payabledisqualify plaintiffs' counsel, compel arbitration, transfer venue to
the three former minority shareholdersNorthern District of Texas, dismiss the claims against the individual
defendants for lack of personal jurisdiction and to purchase their sharesdismiss the entire
complaint.
For a discussion of EMS stock. In
Juneother legal proceedings to which we are a party, refer
to the consolidated financial statements included in our 2005 EMS set aside funds as paymentAnnual Report and
in our Quarterly Report on Form 10-Q for the shares of EMS. As ofquarter ended 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.31, 2006.
In addition to the litigation described above, the Companywe and itsour affiliates are
also involved in various other environmental, contractual, product liability,
patent (or intellectual property), employment and other claims and disputes
incidental to itsour present and former businesses. In certain cases, the Company haswe have
insurance coverage for suchthese items, although the Company
doeswe do not currently expect any
additional material insurance coverage for itsour environmental claims.
The CompanyWe currently believes thatbelieve the disposition of all claims and disputes,
individually or in the aggregate, should not have a material adverse effect on
itsour consolidated financial position, results of operations and liquidity beyond
the accruals already provided for.
Insurance coverage claims.
Reference is madeclaims
For a complete discussion of certain litigation involving us and certain of
our former insurance carriers, refer to the 2005 Annual Report and our Quarterly
Report on Form 10-Q for a discussion of certain
litigation involving NL and certain of its former insurance carriers.the quarter ended March 31, 2006. 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 aJune 2006, the
federal court granted our motion to remand the caseaction to Texas 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 revoceriesrecoveries 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:Recent accounting pronouncements:
Inventory costs. The Company adoptedCosts - Statement of Financial Accounting Standards ("SFAS") No.
151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, on January 1, 2006became effective
for us for inventory costs incurred on or after such date.January 1, 2006. SFAS No. 151
requires that the allocation of fixed production overhead costs to inventory shall be
based on normal capacity. Normal capacity is notof the production facilities, as 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.by SFAS No.
151. SFAS No. 151 also clarifies existing GAAP to require thatthe accounting for abnormal amounts of idle
facility expense, freight handling costs and wasted materials (spoilage) are tomaterial, requiring those
items be expensedrecognized as incurred. The Company'scurrent-period charges. Our existing production cost
accounting had alreadypolicies complied with the requirements of SFAS No. 151, and therefore the adoption
of SFAS No. 151 did not have an effect on its
consolidated financial statements.affect our Consolidated Financial Statements.
Stock options. As permitted by regulationsOptions - We adopted the fair value provisions of the SEC, the Company adopted SFAS No. 123R,
Share-Based Payment, as ofon January 1, 2006.2006 using the modified prospective
application method. SFAS No. 123R, among other things, eliminatesrequires the alternative in existing GAAP to use the intrinsic
value methodcost of accounting for stock-based
employee compensation under
Accounting Principles Board Opinion ("APBO")paid with equity instruments to be measured based on the
grant-date fair value. That cost is then recognized over the vesting period.
Using the modified prospective method, we will apply the provisions of the
standard to all new equity compensation granted after January 1, 2006 and any
existing awards vesting after January 1, 2006. The number of non-vested equity
awards issued by us or our subsidiaries as of December 31, 2005 is not material.
Prior to the adoption of SFAS No. 123R we accounted for our equity compensation
in accordance with APBO No. 25, Accounting for Stock Issued to Employees. The Company is now generally required to recognizeOur
subsidiary NL accounted for their equity awards under the cost of
employee services received in exchange for an award ofvariable accounting
method whereby the equity instrumentsawards were revalued based on the grant-date fair value ofcurrent trading
price at each balance sheet date. We now account for these awards using 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 permittedliability method 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 relatessubstantially identical to the
recognitionvariable accounting method we previously used. We recorded net compensation
income for stock-based employee compensation of compensation cost for existing stock optionsapproximately $1.4 million and
$1.3 million in the Company's
consolidated statementssecond quarter and first six months of 2005, respectively,
and we recorded net compensation income did not have a material effect onof approximately $400,000 in the Company's Consolidated Financial Statements. Should Valhifirst
six months of 2006. We recorded no compensation income or itsexpense in the second
quarter of 2006 for stock-based employee compensation. If we or our subsidiaries
and affiliates, however, either
grant a significant number of optionsequity awards or modify, repurchase or cancel
existing optionsequity awards in the future, the Companyamount of equity compensation expense
in our Consolidated Financial Statements could in the
future recognize material amounts of compensation cost related to such options
in its consolidated financial statements.
Also upon adoption ofbe material.
Effective January 1, 2006, SFAS No. 123R requires 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
(which for us did not represent a significant amount in the Company's consolidated statementsfirst six months of
income, if any,
will2006) to 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.our Consolidated Financial Statements. SFAS No. 123R also requires certain
expanded disclosures regarding the
Company's stock options,equity compensation, and suchwe provided these
expanded disclosures were provided in theour 2005 Annual Report.
Prior to January 1, 2006,Uncertain tax positions - In 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 firstsecond quarter of 2006 the Company purchased an aggregateFinancial
Accounting Standards Board ("FASB") issued FASB Interpretation No. ("FIN") 48,
Accounting for Uncertain Tax Positions, which will become effective for us on
January 1, 2007. FIN No. 48 clarifies when and how much of 275,000 sharesa benefit we can
recognize in our Consolidated Financial Statements for certain positions taken
in our income tax returns under SFAS No. 109, Accounting for Income Taxes, and
enhances the disclosure requirements for our income tax policies and reserves.
Among other things, FIN No. 48 will prohibit us from recognizing the benefits of
its common stock in market transactionsa tax position unless we believe it is more-likely-than-not our position will
prevail with the applicable tax authorities and limits the amount of the benefit
to the largest amount for an aggregatewhich we believe the likelihood of $4.9 million. At March 31, 2006, these treasury shares had been cancelled,realization is
greater than 50%. FIN No. 48 also requires companies to accrue penalties and
interest on the difference between tax positions taken on their tax returns and
the aggregate $4.9 million costamount of such treasury shares cancelled was allocatedbenefit recognized for financial reporting purposes under the new
standard. Our current income tax accounting policies comply with this aspect of
the new standard. We will also be required to common stock at par value, additional paid-in capital and retained earnings
in accordance with GAAP. Asreclassify any reserves we have
for uncertain tax positions from deferred income tax liabilities, where they are
currently recognized, to a separate current or noncurrent liability, depending
on the nature of March 31, 2006, 1.2 million shares were available
for purchases under such authorization.the tax position. We are currently evaluating the impact of FIN
No. 48 on our Consolidated Financial Statements.
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
General
The Company reported income from continuing operationsBusiness Overview
We are primarily a holding company. We operate through our wholly-owned and
majority-owned subsidiaries, including NL Industries, Inc., Kronos Worldwide,
Inc., CompX International, Inc., Tremont LLC and Waste Control Specialists LLC.
We also own a non-controlling interest in Titanium Metals Corporation ("TIMET").
Kronos (NYSE: KRO), NL (NYSE: NL), CompX (NYSE: CIX) and TIMET (NYSE: TIE) each
file periodic reports with the Securities and Exchange Commission ("SEC").
We have three consolidated operating segments:
o Chemicals - Our chemicals segment is operated through our majority
ownership of $22.9 million, or
$.20 per diluted share,Kronos. Kronos is a leading global producer and marketer
of value-added titanium dioxide pigments ("TiO2"). TiO2 is used for a
variety of manufacturing applications, including plastics, paints,
paper and other industrial products.
o Component Products - We operate in the first quartercomponent products industry
through our majority ownership of 2006 compared to incomeCompX. CompX is a leading
manufacturer of $25.1
million, or $.21 per diluted share,precision ball bearing slides, security products and
ergonomic computer support systems used in office furniture,
transportation, tool storage and a variety of other industries. CompX
has recently entered the performance marine components industry
through the acquisition of two performance marine manufacturers.
o Waste Management - WCS is our wholly-owned subsidiary which owns and
operates a West Texas facility for the processing, treatment, storage
and disposal of hazardous, toxic and certain types of low-level
radioactive waste. WCS is in the first quarterprocess of 2005.
The decreaseobtaining regulatory
authorization to expand its low-level and mixed-level radioactive
waste handling capabilities.
In addition, we account for our 35% non-controlling interest 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 provisionsequity method. TIMET is a leading global producer of titanium sponge, melted
products and milled products. Titanium is used for a variety of commercial,
aerospace, military, medical and other emerging markets. TIMET is also the only
titanium producer with major production facilities in both of the world's
principal titanium markets: the U.S. and Europe.
General
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, the Company cautions that the statements1995. Statements in this Quarterly
Report on Form 10-Q relating to matters that are not historical facts,in nature are forward-looking in
nature about our future that are not statements of historical fact. Statements
in this report including, but not limited to, statements found in Item 2 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," are forward-looking statements that represent management'sour beliefs and
assumptions based on currently available information. Forward-lookingIn some cases you can
identify these 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 thatwe
believe the expectations reflected in such forward-looking statements are reasonable,
it cannot give any
assurances thatwe do not know if these expectations will prove to be correct. SuchForward-looking statements
by their nature involve substantial risks and uncertainties that could
significantly impact expected results, and actualresults. Actual future results could differ
materially from those described in such forward-looking statements.predicted. While it is not possible to identify all
factors, the Company continueswe continue to face many risks and uncertainties. Among the factors
that could cause our actual future results to differ materially from those
described herein are the risks and uncertainties discussed in this Quarterly
Report and those described from time to time in the
Company'sour other filings with the SEC
including, but not limited to, the following:
o Future supply and demand for the Company'sour products,
o The extent of the dependence of certain of the Company'sour 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'sour 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'sour 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 our 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 our 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 TheOur ability of the Company to renew or refinance credit facilities,
o The extent to which our subsidiaries were to become unable to pay us
dividends,
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""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 our former operation of the Company)operations),
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 disclaimsWe disclaim any intention or obligation to update or revise any
forward-looking statement whether as a result of changes in information, future
events or otherwise.
Chemicals
Relative changesNet Income Overview
Quarter Ended June 30, 2005 Compared to the Quarter Ended June 30, 2006 -
We reported income from continuing operations of $18.3 million, or $.16
per diluted share, in Kronos' TiO2 sales andthe second quarter of 2006 compared to income of $28.3
million, or $.24 per diluted share, in the second quarter of 2005. Our diluted
earnings per share declined from 2005 to 2006 due primarily to the net effects
of:
o lower chemicals operating income duringat Kronos in 2006,
o higher component products operating income at CompX in 2006,
o certain securities transaction gains realized in 2005,
o a charge in 2006 from the redemption of our 8.875% Senior Secured
Notes,
o certain income tax benefits and another non-operating income item
recognized by TIMET in 2005,
o higher operating income for TIMET in 2006, and
o certain income tax benefits recognized by Kronos in 2006.
Our income from continuing operations in 2005 includes (net of income taxes
and minority interest): o a gain from the sale of our passive interest in a
Norwegian smelting operation of $.02 per diluted share, o income related to
TIMET's sale of certain real property adjacent to its Nevada operations of $.02
per diluted share, and o income related to certain income tax benefits
recognized by TIMET of $.01 per diluted share.
Our income from continuing operations in 2006 includes (net of income taxes
and minority interest):
o a charge related to the redemption of our 8.875% Senior Secured Notes
of $.09 per diluted share, and
o an aggregate income tax benefit of $.07 per diluted share associated
with Kronos' operations related to the withdrawal of certain income
tax assessments previously made by the Belgian and Norwegian tax
authorities, the favorable resolution of certain income tax issues
related to our German and Belgian operations and the enactment of a
reduction in Canadian federal income tax rates.
These amounts are more fully discussed in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations" or in the 2005 andAnnual Report.
We currently believe net income for the full year 2006 periods presented arewill be lower than
2005 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: increasinglower expected chemicals operating income.
Six Months Ended June 30, 2005 Compared to the Six Months Ended June 30,
2006 -
We reported income from continuing operations of $41.2 million, or $.35 per
diluted share, in the first six months of 2005, decreasing during the
second half2006 compared to income of 2005 and increasing during$53.4
million, or $.44 per diluted share, in the first quartersix months of 2005. Our diluted
earnings per share declined from 2005 to 2006 due primarily to the net effects
of:
o lower chemicals operating income at Kronos in 2006,
o higher component products operating income at CompX in 2006,
o certain securities transaction gains realized in 2005,
o a charge in 2006 from the redemption of our 8.875% Senior Secured
Notes,
o certain income tax benefits and another non-operating income item
recognized by TIMET in 2005,
o higher operating income for TIMET in 2006, and
o certain income tax benefits recognized by Kronos in 2006.
Our income from continuing operations in 2005 includes (net of income taxes
and minority interest): o gains from NL's sales of shares of Kronos common stock
of $.05 per diluted share, o a gain from the sale of our passive interest in a
Norwegian smelting operation of $.02 per diluted share, o income related to
TIMET's sale of certain real property adjacent to its Nevada operations of $.02
per diluted share, and o income related to certain income tax benefits
recognized by TIMET of $.08 per diluted share.
Our income from continuing operations in 2006 includes (net of income taxes
and minority interest):
o a charge related to the redemption of our 8.875% Senior Secured Notes
of $.09 per diluted share,
o an aggregate income tax benefit of $.07 per diluted share associated
with Kronos' operations related to the withdrawal of certain income
tax assessments previously made by the Belgian and Norwegian tax
authorities, the favorable resolution of certain income tax issues
related to our German and Belgian operations and the enactment of a
reduction in Canadian federal income tax rates, and
o income of $.01 per diluted share related to certain insurance
recoveries recognized by NL.
Segment Operating Results - 2005 Compared to 2006 -
Chemicals -
We consider TiO2 to be a "quality of life" product, with demand affected by
gross domestic product (or "GDP") in various regions of the world. Over the
long-term, we expect that demand for TiO2 will grow by 2% to 3% per year,
consistent with our expectations for the long-term growth in GDP. However, even
if we and our competitors maintain consistent shares of the worldwide market,
demand for TiO2 in any interim or annual period may not change in the same
proportion as the change in GDP, in part due to relative changes in the TiO2
inventory levels of our customers. We believe that our customers' inventory
levels are partly influenced by their expectation for future changes in market
TiO2 selling prices.
The factors having the most impact on our reported operating results are
o The level of our TiO2 average selling prices,
o Foreign currency exchange rates (particularly the exchange rate for
the U.S. dollar relative to the euro and the Canadian dollar),
o The level of our TiO2 sales and production volumes, and
o Manufacturing costs, particularly maintenance and energy-related
expenses.
The key performance indicators for our Chemicals Segment are our TiO2
average selling prices, and our TiO2 sales and production volumes.
Three months ended March 31,
---------------------- %June 30, Six months ended June 30,
------------------------------------ ----------------------------------
2005 2006 % Change -------2005 2006 % Change
-------- ------ (In $--------- ------ ------ ----------
(Dollars in millions)
Net sales $291.9 $304.3 +4%$311.7 $345.1 +11% $603.6 $649.4 +8%
Cost of sales 220.8 266.8 +21% 432.4 499.9 +16%
------ ------ ------ ------
Gross margin $ 90.9 $ 78.3 -14% $171.2 $149.5 -13%
====== ====== ====== ======
Operating income 43.6 32.2 -26%$ 55.1 $ 34.3 -38% $ 98.7 $ 66.5 -33%
Percent of net sales:
Cost of goods sold 71% 77% 72% 77%
Gross margin 29% 23% 28% 23%
Operating income 18% 10% 16% 10%
Ti02 operating statistics:
Sales volumes* 114 124 +9%122 139 +14% 237 264 +11%
Production volumes* 122 127 +4%130 +2% 249 257 +3%
Percent change in net
sales:
Product pricing -1% +1%
Sales volumes +14% +11%
Ti02 average selling prices:
Using actual foreignproduct mix -1% -1%
Foreign currency exchange rates -1% -3%
Impact of changes in
foreign currency
exchange rates +5%
--- In billing currencies +2%
===---
+11% +8%
* Thousands of metric tons
Kronos'Net sales - Our Chemicals sales increased $12.4$33.4 million (4%(11%) in the firstsecond
quarter of 2006 as
compared to the firstsecond quarter of 2005 due primarily to the net
effects of higher(i) a 14% increase in TiO2 sales volumes, (ii) a 1% decrease in
average TiO2 selling prices higher TiO2 sales volumes and (iii) the unfavorable net effect of fluctuations in
foreign currency exchange rates, which decreased chemicals sales by approximately $16$4
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 currenciesor 1%. Chemicals sales increased $45.9 million (8%) in the first quartersix
months of 2006 were 2% higher as compared to the first quartersix months of 2005. When translated
from billing currencies2005 due primarily to U.S. dollars using actual foreignan 11%
increase in TiO2 sales volumes, somewhat offset by the unfavorable effect of
changes in currency exchange rates, prevailing during the respective periods, Kronos' averagewhich decreased Chemicals sales by
approximately $19 million, or 3%. We expect our 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 will
remain reasonably stable 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 quartersecond half of 2006 as compared to the firstsecond
quarter of 2005 using actual foreign currency exchange
rates prevailing during the respective periods (the GAAP measure), and the 2%2006.
The 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'our TiO2 sales volumes in the first quarter of 2005 increased 9%
compared to the first quarter of 2005,2006 was due primarily to higher
sales volumes in the United States, and slightly higher sales volumes in Europe and in export markets, offsetting the effect ofwhich were
somewhat offset by lower sales volumes in Canada. Demand for TiO2
has remained strongKronos' sales volumes in the
first quarterhalf of 2006 and while Kronos believes thatwere a new record for Kronos. We believe Chemicals sales
volumes in Canada have decreased as our customers demand has been affected by
the strongeffects of the strengthened Canadian dollar. We expect demand is largely attributablefor TiO2 will
continue to remain high for the remainder of the year.
Cost of sales - Our Chemicals cost of sales increased in 2006 due primarily
to the end-use demandimpact of its
customers, it is possible that some portionhigher sales volumes and higher operating costs. Cost of sales
as a percentage of sales increased in 2006 primarily due to increases in raw
material and other operating costs (including energy costs). The negative impact
of the strong demand resulted from
customers increasing their inventory levelsincrease in advance of implementation of
announced or anticipated price increases. Kronos'raw materials and energy costs on our Chemicals gross margin
and operating income comparisons were favorably impactedwas somewhat offset by higherrecord TiO2 production
levels, which increased 4% in the
first quarter of 2006 as comparedvolumes. We continued to the same period in 2005. Kronos'gain operational efficiencies at our existing TiO2
facilities by debottlenecking production to meet long-term demand. Our operating
rates were near full capacity in both periods, and Kronos' sales andour TiO2 production volumes
in the second quarter and first quarterhalf of 2006 were also new records for Kronosus.
Through our debottlenecking program, we added finishing capacity in our
German chloride-process facility and equipment upgrades and enhancements in
several locations have allowed us to reduce downtime for a first
quarter. Kronos'maintenance activities.
Our production capacity has increased by approximately 30% over the past ten
years with only moderate capital expenditures. We believe our annual attainable
TiO2 production capacity for 2006 is approximately 510,000 metric tons, with
some additional capacity expected to be available in 2007 through our continued
debottlenecking efforts.
Operating income - Our Chemicals segment operating income comparisons were negatively impacteddeclined in 2006
primarily due to of the decrease in gross margin discussed above and the effect
of fluctuations in foreign currency exchange rates discussed below. Our
Chemicals operating income is stated net of amortization of purchase accounting
adjustments made in conjunction with our acquisitions of interests in NL and
Kronos. As a result, we recognize additional depreciation expense above the
amounts Kronos reports separately, substantially all of which is included with
Chemicals cost of goods sold. We recognized an additional $8.6 million of
depreciation expense in the first six months of 2005 and $8.1 million in the
first six months of 2006, which reduced our reported Chemicals Segment operating
income as compared to amounts reported by higher
raw material and other operating costs (including energy).
Kronos hasKronos.
Foreign currency exchange rates - We have substantial Chemicals operations
and assets located outside the United States (primarily in Germany, Belgium,
Norway and Canada). A significant amountThe majority of Kronos'our Chemicals sales generated from its non-U.S.our
foreign operations are denominated in foreign currencies, other than the U.S. dollar, principally the euro,
other major European currencies and the Canadian dollar. A portion of Kronos'our
Chemicals sales generated from its non-U.S.our foreign operations are denominated in the
U.S. dollar. Certain raw materials used worldwide, primarily titanium-containing
feedstocks, are purchased in U.S. dollars, while labor and other production
costs are denominatedpurchased primarily in local currencies. Consequently, the translated
U.S. dollar value of Kronos'our foreign Chemicals sales and operating results are
subject to currency exchange rate fluctuations which may favorably or adversely
impact reported earnings and may affect the comparability of period-to-period
operating results. Overall, fluctuations in foreign currency exchange rates had
the value of the U.S. dollar relative to other currencies,
primarily the euro, decreased TiO2following effects on our Chemicals sales by a net $16 millionand operating income 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.
Increase (decrease)
Three months ended Six months ended
June 30, 2006 June 30, 2006
vs. 2005 vs. 2005
----------------- ------------
(in millions)
Impact on:
Net sales $ (4) $ (19)
Operating income (11) (16)
Other - On September 22, 2005, the chloride-process TiO2 facility operated
by Kronos'our 50%-owned joint venture, Louisiana Pigment Company ("LPC"), temporarily
halted production due to Hurricane Rita. Although there was minimal 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 ventureLPC 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
believeswe believe insurance will cover itsour
lost profits (subject to applicable deductibles) resulting from itsour share of the
lost production fromat LPC. Insurance
proceeds fromWe and LPC both have filed claims with our insurers. We
expect to recover our losses through the lost profit for product that Kronos was not able to sell as a
result ofinsurer in the loss of production from LPC are expected to be recognized by
Kronos during the remaindersecond half of 2006,
although the amount and timing of suchthe insurance recoveriesrecovery is not presently determinable.yet known.
Accordingly, we have not accrued a receivable for the amount of the insurance
claim and will not record the claim until negotiations with their insurer are
finalized. The effect on Kronos'
financialour Chemicals operating 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 capacityOutlook - We expect our Chemicals operating income 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 insecond half of
2006 will continue to be somewhat
lower than the second half of 2005. Kronos'Our expectations as
to the future prospects of Kronosour Chemicals segment and the TiO2 industry are based
upon a number of factors beyond Kronos'our control, including worldwide growth of gross
domestic product, competition in the marketplace, unexpected or
earlier-than-expected capacity additions and technological advances. If actual
developments differ from Kronos'our expectations, Kronos'our Chemicals Segment results of
operations could be unfavorably affected.
Chemicals
Component Products -
The key performance indicator for our Component Products Segment is
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 productsmargin.
Three months ended March 31,
-------------------- %June 30, Six months ended June 30,
----------------------------------- -----------------------------------
2005 2006 % Change ---- ----2005 2006 % Change
------ (In------ --------- ------ ------ ----------
(Dollars in millions)
Net sales $46.8 $47.0 - %$45.8 $50.2 +10% $92.6 $97.2 +5%
Cost of sales 35.2 37.8 +7% 71.8 73.2 +2%
----- ----- ----- -----
Gross margin $10.6 $12.4 +17% $20.8 $24.0 +15%
===== ===== ===== =====
Operating income 4.1 5.1 +23%$ 4.8 $ 5.7 +19% $ 8.9 $10.8 +21%
Percent of net sales:
Cost of goods sold 77% 75% 78% 75%
Gross margin 23% 25% 22% 25%
Operating income 10% 11% 10% 11%
Net sales - Our Component productProducts sales increased slightly in the second quarter
and first quartersix months of 2006 as compared to the samesecond quarter and first six
months of 2005 due mainly to the effect of sales volumes generated from the
August 2005 and April 2006 acquisitions of two marine component businesses and a
general increase in sales volumes to new and existing security products
customers, offset by lower sales volumes for certain furniture component
products resulting from increased Asian competition and an unfavorable Canadian
dollar exchange rate which has caused operational difficulties for many of
CompX's Canadian customers.
Cost of sales - Our Component Products cost of goods sold increased in 2006
as higher volumescompared to 2005 due to the increase in Component Products sales. As a
percent of securitysales, component products cost of goods sold was lower in 2006 as
compared to 2005 due primarily to an improved product mix as the decline in
lower-margin furniture components sales were offset by decreases inincreased sales for certain otherof
higher-margin security and marine component products.
Operating income - Component 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 productsgross margin and operating income
increased in 2006 due primarily to the increase in Component Products sales and
more favorable product mix as well as the favorable impact of CompX's continueda continuous focus
on reducing costs across all segments and a favorable change in product mix resulting from increases in saleslines, partially offset by the negative
impact of certain higher margin security products.
CompX hascurrency exchange rates as discussed below.
Foreign currency exchange rates - We have substantial Component Products
operations and assets located outside the United States in Canada and Taiwan.
A portion of CompX'sComponent Products sales generated from itsour non-U.S. Component Products
operations are denominated in both the U.S. dollar and in currencies other than
the U.S. dollar, principally the Canadian dollar and the New Taiwan dollar. In addition, a
portionMost
of CompX's sales generated from its non-U.S. operations (principally in
Canada) are denominated in the U.S. dollar. Mostour raw materials, labor and other production costs for suchthese non-U.S.
operations are denominated primarily in local currencies. Consequently, the
translated U.S. dollar values of CompX's foreignour non-U.S. Component Products 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,Overall, fluctuations in foreign currency
exchange rate fluctuations did not have a significant effectrates had the following effects on component productsour Component Products sales orand
operating income in 2006 as compared to the first quarter of
2005.
Increase (decrease)
Three months ended Six months ended
June 30, 2006 June 30, 2006
vs. 2005 vs. 2005
----------------- ------------
(In thousands)
Impact on:
Net sales $ 496 $ 744
Operating income (709) (952)
Outlook - The component product areas where CompX operatesmarkets in which we operate are highly
competitive in terms of product pricing and features. CompX'sOur Component Products
strategy is to focus on areas where itwe can provide products that have
value-added, user-oriented-featuresuser-oriented features which enable itsour 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
believeswe believe that itsour focus on collaborating with
customers to identify solutions and itsour ability to provide a high level of
customer service enable itus to compete effectively. In response to competitive
pricing pressure, CompX continuously
focuseswe continually focus on reducing production cost through
product reengineering, improvement in manufacturing processes or moving
production to lower-costlower cost facilities.
RawComponent Product raw material prices, especially steel, zinc and copper
continue to be volatile putting pressure on CompX'sour Component Products margins. CompXWe
actively seeksseek 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, passpassing on the cost increases to
our customers through surcharges and price increases. To date we have been able
to effectively mitigate the impact of higher material cost on our margins,
however, we may not be able to achieve these same results in future periods.
Waste managementManagement -
Three months ended March 31,
--------------------Six months ended
June 30, June 30,
------------------ --------------
2005 2006 2005 2006
---- ---- ---- ----
(In millions) (In millions)
Net sales $ 2.52.0 $ 3.04.3 $ 4.5 $ 7.3
Cost of goods sold 3.9 3.8 7.7 7.9
----- ----- ----- -----
Gross margin $(1.9) $ .5 $(3.2) $ (.6)
===== ===== ===== =====
Operating loss (2.8) (2.6)$(3.5) $(1.1) $(6.3) $(3.7)
General - We continue to operate our Waste management sales increased,Management facility owned by WCS
on a relatively limited basis while we navigate the regulatory licensing
requirements to receive permits for the disposal of byproduct 11.e(2) waste
material and its operating loss declined,for a broad range of low-level and mixed low-level radioactive
wastes. We have previously filed license applications for such disposal
capabilities with the applicable Texas state agency, but the length of time it
will take for the agencies to complete their review and act upon our license
applications is uncertain. We currently believe the applicable state agency will
issue a final decision on our application for 11.e(2) waste material by the end
of this year, but we do not expect to receive a final decision on our
application for the low-level and mixed low-level radioactive waste disposal
capability until early 2008. We do not know if we will be successful in
obtaining these licenses. While 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,approvals for these licenses are still in
the remainder of 2006.
Waste Control Specialistsprocess, we currently hashave permits which allow itus 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 sectorsNet sales and operating income - Our Waste Management sales increased, and
our Waste Management operating loss decreased, in 2006 as compared to the same
periods in 2005 as we obtained new customers and existing customers increased
their utilization 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'our waste management services. Although Waste Control
Specialists believes demand appearsWe continue 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 effortsseek to
increase itsour Waste Management sales volumes from waste streams that conform to authorizations it currently has in
place. Waste Control Specialists ispermitted under
our current licenses.
Outlook - We are also continuing to identify certain waste
streams, and attemptingexploring opportunities to obtain modifications to its current permits, that
would allow for treatment, storage and disposal of additionalcertain types of
wastes.
Thenew business (including disposal and storage of certain types of waste) that, if
obtained, could help to further increase Waste Management sales, and decrease
Waste Management operating losses, in the remainder of 2006 and 2007. Our
ability of Waste Control Specialists to achieve increased Waste Management sales volumes ofthrough these waste
streams, together with improved operating efficiencies through further cost
reductions and increased capacity utilization, are important factors in
improving our Waste Control Specialists' ability to achieve improvedManagement operating results and cash flows. The CompanyUntil we are
able to increase our Waste Management sales volumes, we expect we will continue
to generally report Waste Management operating losses. While achieving increased
sales volumes could result in us reporting Waste Management operating profits,
we currently believesdo not believe that we will report any significant levels of Waste
Control SpecialistsManagement operating profit until we have obtained the licenses discussed above.
We believe WCS can become a viable, profitable operation, even if Waste Control Specialists iswe are
unsuccessful in obtaining a license for the disposal of a broad range of
low-level and mixed low-level radioactive wastes. However, there canwe do not know if we
will be no assurance that Waste
Control Specialists' efforts will prove successful in improving itsWCS's cash flows. Valhi hasWe have in the past, and we
may in the future, consider strategic alternatives with respect to Waste Control Specialists. There can be no assurance that the
Company would notWCS. We could
report a loss with respect toin any such strategic transaction.
Equity in earnings of TIMET
Three months ended March 31,
---------------------June 30, Six months ended June 30,
--------------------------------- -----------------------------------
2005 2006 ---- ----
(In% Change 2005 2006 % Change
------ ------- -------- ----- ------ ---------
(Dollars in millions)
TIMET historical:As reported by TIMET:
Net sales $155.2 $286.9
====== ======$183.7 $300.9 +64% $339.0 $587.8 +73%
Cost of sales 135.8 194.6 +43% 262.2 373.2 +42%
------ ------ ------ ------
Gross margin 47.9 106.3 +122% 76.8 214.6 +179%
Other operating expenses,
net 11.0 12.7 +16% 20.5 25.9 +26%
------ ------ ------ ------
Operating income $ 19.4 $ 95.136.9 93.6 +153% 56.3 188.7 +235%
Gain on sale of land 13.9 - 13.9 -
Other general corporate,nonoperating income
(expense), net .7 .31.5 (1.7) 2.3 (1.4)
Interest expense (.7) (1.0)(.9) (.6) (1.6) (1.6)
------ ------ 19.4 94.4------ ------
Income tax benefit (expense) 22.9 (33.2)before taxes 51.4 91.3 70.9 185.7
Provision for income
taxes (benefit) 13.3 32.8 (9.5) 66.1
Minority interest (.9) (2.3)1.2 2.3 2.1 4.6
Dividends on preferred stock (3.3) (2.1)3.3 1.9 6.6 3.9
------ ------ ------ ------
Net income attributable to
common stockholders $ 38.133.6 $ 56.854.3 +62% $ 71.7 $111.1 +55%
====== ====== Equity====== ======
Our equity in earnings of
TIMET $ 16.815.8 $ 22.120.4 +29% $ 32.6 $ 42.5 +30%
====== ====== ====== ======
TIMET reported higherNet sales - We experienced significant growth in our Titanium Metals sales
and operating income during 2006 as compared to 2005, as we and the titanium
industry as a whole have benefited from significantly increased demand for
titanium from the commercial aerospace and military sectors that has driven
melted and milled titanium prices to record levels. As a result of these market
factors, our average selling prices for melted and milled products in the second
quarter of 2006 increased 118% and 40%, respectively, over the same period in
2005. For the first six months of 2006, these average selling prices increased
114% and 45%, respectively.
In addition to the improved pricing we experienced in our Titanium Metals
business, sales volumes of our melted and mill products increased 14% and 12%,
respectively, in the second quarter of 2006 as compared to the firstsecond quarter of
2005, due in part to a 3% increase in2005. For the first six months of 2006, 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
forour melted and millmilled
products respectively. The increased 8% and 15%, respectively, compared to 2005. These higher
sales volumes were driven bya result of increased demand across all of TIMET'sour market
sectors. TIMET's meltedIn addition, our other product sales increased 46% in the year-to-date
period due principally to improved demand for our fabrication products.
As a result of current and future outlook for demand for our titanium
products, we are generally soldcurrently producing at approximately 90% of capacity at the
majority of our Titanium Metals facilities and have initiated several strategic
capital improvement projects at our existing facilities that will add capacity
to capitalize on the anticipated increase in U.S. dollars. Average selling prices for TIMET's
melteddemand, as further discussed below.
Cost of sales - Our cost of Titanium Metals raw materials, primarily sponge
and mill products were both positively affected by current market
conditionsscrap, increased in 2006 due to increased industry-wide demand as well as
demand in non-titanium markets that use titanium as an alloying agent.
Additionally, we have experienced increasing rutile 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 asenergy costs compared to
both the British pound sterlingprior year, although these increases have somewhat been offset by a decrease
in our non-titanium alloy costs in 2006 compared to 2005. To support the
continued growth of our Titanium Metals business, we have increased our
manufacturing and other headcount levels from the euro.
TIMET's operating results comparisons were negatively impacted by higher
costs for raw materials and energy. TIMET's operating results comparisonscomparable 2005 periods.
Somewhat offsetting these cost increases, we were favorably impacted by improved
plant operating rates, which increased to 89% of practical capacity in the first
six months of 2006 from 80% in the first six months of 2005.
Equity in earnings of TIMET - Our Titanium Metals comparisons were also
negatively impacted in 2006 by a $1.3 million charge we recognized for a change
in estimate of the aggregate liability for worker's compensation bonds issued on
behalf of a former subsidiary of TIMET, Freedom Forge Corporation. During the
second quarter of 2005, to 88% in the first quarterwe realized a pre-tax gain of 2006. TIMET's
operating results in 2006 include an additional $7.1$13.9 million resulting primarily
fromon the sale
of other non-mill productscertain property. TIMET's effective income tax rate is significantly higher
in 2006 as compared to 2005, due primarily to TIMET's reversal during the first
six months of 2005 period.
TIMETof $35.6 million of its valuation allowance attributable to
its U.S. and U.K. deferred income tax assets.
Outlook - We expect that current industry-wide demand trends will continue
beyond 2006. We also continue to expect the availability of certain raw
materials will tighten, and, consequently, the prices for these raw materials
are increasing. We currently expectsexpect that the shortage in certain raw materials
will continue throughout the remainder of 2006, which could limit our ability to
produce enough titanium products to fully meet customer demand. In addition, we
are limited in our ability to increase sales volumes by our existing capacity.
We are currently aggressively increasing our capacity through capital spending
for plant expansions. We currently expect production volumes to remain at
current levels for the remainder of 2006, with overall capacity utilization
expected to approximate 89% of practical capacity for the full year 2006 (as
compared to 80% in 2005). However, practical capacity utilization measures can
vary significantly based on product mix.
We have certain long-term customer agreements that will somewhat limit our
ability to pass on all of our increased raw material costs. However, we expect
that the impact of higher average selling prices for melted and mill products in
2006 will more than offset such increased raw materials costs, as has been the
case for the first half of 2006.
In July 2006, The Airline Monitor, a leading aerospace publication, issued
its full-yearsemi-annual forecast for commercial aircraft deliveries. This forecast
delays the expected delivery timeline for approximately 1% of the planes
previously forecasted for delivery in 2006 sales revenueand 2007. However, with an increase
in expected deliveries from 2008 through 2010, this forecast confirms the
previously projected trend of increasing large commercial aircraft deliveries in
the five years ending in 2010, and the current estimate of 3,800 delivered
aircraft exceeds previous five-year estimates by 80 planes. The current estimate
of large commercial aircraft deliveries through 2010 includes 210 Boeing 787
wide bodies (which currently require a higher percentage of titanium in their
airframes, engines and other parts than any other commercial aircraft). This
updated forecast supports our belief that the titanium industry is in the early
stages of the business cycle and that the current industry-wide demand trends
will increasecontinue beyond 2006.
TIMET's backlog at June 30, 2006 was $860 million, compared to between $1.1 billion$870 million
at December 31, 2005 and $1.2 billion.$580 million at June 30, 2005. The backlog has somewhat
decreased from December 31, 2005 as discussions regarding volumes and pricing
for 2007 orders continue with certain customers, and as a result TIMET's backlog
does not yet reflect orders that we expect to acknowledge during the third and
fourth quarters of 2006.
Our Titanium Metals 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 itsour manufacturing
cost structure, and, TIMET currently expects it willas previously discussed, continued cost increases for
certain raw materials have occurred during the first half of 2006 and are
expected to continue to experience increases inthroughout the remainder of 2006. Scrap and other certain
raw material costs during 2006. TIMET currently
expects itshave continued to rise, and increased energy costs also
continue to have a negative impact on gross margin.
Based on the foregoing, we anticipate our full year 2006 Titanium Metals
net sales revenue will range from $1.1 billion to $1.2 billion and our full year
2006 operating income will range from $325 million to $350 million.
Outlook - We account 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 itsour interest in TIMET by the equity method. The
Company'sOur
equity in earnings in TIMET is net of TIMETamortization and purchase accounting
adjustments made in conjunction with our acquisition and interest in TIMET. As a
result, our equity in earnings differs from the amountsamount that would be expected by
applying the Company'sour ownership percentage to TIMET's separately-reported earnings because of thestand-alone earnings. The net
effect of amortization of purchase
accounting adjustments madethese differences increased our equity in earnings in TIMET 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$2.3
million in the first quartersix months of 2005 and $1.1$2.4 million in the first quartersix months
of 2006. General corporate and other items
General corporate interest and dividend income. General corporate interest
and dividend incomeThe percentage increases in the first quarterour equity in earnings of TIMET in 2006 was comparableas
compared to the first
quartersame periods in 2005 are lower than the percentage increases in
TIMET's separately-reported net income attributable to common stockholders
during the same periods because we owned a lower percentage of 2005.TIMET in 2006 as
compared to 2005 due to TIMET's issuance of shares of its common stock,
primarily from the conversion of shares of its convertible preferred stock into
TIMET common stock and the exercise of options to purchase TIMET common stock
held by its employees.
General Corporate Items, Interest Expense, Provision for Income Taxes
(Benefit), Minority Interest and Discontinued Operations - 2006 Compared to 2005
Interest and Dividend Income -
A significant portion of the Company's general corporateour interest and dividend income in both the first quarter of 2005 and
2006 relates to the distributions we received from The Amalgamated Sugar Company
LLC and, in the
first quarter of 2005, from the interest income we earned on the Company'sour $80 million loan to
Snake River Sugar Company that wasSnake River prepaid in October 2005. We
recognized dividend income from the LLC of $6.1 million and $12.4 million in the
second quarter and first six months of 2005, respectively, compared to $7.3
million and $14.4 million in the second quarter and first six months of 2006. We
also recognized interest income on our $80 million loan to Snake River of $1.3
million and $2.7 million in the second quarter and first six months of 2005.
In October 2005, the Companywe 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)us) as compared to
levels required under the prior Company Agreement, which would result inAgreement. Under the Company receivingnew agreement, we
should receive aggregate 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 the first six months of 2006, and
which are currently expectedwe expect will continue to be met during the remainder of the 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 receivingus at least an additional $25 million
during the 15-month period ending December 31, 2006 (with2006. This distribution is in
addition to the $25.4 million distribution noted above. We received
approximately $19 receivedmillion of this additional amount in the fourth quarter of
2005, and we expect the LLC will pay us the remaining $6 million expected to beduring 2006
(including approximately $1.7 million which the LLC has paid us during 2006)the first
six months of the year). Consequently, general corporateWe expect our interest and dividend and interest income for all of
2006 is expected towill be lower than 2005, principally due to a significantly lower
amount expectedthe one-time $19 million in dividend
distributions we received from the LLC in the fourth quarter of 2006 as compared to the same quarter of
2005.
Insurance recoveries.Recoveries -
NL has reached an agreement with a former insurance carrier in which suchthe
carrier wouldwill reimburse NL for a portion of its past and future lead pigment
litigation defense costs. NL received approximately $750,000$1.1 million during the
first quartersix months of 2006 under such agreement. The aggregate amount thatthe agreement (including $300,000 in the second
quarter). We are not able to determine how much NL will ultimately recover from
suchthe carrier with respect to suchfor past defense costs incurred by NL is not yet determinable.
Insurancebecause the carrier has
certain discretion regarding which past defense costs qualify for reimbursement.
NL also received $1.7 million in insurance recoveries in the first quartersix
months of 2006 also include
approximately $1.5 million in settlements NL received fromwith certain of its former insurance carriers.carriers
(including approximately $300,000 in the second quarter). These settlements, as
well as similar prior settlements NL reached in the past few years (including
$1.2 million in the second quarter of 2005), resolved court proceedings in which
NL had sought reimbursement from carriers for legal defense costs and indemnity
coverage for certain of NL'sits environmental remediation expenditures. NoWe do not
expect NL will receive any further material insurance settlements relating to
litigation concerning environmental remediation coverages are expected.coverages.
While NL continues to seek additional insurance recoveries, there can be no
assurance thatwe do not know
if NL will be successful in obtaining reimbursement for either defense costs or
indemnity. NL has not considered any additional potential insurance recoveries
in determining related accruals for lead pigment litigation matters. Any such additional
insurance recoveries would be recognized when theirthe receipt is deemed probable and the
amount is determinable.
General corporate expenses. Net general corporateCorporate Expenses -
Corporate expenses were $15.0 million in the first six months of 2006,
slightly lower than the $15.9 million in the first six months of 2005, as lower
environmental remediation expenses of NL were partially offset by higher
litigation and related expenses for NL. Corporate expenses were approximately
$900,000 higher in the second quarter of 2006 were $1.8 million lower thanas compared to the firstsecond quarter
of 2005 due primarily to lowerhigher environmental remediation and legallitigation and
related expenses of NL. Net
generalWe expect corporate expenses in calendar 2006 are currently expected towill be
higher as compared to calendarthan 2005, in part due to higher expected litigation and related expenses
of NL. However, obligations for environmental remediation obligationscosts are difficult to
assess and estimate, and no assurance can be givenit is possible that actual costs for environmental
remediation will not exceed accrued amounts or that costs will not be incurred in the
future with respect tofor sites forin which nowe cannot currently estimate of liability can presently be made.the liability. See Note
1315 to the Condensed Consolidated Financial Statements.
Loss on Prepayment of Debt -
In April 2006, we issued our euro 400 million aggregate principal amount of
6.5% Senior Secured Notes due 2013, and used the proceeds to redeem our euro 375
million aggregate principal amount of 8.875% Senior Secured Notes in May 2006.
As a result of this prepayment, we recognized a $22.3 million pre-tax interest
expense charge in the second quarter of 2006, representing the call premium on
the old Notes and the write-off of deferred financing costs and the existing
unamortized premium on the old Notes. See Note 7 to the Condensed Consolidated
Financial Statements. The annual interest expense on the new 6.5% Notes will be
approximately euro 6 million less than on the old 8.875% Notes.
Interest expense. The Company hasExpense -
We have a significant amount of indebtedness denominated in the euro,
primarily through our subsidiary Kronos International'sInternational ("KII")
euro-denominated 8.875% Senior Secured Notes (euro 375. KII has euro 400
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 millionaggregate 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 in 2013
outstanding (and had the proceedseuro 375 million aggregate principal amount of which will
be used to redeem KII's existing 8.875%
Senior Secured Notes due 2009 (euro 375
million outstanding at March 31,until May 2006), annual. The interest expense associatedwe
recognize on these fixed rate Notes will vary with fluctuations in the new Senior Secured Notes due 2013 will be less than annual interesteuro
exchange rate.
Interest expense associated withincreased $1.4 million from $17.8 million in the existing Senior Secured Notes due 2009, assecond
quarter of 2005 to $19.2 million in the impactsecond quarter of a2006. Interest expense
was 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 tobecause the early extinguishment
of such indebtedness, consisting of the call premium on such8.875% Senior Secured Notes
and the net
write-off6.5% Senior Secured Notes were both outstanding for 30 days during the
quarter. This additional interest expense was partially offset by changes in
currency exchange rates in 2006 compared to 2005. Interest expense in the first
six months of deferred financing costs and existing unamortized premium related2006 increased slightly compared to such Notes. Such charge will be classifiedthe first six months of 2005,
as partthe effect of the 30 days of interest expense. See
Note 9 to the Condensed Consolidated Financial Statements.expense on both Senior Secured Notes
was mostly offset by changes in currency exchange rates.
Assuming interest
rates and foreign currency exchange rates do not change significantly from their
current levels, and ignoringwe expect interest expense will be lower in the impactsecond half of
2006 as compared to the first half of the $21 million charge relatedyear due to the redemption of KII'slower interest expense
associated with the 6.5% Senior Secured Notes as compared to the 8.875% Senior
Secured Notes, interest expenseNotes.
Provision for Income Taxes (Benefit) -
We recognized an income tax benefit of $600,000 in the remaindersecond quarter of
2006 compared to a provision for income taxes of $29.4 million in the second
quarter of 2005. For the first six months of 2006, we recognized a provision for
income taxes of $18.1 million compared to a provision of $59.3 million in the
first six months of 2005. The income tax benefit we recognized in the second
quarter of 2006, and the unusually low overall effective income tax rate we
recognized in the first six months of 2006, is 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 2009a $9.2 million
reduction in our tax contingency reserves related to favorable developments 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 ratesaudits for our Belgian 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 $597Norwegian operations, a $2.0 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 favorable developments with certain income tax issues
related to our German and Belgium operations and a $1.3 million benefit
resulting from the carryforwards.
Minority interest.enactment of a reduction in Canadian income tax rates.
Substantially all of this aggregate income tax benefit was recognized in the
second quarter of 2006. See Note 12 to the Condensed Consolidated Financial
Statements.
Discontinued operations.Statements for a tabular reconciliation of our statutory tax expense to our
actual tax expense.
Minority Interest in Continuing Operations -
Minority interest in earnings declined $5.4 million in the first six months
of 2006 to $4.9 million from $10.3 million in the same period in the prior year,
primarily due to lower income at both Kronos and NL. In addition, we purchased
additional shares of Kronos and CompX common stock during the last half of 2005
and the first six months of 2006 which increased our ownership of these
companies as compared to last year. See Note 1513 to the Condensed Consolidated
Financial Statements.
Accounting principles newly adoptedDiscontinued Operations, Net of Tax -
Discontinued operations relates to the former Thomas Regout operations of
CompX in 2006.the Netherlands. Discontinued operations in 2005 consists of additional
expenses we incurred with the sale of Thomas Regout. Discontinued operations in
2006 relates to a change in our estimate of certain indemnification obligations
we had to the purchaser of the Thomas Regout. See Note 1614 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 flowsCash Flows
Operating activities.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'sour earnings.
However, certain items includedCash flows used 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 fromour operating activities but the impact of such items on
cash flowsdecreased 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$26.7 million
use of cash of $10.5
million in the first quartersix months of 2005 to a $15.0 million use of cash of $14.4 million in
the first quartersix months of 2006. This $3.9 million net decrease isin the use of cash was due primarily
to the net effects of (i)the following items:
o Lower consolidated operating income in 2006 of $27.7 million, due
primarily to the lower net incomechemicals earnings, o Lower cash paid for
interest in 2006 of $1.9$7.4 million, (ii) lower net securities
transaction gainsprimarily as a result of $14.4the May
2006 redemption of our 8.875% Senior Secured Notes (which paid
interest semiannually in June and December) and the April 2006
issuance of our 6.5% Senior Secured Notes (which will pay interest
semiannually in April and October starting in October 2006),
o The $20.9 million (iii) a lower provisioncall premium we paid in 2006 when we prepaid our
8.875% Senior Secured Notes, which GAAP requires to be included in the
determination of cash flows from operating activities,
o Lower cash paid for deferred income taxes in 2006 of $8.1$8.8 million, (iv) lower minority interestdue in part
to a $21 million tax payment we made in 2005 to settle a
previously-reported income tax audit of $2.7 million, (v) higher
equityNL 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
higherU.S.,
o Higher net cash provided relatedby changes in receivables, inventories,
payables and accrued liabilities in 2006 of $33.8 million, due
primarily to relative changes in assetKronos' inventory levels, and
liabilities
(principallyo Lower cash paid for environmental remediation expenditures of $2.9
million in 2006.
Changes in working capital were affected by accounts receivable inventories, payables and
accruals and
accounts with affiliates).inventory changes. Kronos' average days sales outstanding ("DSO") increased from
55 days at December 31, 2005 to 6865 days at March 31,June 30, 2006 due to the timing of
collection on higher accounts receivable balances at the end of June. CompX's
average DSO increased from 40 days at December 31, 2005 to 41 days at June 30,
2006 due to timing of collection on the higher accounts receivable balance at
the end of March.June. For comparative purposes, Kronos' average DSO increased from 60
days at December 31, 2004 to 64 days at June 30, 2005, and CompX's average DSO
increased from 4038 days to 4442 days, also due to the timing of collection on thetheir
slightly higher accounts receivable balancebalances at the end of March.June 2005.
Kronos' average days sales in inventory ("DSI") decreased from 102 days at
December 31, 2005 to 10088 days at March 31,June 30, 2006, due toas their strong TiO2 production
volumes in the effectsfirst six months of higher2006 still exceeded their strong TiO2 sales
volumes.volumes during such period by approximately 7,000 metric tons. CompX's average
DSI decreased from 59 days at December 31, 2005 to 57 days at June 30, 2006 due
primarily to their lower commodity raw material inventories.
Valhi doesbalance at June 30, 2006 as
compared to December 31, 2005. For comparative purposes, Kronos' and CompX's
average DSI of 97 days and 52 days, respectively, at December 31, 2004 were both
comparable to their average DSI at June 30, 2005.
We do not have complete access to the cash flows of certain of itsour majority-owned
subsidiaries, and affiliates,due in part due to limitations contained in certain credit agreements
as well asof the fact that such subsidiaries and affiliates arebecause we do not own 100% owned by Valhi.of these subsidiaries. A
detail of Valhi'sour consolidated cash flows from operating activities is presented in
the table below. Eliminations consist of
intercompanyIntercompany dividends (most of which are paid to Valhi Parent and NL Parent).have been eliminated.
ThreeSix months ended
March 31,June 30,
--------------------
2005 2006
---- ----
(In millions)
Cash provided by (used in) operating activities:
Kronos $ (5.0) $(17.8)2.4 $(19.0)
CompX 1.9 4.08.6 11.3
Waste Control Specialists (2.5) (.7)(3.2) (2.8)
NL Parent (4.5) (.6)(24.2) (2.4)
Tremont (.7) .3(1.5) (.8)
Valhi Parent 13.4 18.627.4 34.8
Other - (.2)(.3) (.1)
Eliminations (13.1) (18.0)(35.9) (36.0)
------ ------
$(10.5) $(14.4)Total $(26.7) $(15.0)
====== ======
Investing and financing activities. Approximately 60%Financing Activities -
Our Chemicals Segment accounted for approximately $13.4 million of the Company'sour
consolidated capital expenditures in the first quartersix months of 2006, relate to Kronos,
38% relate to CompX and$5.4 million
for our Component Products Segment with substantially all of the remainder relate tofor
our Waste Control Specialists. DuringManagement Segment.
We purchased the following securities in market transactions during the
first quartersix months of 2006, (i) Valhi purchased2006:
o shares of Kronos common stock in market transactions for $22.4$25.2 million,
(ii) NL
purchasedo shares of TIMET common stock for $17.0 million,
o shares of CompX common stock in market transactions for $404,000,$1.8 million, and
(iii) the Company made net purchases ofo other marketable securities for a net of $483,000.$1.1 million.
In addition, during the first six months of 2006 we:
o acquired a marine components products company for approximately $9.8
million, and
o capitalized $3.7 million of expenditures related to WCS' permitting
efforts.
See Note 2 to the Condensed Consolidated Financial Statements.
DuringIn April 2006, we issued euro 400 million aggregate principal amount of our
6.5% Senior Secured Notes due 2013 ($498.5 million when issued), and used the
first quarterproceeds to redeem our euro 375 million aggregate principal amount of 8.875%
Senior Secured Notes in May 2006 (i) Kronos($470.5 million when redeemed). In addition, we
borrowed an aggregate of $18.3a net Cdn. $5.0 million ($4.5 million when borrowed) under Kronos'
Canadian revolving credit facility and $20.8 million under itsKronos' U.S. bank
credit facility, and an aggregateCompX repaid $1.5 million 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.
Valhiindebtedness. See Note 7
to the Condensed Consolidated Financial Statements.
We paid aggregate cash dividends on our Valhi common stock of $12.1$24.1 million
($.10 per share)share per quarter) in the first quartersix months of 2006.2006 to our
shareholders. Distributions to minority interest in the first quartersix months of 2006
are primarily comprised of Kronos cash dividends paid to shareholders other than
Valhi andus or NL, and CompX dividends paid to shareholders other than NL.
In addition, ValhiWe purchased approximately 275,000506,000 shares of itsour common stock in market
transactions for an aggregate$10.2 million during the first six months of $4.9 million,2006. We funded
these purchases with our available cash on hand. We and other cash flows from
financing activities relate primarily to proceeds from the issuancesome of NL and
Valhiour subsidiaries
issued a nominal amount of common stock issued upon the exercise of stock options.
Outstanding Debt Obligations
At March 31,June 30, 2006, unused credit available under existing credit facilities
approximated $272.7 million, whichconsolidated third-party indebtedness was comprised of:
CompX - $50.0o KII's euro 400 million under
its revolving credit facility; Kronos - $94.0aggregate principal amount 6.5% Senior Secured
Notes ($449.4 million under its European credit
facility, $15.0at June, 30, 2006, including the effect of the
unamortized original issue discount) due in 2013,
o Our $250 million under itsloan from Snake River Sugar Company due in 2027,
o Kronos' 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 containedfacility ($32.3 million
outstanding) due in certain2008,
o Kronos' Canadian bank credit facility ($4.5 million outstanding) due
in 2009, and
o $5.3 million of other indebtedness.
We and all of our subsidiaries are in compliance with all of our debt
covenants at June 30, 2006. See Note 7 to the Company'sCondensed Consolidated Financial
Statements. At June 30, 2006, only $1.4 million of our indebtedness is due
within the next twelve months, and therefore we do not currently expect we will
be required to use a significant amount of our available liquidity to repay
indebtedness during the next twelve months.
Certain of our credit agreements contain provisions which could result in
the acceleration of the applicable indebtedness prior to its stated maturity for reasons other
than defaults from failingfor failure to comply with typical
financialthe applicable covenants. For example,
certain credit agreements allow the lender to accelerate the maturity of the
indebtedness upon a change of control (as defined)defined in the agreement) of the
borrower. The terms of Valhi's revolving bank credit facility could require
Valhi to either reduce outstanding borrowings or pledge additional collateral in
the event the fair value of the existing pledged collateral falls below
specified levels. In addition, certain credit agreements could result in the
acceleration of all or a portion of the indebtedness following a sale of assets
outside the ordinary course of business.
See Note 9Future Cash Requirements
Liquidity -
Our primary source of liquidity on an on-going basis is our cash flows from
operating activities and borrowings under various lines of credit and notes. We
generally use these amounts 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(i) fund capital expenditures, (ii) repay
short-term indebtedness incurred primarily for working capital purposes 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(iii) provide for the TiO2 industry, Kronos expectspayment of dividends (including dividends paid to have sufficient liquidityus by
our subsidiaries) or treasury stock purchases. From time-to-time we will incur
indebtedness, generally to meet its future
obligations including operations,(i) fund short-term working capital needs, (ii)
refinance existing indebtedness, (iii) make investments in marketable and other
securities (including the acquisition of securities issued by our subsidiaries
and affiliates) or (iv) fund major capital expenditures debt serviceor the acquisition of
other assets outside the ordinary course of business. Occasionally we sell
assets outside the ordinary course of business, and current
dividend policy. Towe generally use 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 relatedproceeds 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,(i) repay existing indebtedness (including indebtedness which redemption
was fundedmay
have been collateralized 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 ofsold), (ii) make investments in
its operating
subsidiaries,marketable and its ability to service its parent level obligations, includingother securities, (iii) fund major capital expenditures or the
Senior Secured Notes, depends in large part uponacquisition of other assets outside the distributionordinary course of earnings of its subsidiaries, whether in the form of dividends, advancesbusiness 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(iv) pay
dividends.
We routinely compare our liquidity requirements and 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 andagainst the estimated future operating cash flows.flows we expect to receive from our
subsidiaries, and the estimated sales value of those units. As a result of this
process, Kronoswe have in the past has sought and may in the future seek to reduce,raise additional
capital, refinance repurchase or restructure indebtedness, raise additional capital,
repurchase sharesindebtedness in the
market or otherwise, modify our dividend policies, consider the sale of its common stock, modify its dividend policy, restructure
ownership interests, sellour
interests in our subsidiaries, affiliates, business units, marketable securities
or other assets, or take a combination of such steps orthese and other steps, to manage itsincrease
liquidity, reduce indebtedness and capital
resources. In the normal course of its business, Kronos may review opportunities
for the acquisition, divestiture, joint venture or other business combinationsfund future activities. Such activities have
in the chemicals or other industries, as well aspast and may in the acquisitionfuture involve related companies.
We periodically evaluate acquisitions of interests in or combinations with
companies (including related entities. Incompanies) perceived by management to be
undervalued in the event of anymarketplace. These companies may or may not be engaged in
businesses related to our current businesses. We intend to consider such
transaction, Kronosacquisition activities in the future and, in connection with this activity, may
consider using available cash, issuing additional equity securities orand increasing indebtedness. From
time to time, we also evaluate the restructuring of ownership interests among
our respective subsidiaries and related companies.
Based upon our expectations of our operating performance, and the
anticipated demands on our cash resources, we expect to have sufficient
liquidity to meet our short-term obligations (defined as the twelve-month period
ending June 30, 2007) and our long-term obligations (defined as the five-year
period ending December 31, 2010, our time period for long-term budgeting). If
actual developments differ from our expectations, our liquidity could be
adversely affected.
At June 30, 2006, we had credit available under existing facilities of
approximated $266.3 million, which was comprised of:
o $50.0 million under CompX's revolving credit facility,
o $118.0 million under Kronos' various U.S. and non-U.S. credit
facilities, and
o $98.3 million under Valhi's revolving bank credit facility.
At June 30, 2006, TIMET had $179.7 million of borrowing availability under
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 thevarious U.S. dollar. As a result, the reported
amountsand European credit agreements.
At June 30, 2006, we had an aggregate of Kronos' assets$217.8 million of restricted 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) hadunrestricted cash, cash equivalents and marketable debtsecurities. A detail by
entity is presented in the table below.
Amount
-------------
(In millions)
Valhi Parent $ 71.7
Kronos 65.4
NL Parent 43.4
CompX 22.8
Tremont 10.0
Waste Control Specialists 4.4
Other .1
------
Total cash, cash equivalents, and marketable securities $217.8
======
Capital Expenditures -
We intend to invest a total of $52.8approximately $67 million for capital
expenditures during 2006. Capital expenditures are primarily for improvements
and upgrades to existing facilities. We spent $19.2 million though June 30,
2006.
TIMET intends to invest a total of approximately $110 million to $120
million for capital expenditures during 2006, primarily for improvements and
upgrades to our existing Titanium Metals facilities, including restricted balancesexpansions of
$13.2 million.
Seesponge and melting capacity, and other additions of plant machinery and
equipment. In May 2005, we announced plans to expand TIMET's existing titanium
sponge facility in Nevada. This expansion, which we currently expect will be
completed by the end of 2006, 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 the Nevada facility. In April 2006,
we announced plans to expand TIMET's electron beam cold hearth melt capacity in
Pennsylvania. This expansion, which we currently expect will be completed by
early 2008, will have, depending on product mix, the capacity to produce an
additional 8,500 metric tons of melted products, an increase of approximately
54% over the current production capacity levels at the Pennsylvania facility.
Repurchases of our Common Stock -
We have in the past, and may in the future, make repurchases of our common
stock in market or privately-negotiated transactions. At June 30, 2006 we had
approximately 982,000 shares available for repurchase of our common stock under
the authorization described in Note 1110 to the Condensed Consolidated Financial
Statements forStatements.
Dividends -
Because our operations are conducted primarily through subsidiaries and
affiliates, our long-term ability to meet parent company level corporate
obligations is largely dependent on the receipt of dividends or other
distributions from our subsidiaries and affiliates. Based on the 29.0 million
shares of Kronos we held at June 30, 2006 and Kronos' current quarterly dividend
rate of $.25 per share, we would receive aggregate annual dividends from Kronos
of $29.0 million. NL's current quarterly cash dividend is $.125 per share,
although in the past NL has paid a dividend in the form of Kronos common stock.
If NL pays its regular quarterly dividends in cash, based on the 40.4 million
shares we held of NL common stock at June 30, 2006, we would receive aggregate
annual dividends from NL of $20.2 million. We do not expect to receive any
distributions from WCS or TIMET during 2006.
Our subsidiaries have various credit agreements which contain customary
limitations on the payment of dividends, typically a percentage of net income or
cash flow; however, these restrictions in the past have not significantly
impacted their ability to pay dividends.
Investment in our Subsidiaries and Affiliates and other Acquisitions -
We have in the past, and may in the future, purchase the securities of our
subsidiaries and affiliates or third-parties in market or privately-negotiated
transactions. We base our purchase decision on a variety of factors, including
an analysis of the optimal use of our capital, taking into account the market
value of the securities and the relative value of expected returns on
alternative investments. In connection with these activities, we may consider
issuing additional equity securities or increasing our indebtedness. We may also
evaluate the restructuring of ownership interests of our businesses among our
subsidiaries and related companies.
We generally do not guarantee any indebtedness or other obligations of our
subsidiaries or affiliates. Our subsidiaries are not required to pay us
dividends. If one or more of our subsidiaries were unable to maintain its
current level of dividends, either due to restrictions contained in a credit
agreement or to satisfy its liabilities or otherwise, our ability to service our
liabilities or to pay dividends on our common stock could be adversely impacted.
If this were to occur, we might consider reducing or eliminating our dividends
or selling interests in subsidiaries or other assets. If we were required to
liquidate assets to generate funds to satisfy our liabilities, we may be
required to sell at what we believe would be less than the actual value of such
assets.
WCS is required to provide certain income tax examinations currently underwayfinancial assurances to Texas
governmental agencies with respect to certain decommissioning obligations
related to its facility in West Texas. The financial assurances may be provided
by various means, including a parent company guarantee assuming the parent meets
specified financial tests. In March 2005, we agreed to guarantee certain of NL'sWCS'
specified decommissioning obligations. WCS currently estimates these obligations
at approximately $3.5 million. Such obligations would arise only upon a closure
of the facility and WCS' failure to perform such activities. We do not currently
expect we will have to perform under this guarantee for the foreseeable future.
WCS' primary source of liquidity currently consists of intercompany
borrowings from one of our wholly-owned subsidiaries under the terms of a
revolving credit facility that matures in March 2007. WCS borrowed a net $5.8
million from our subsidiary during the first six months of 2006. The outstanding
amount of this intercompany borrowing, which is eliminated in our Condensed
Consolidated Financial Statements, was $10.4 million at June 30, 2006 and $4.6
million at December 31, 2005. We expect that WCS will likely borrow additional
amounts during the remainder of 2006 from our subsidiary.
Investment in The Amalgamated Sugar Company LLC -
The terms of The Amalgamated Sugar Company LLC Company Agreement provide
for annual "base level" of cash dividend distributions (sometimes referred to as
distributable cash) by the LLC of $26.7 million, from which we are entitled to a
95% preferential share. Distributions from the LLC are dependent, in part, upon
the operations of the LLC. We record dividend distributions from the LLC as
income when they are declared by the LLC, which is generally the same month in
which we receive the distributions, although distributions may in certain cases
be paid on the first business day of the following month. To the extent the
LLC's distributable cash is below this base level in any given year, we are
entitled to an additional 95% preferential share of any future annual LLC
distributable cash in excess of the base level until such shortfall is
recovered. Based on the LLC's current projections for 2006, we expect
distributions received from the LLC in 2006 will exceed our debt service
requirements under our $250 million loans from Snake River Sugar Company.
We may, at our option, require the LLC to redeem our interest in the LLC
beginning in 2012, and the LLC has the right to redeem our interest in the LLC
beginning in 2027. The redemption price is generally $250 million plus the
amount of certain undistributed income allocable to us, if any. In the event we
require the LLC to redeem our interest in the LLC, Snake River has the right to
accelerate the maturity of and call our $250 million loans from Snake River.
Redemption of our interest in the LLC would result in us reporting income
related to the disposition of our LLC interest for income tax returns,purposes, although
we 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 our $250 million loans from Snake River upon redemption
of our interest in the LLC, the net cash proceeds (after repayment of the debt)
generated by the redemption of our interest in the LLC could be less than the
income taxes that we would be required to pay as a result of the disposition.
Off-balance Sheet Financing
We do not have any off-balance sheet financing agreements other than the
operating leases discussed in our 2005 Annual Report.
Commitments and see Note 13Contingencies
There have been no material changes in our contractual obligations since we
filed our 2005 Annual Report, and we refer you to the report for a complete
description of these commitments.
We are subject to certain commitments and contingencies, as more fully
described in Notes 12 and 15 to the Condensed Consolidated Financial Statements
and in Part II, Item 1 "Legal Proceedings" with respectof this report, including o certain income tax
examinations which are underway in various U.S. and non-U.S. jurisdictions, o
certain environmental remediation matters involving NL, Tremont, Valhi and
TIMET, and o certain other litigation to certain
legal proceedings and environmental matters with respect to NL.which we are a party.
In addition to those legal proceedings described in Note 1315 to the
Condensed Consolidated Financial Statements, various legislation and
administrative regulations have, from time to time, been proposed that seek to
(i) impose various obligations on present and former manufacturers of lead
pigment and lead-based paint (including NL) with respect to asserted health
concerns associated with the use of such products and (ii) effectively overturn
court decisions in which NL and other pigment manufacturers have been
successful. Examples of such proposed legislation include bills which would permit
civil liability for damages on the basis of market share, rather than requiring
plaintiffs to prove that the defendant's product caused the alleged damage, and
bills which would revive actions barred by the statute of limitations. While no
legislation or regulations have been enacted to date that are expected to have a
material adverse effect on 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.Recent Accounting Pronouncements
See Note 1316 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 andCritical Accounting Policies
There have been no changes in the aggregate, will not have a material adverse effect on
TIMET's consolidated financial position, liquidity or overall trends in resultssecond quarter 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 matters2006 with respect to
Tremont.
General corporate - Valhi
Because Valhi's operations are conducted primarily through its subsidiariesour critical accounting policies presented in Management's Discussion and
affiliates, Valhi's long-term ability to meet its parent company level
corporate obligations is dependentAnalysis of Financial Condition and Results of Operation 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 ofour 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.
Annual
Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Reference is madeWe are exposed to the 2005 Annual Report for a discussion of the market risks associated with changes inrisk, including foreign currency exchange rates,
interest rates and security prices that affect the Company.prices. For a discussion of such market risk items,
refer to Part I, Item 7A - "Quantitative and Qualitative Disclosure About Market
Risk" in our 2005 Annual Report. There have been no material changes in suchthese
market risks sinceduring the Company filedfirst six months of 2006.
We have substantial operations located outside the 2005 Annual Report.
CertainUnited States for which
the functional currency is not the U.S. dollar. As a result, our assets and
liabilities, results of the Kronos' sales generated by its non-U.S. operations are
denominatedand cash flows will fluctuate based upon
changes in U.S. dollars. Kronosforeign currency exchange rates.
We periodically usesuse currency forward contracts to manage a very nominal portion of
foreign currency exchange rate market risk associated with trade receivables, or
similar exchange rate risk associated with receivablesfuture sales, denominated in a
currency other than the holder's functional currency or similar exchange rate risk associated with future sales. Kronos hascurrency. These contracts generally
relate to our Chemicals and Component Products operations. We have not entered
into these contracts for trading or speculative purposes in the past, nor does Kronosdo we
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 foreignSome of the currency denominated financial assets and liabilities whichforward contracts we enter into
meet the criteria for hedge accounting under GAAP and are designated as cash
flow hedges. Consequently,For these currency forward contracts, gains and losses representing
the effective portion of gains and losses isour hedges are deferred as a component of accumulated
other comprehensive income, and isare subsequently recognized in earnings at the
time the hedged item affects earnings. Contracts thatFor the currency forward contracts we
enter into which do not meet the criteria for hedge accounting, are marked-to-marketwe
mark-to-market the estimated fair value of such contracts at each balance sheet
date, with any resulting gain or loss recognized in income currently as part of
net currency transactions.
To manage
such exchange rate risk, at March 31,At June 30, 2006, Kronoswe held a series of contracts, with expiration dates
ranging from AprilJuly 2006 to September 2006, to exchange an aggregate of U.S. $25.5$19.6
million for an equivalent amount of Canadian dollars at exchange rates ranging
from Cdn. $1.16$1.11 to Cdn. $1.17$1.16 per U.S. dollar. At March
31,June 30, 2006, the actual
exchange rate was Cdn. $1.17$1.12 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 31,30, 2006 is insignificant.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. The Company maintainsProcedures -
We maintain a system of disclosure controls and procedures. The term
"disclosure controls and procedures," as defined by regulations of the SEC,
means controls and other procedures that are designed to ensure that information
required to be disclosed in the reports that the Company fileswe file or submitssubmit 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 we are required to
be disclosed by the
Companydisclose in the reports that it fileswe file or submitssubmit to the SEC under the Act is
accumulated and communicated to the Company'sour management, including itsour principal
executive officer and itsour 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'sour President and Chief Executive
Officer, and Bobby D. O'Brien, the Company'sour Vice President and Chief Financial Officer,
have evaluated the design and operations effectiveness of the Company'sour disclosure
controls and procedures as of March
31,June 30, 2006. Based upon their evaluation, these
executive officers have concluded that the Company'sour disclosure controls and procedures
were effective as of March
31,June 30, 2006.
Internal Control Over Financial Reporting. The CompanyReporting -
We also maintainsmaintain internal control over financial reporting. The term
"internal control over financial reporting," as defined by SEC regulations, of the SEC,
means a process designed by, or under the supervision of, the Company'sour principal
executive and principal financial officers, or persons performing similar
functions, and effected by the Company'sour 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 Pertainpertain to the maintenance of records that in reasonable detail
accurately and fairly reflect theour transactions and dispositions of theour
assets,
of the Company,
o Provideprovide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, and that our receipts and expenditures of the Company are being made only in
accordance with authorizations of our management and directors, of the Company, and
o Provideprovide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company'sour assets that
could have a material effect on the Company'sour Condensed Consolidated Financial
Statements.
As permitted by the SEC, the Company'sour assessment of internal control over financial
reporting excludes (i) internal control over financial reporting of itsour equity
method investees and (ii) internal control over the preparation of the Company'sour 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'sour
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.Reporting -
There has been no change to the Company'sour internal control over financial reporting
during the quarter ended March 31,June 30, 2006 that has materially affected, or is
reasonably likely to materially affect, the Company'sour internal control over financial
reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is madeIn addition to the matters discussed below, refer to Note 1315 to the
Condensed Consolidated Financial Statements, and to theour 2005 Annual Report and our
Quarterly Report on Form 10-Q 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,quarter ended March 31, 2006.
Lewis, et al. v. Lead Industries Association, et al. (Circuit Court for
Baltimore City, Maryland,of Cook
County, Illinois, County Department, Chancery Division, Case No. 24-C-99-004490)00CH09800). In
MarchMay 2006, defendants' petition seeking review of the appellate court's ruling
was denied by the Illinois Supreme Court.
Jones v. NL Industries, Inc., et al. (Circuit Court of LeFlore County,
Mississippi, Civil Action No. 2002-0241-CICI). In May 2006, the court granted
defendants' summary judgment motion with respect to the failure to warn and
fraudulent concealment claims, but denied the rest of the motion. Trial began
before a Mississippi federal court jury in July 2006, and in August 2006 the
jury returned a verdict in favor of the defendants filed a conditional cross-appeal, asserting that there is no final judgmenton all counts.
Terry, et al. v. NL Industries, Inc., et al. (United States District Court,
Southern District of Mississippi, Case No. 4:04 CV 269 PB). Following plaintiffs
re-pleading the fraud claim, defendants answered the non-fraud counts of the
complaint and moved to be reviewed becausedismiss the fraud claim for lack of sufficiency; however,
the court has stayed the case pending trial court's severance was improper.in the Jones v. NL Industries, Inc.,
et al. (Circuit Court of LeFlore County, of Santa ClaraMississippi, Civil Action No.
2002-0241-CICI) case.
Evans v. Atlantic Richfield Company, etet. al. (Superior(Circuit Court, of the State of California, County of Santa Clara,Milwaukee,
Wisconsin, Case No. CV788657)05-CV-9281). In March
2006, defendants filed a petition for rehearing with the appellate court. In April 2006, the defendants filed a petition for review withcourt allowed plaintiff to
amend 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 thecomplaint to avoid defendants' motion to dismiss. Plaintiff amended
the complaint; however, in July 2006, defendants renewed their motion to dismiss
and set a trial date of
January 2007.the defective product claims.
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 AprilMay 2006, NLplaintiffs
moved to remand the case back to state court, and in June 2006, the U.S. EPA entered into an administrative ordercourt
remanded the case.
In July 2006, we began work 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. We anticipate that the
removal action will be completed in the fourth quarter of 2006.
Brown et. al. v. NL Industries, Inc. et. al. (Circuit Court Wayne County,
Michigan, Case No. 06-602096 CZ). In FebruaryApril 2006, defendants filed a motion to
dismiss the plaintiffs' claims for trespass and violations of certain Michigan
state laws.
In June 2006, we and several other PRPs received a Unilateral
Administrative Order from the U.S. EPA regarding a formerly owned mine and
smelting facility located in Park Hills, Missouri. The Doe Run Company is the
current owner of the site, and its predecessor purchased the site from us in
approximately 1948. Doe Run is also named in the Order. We intend to comply with
the Order and are negotiating with Doe Run an appropriate allocation of costs
for the remediation.
In June 2006, we were served with a complaint in Donnelly and Donnelly v.
NL removedIndustries, Inc. (State of New York Supreme Court, County of Rensselaer,
Cause No. 218149). The plaintiff, a man who claims to have worked near one of
our former sites in New York, and his wife allege that he suffered injuries
(which are not described in the casecomplaint) as a result of exposure to federal court.harmful
levels of toxic substances as a result of NL's conduct. Plaintiffs claim damages
for negligence, product liability and derivative losses on the part of the wife.
We believe that these claims are without merit and intend to deny all of the
allegations and to defend against all of the claims vigorously.
Item 1A. Risk Factors.
Reference is made to the 2005 Annual Report forFor a discussion of the risk factors related to the Company's businesses.our businesses, refer to
Part I, Item 1A, "Risk Factors," in our 2005 Annual report. There have been no
material changes into such risk factors sinceduring the Company filed the 2005 Annual Report.six months ended June 30, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds; Share
Repurchases.
In March 2005, the Company'sour board of directors authorized the repurchase of up to
5.0 million shares of Valhi'sour common stock in open market transactions, including
block purchases, or in privately negotiated transactions, which may include
transactions with affiliates of Valhi. Theour affiliates. We may repurchase our common 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, we may terminate the program could be terminated prior to its
completion. The CompanyWe will use its cash on hand to acquire the shares. Repurchased shares
will beare retired and cancelled or may be added to Valhi'sour treasury and used for employee
benefit plans, future acquisitions or other corporate purposes. See Note 1710 to
the Condensed Consolidated Financial Statements.
The following table discloses certain information regarding shares of Valhi
common stock we purchased by Valhi during the firstsecond 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.
Average Maximum number of Averageshares
price paid Total number of sharresshares that may yet Total price paid shares purchased be purchased
underTotal number of per share, purchased as part of a under the
publicly-of shares including publicly-announced announcedpublicly-announced plan at
Period purchased commissions plan end of period
------ --------- ----------- ------------------ ------------------
January---------------
April 1, 2006
to January 31,April 30,
2006 40,500 $18.33 40,500 1,447,200
February64,200 $18.86 64,200 1,148,800
May 1, 2006
to February 28,May 31, 2006 80,500 18.18 80,500 1,366,700
March84,800 24.33 84,800 1,064,000
June 1, 2006
to March 31,June 30, 2006 153,700 17.54 153,700 1,213,00082,200 24.29 82,200 981,800
------- -------
274,700 274,700231,200 231,200
======= =======
Item 4. Submission of Matters to a Vote of Security Holders.
Our 2005 Annual Meeting of Shareholders was held on May 25, 2006. Thomas E.
Barry, Normal S. Edelcup, W. Hayden McIlroy, Glenn R. Simmons, Harold C.
Simmons, J. Walter Tucker, Jr. and Steven L. Watson were elected as directors,
each receiving votes "For" their election from at least 97.7% of the 115.8
million common shares eligible to vote at the Annual Meeting.
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,August 7, 2006 By /s/ Bobby D. O'Brien
--------------------------------- ------------------------------
Bobby D. O'Brien
Vice President and Chief Financial
Officer
(Principal Financial Officer)
Date May 8,August 7, 2006 By /s/ Gregory M. Swalwell
------------------------------- ------------------------------
Gregory M. Swalwell
Vice President and Controller
(Principal Accounting Officer)