10-Q 1 vhi-10q_20140331.htm 10-Q

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 2014

Commission file number 1-5467

 

VALHI, INC.

(Exact name of Registrant as specified in its charter)

 

 

Delaware

 

87-0110150

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

 

 

5430 LBJ Freeway, Suite 1700, Dallas, Texas

 

75240-2697

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (972) 233-1700

 

Indicate by check mark:

Whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Act).

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

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 May 2, 2014: 339,120,449

 

 

 

 

 

 


 

VALHI, INC. AND SUBSIDIARIES

INDEX

 

 

 

 

 

 

 

Page number

 

 

 

 

 

 

 

 

Part I.

 

FINANCIAL INFORMATION

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 1.

  

Financial Statements

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Condensed Consolidated Balance Sheets – December 31, 2013 and March 31, 2014 (unaudited)

  

 

3

  

 

 

 

 

 

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Operations (unaudited) – Three  months ended March 31, 2013 and 2014

  

 

5

  

 

 

 

 

 

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) – Three  months ended March 31, 2013 and 2014

  

 

6

  

 

 

 

 

 

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Cash Flows (unaudited) – Three months ended March 31, 2013 and 2014

  

 

7

  

 

 

 

 

 

 

 

 

 

 

 

 

  

Condensed Consolidated Statement of Equity (unaudited) – Three months ended March 31, 2014

  

 

8

  

 

 

 

 

 

 

 

 

 

 

 

 

  

Notes to Condensed Consolidated Financial Statements (unaudited)

  

 

9

  

 

 

 

 

 

 

 

 

 

 

 

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

  

 

29

 

 

 

 

 

 

 

 

 

 

 

 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

 

45

 

 

 

 

 

 

 

 

 

 

 

 

Item 4.

  

Controls and Procedures

  

 

46

 

 

 

 

 

 

 

 

 

 

Part II.

 

OTHER INFORMATION

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 1.

  

Legal Proceedings

  

 

47

 

 

 

 

 

 

 

 

 

 

 

 

Item 1A.

  

Risk Factors

  

 

47

 

 

 

 

 

 

 

 

 

 

 

 

Item 6.

  

Exhibits

  

 

48

 

Items 2, 3, 4 and 5 of Part II are omitted because there is no information to report.

 

 

 

- 2 -


 

VALHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

 

 

December 31,
2013

 

 

March 31,
2014

 

 

 

 

 

(unaudited)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

142.8

 

 

$

256.2

 

Restricted cash equivalents

 

10.4

 

 

 

11.7

 

Marketable securities

 

3.8

 

 

 

4.1

 

Accounts and other receivables, net

 

303.3

 

 

 

348.8

 

Land held for development

 

14.3

 

 

 

17.7

 

Inventories, net

 

430.6

 

 

 

420.9

 

Other current assets

 

20.8

 

 

 

20.0

 

Deferred income taxes

 

23.0

 

 

 

15.9

 

Total current assets

 

949.0

 

 

 

1,095.3

 

 

Other assets:

 

 

 

 

 

 

 

Marketable securities

 

253.3

 

 

 

255.6

 

Investment in affiliates

 

102.3

 

 

 

97.8

 

Goodwill

 

379.7

 

 

 

379.7

 

Deferred income taxes

 

149.2

 

 

 

146.0

 

Other noncurrent assets

 

337.3

 

 

 

315.1

 

Total other assets

 

1,221.8

 

 

 

1,194.2

 

Property and equipment:

 

 

 

 

 

 

 

Land

 

51.5

 

 

 

53.9

 

Buildings

 

285.1

 

 

 

284.9

 

Equipment

 

1,194.8

 

 

 

1,215.0

 

Treatment, storage and disposal facility

 

158.9

 

 

 

158.9

 

Mining properties

 

66.5

 

 

 

61.4

 

Construction in progress

 

54.2

 

 

 

34.2

 

 

 

1,811.0

 

 

 

1,808.3

 

Less accumulated depreciation

 

1,014.6

 

 

 

1,015.6

 

 

Net property and equipment

 

796.4

 

 

 

792.7

 

 

Total assets

$

2,967.2

 

 

$

3,082.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- 3 -


 

VALHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In millions)

 

 

December 31,
2013

 

 

March 31,
2014

 

 

 

 

 

(unaudited)

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current maturities of long-term debt

$

10.7

 

 

$

11.8

 

Accounts payable and accrued liabilities

 

372.9

 

 

 

378.9

 

Income taxes

 

8.9

 

 

 

9.2

 

Deferred income taxes

 

2.2

 

 

 

2.2

 

Total current liabilities

 

394.7

 

 

 

402.1

 

 

Noncurrent liabilities:

 

 

 

 

 

 

 

Long-term debt

 

741.8

 

 

 

917.2

 

Deferred income taxes

 

431.1

 

 

 

409.2

 

Accrued pension costs

 

169.3

 

 

 

163.1

 

Accrued environmental remediation and related costs

 

113.6

 

 

 

113.0

 

Accrued postretirement benefits costs

 

13.7

 

 

 

13.2

 

Other liabilities

 

110.2

 

 

 

110.6

 

Total noncurrent liabilities

 

1,579.7

 

 

 

1,726.3

 

 

Equity:

 

 

 

 

 

 

 

Valhi stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock

 

667.3

 

 

 

667.3

 

Common stock

 

3.6

 

 

 

3.6

 

Additional paid-in capital

 

27.6

 

 

 

10.7

 

Accumulated deficit

 

(39.6

)

 

 

(38.8

)

Accumulated other comprehensive loss

 

(8.0

)

 

 

(9.6

)

Treasury stock

 

(49.6

)

 

 

(49.6

)

Total Valhi stockholders’ equity

 

601.3

 

 

 

583.6

 

 

 

 

 

 

 

 

 

Noncontrolling interest in subsidiaries

 

391.5

 

 

 

370.2

 

Total equity

 

992.8

 

 

 

953.8

 

Total liabilities and equity

$

2,967.2

 

 

$

3,082.2

 

Commitments and contingencies (Notes 13 and 16)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

- 4 -


 

VALHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

 

 

 

Three months ended
March 31,

 

 

 

2013

 

 

2014

 

 

 

(unaudited)

 

Revenues and other income:

 

 

 

 

 

 

 

 

Net sales

 

$

499.2

 

 

$

462.4

 

Other income, net

 

 

8.8

 

 

 

5.1

 

Total revenues and other income

 

 

508.0

 

 

 

467.5

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of sales

 

 

486.3

 

 

 

376.6

 

Selling, general and administrative

 

 

69.7

 

 

 

68.8

 

Loss on prepayment of debt

 

 

6.6

 

 

 

-

 

Interest

 

 

15.4

 

 

 

13.7

 

Total costs and expenses

 

 

578.0

 

 

 

459.1

 

 

Income (loss) before income taxes

 

 

(70.0

)

 

 

8.4

 

 

Income tax expense (benefit)

 

 

(21.8

)

 

 

3.8

 

Net income (loss)

 

 

(48.2

)

 

 

4.6

 

 

Noncontrolling interest in net income (loss) of subsidiaries

 

 

(8.4

)

 

 

3.8

 

Net income (loss) attributable to Valhi stockholders

 

$

(39.8

)

 

$

.8

 

 

Amounts attributable to Valhi stockholders:

 

 

 

 

 

 

 

 

Basic and diluted net income (loss) per share

 

$

(.12

)

 

$

-

 

 

Cash dividends per share

 

$

.05

 

 

$

.05

 

 

Basic and diluted weighted average shares outstanding

 

 

342.0

 

 

 

342.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

- 5 -


 

VALHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

 

 

 

Three months
ended March 31,

 

 

 

2013

 

 

2014

 

 

 

(unaudited)

 

Net income (loss)

 

$

(48.2

)

 

$

4.6

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Currency translation

 

 

(28.1

)

 

 

(2.7

)

Marketable securities

 

 

6.4

 

 

 

(17.1

)

Defined benefit pension plans

 

 

2.7

 

 

 

2.1

 

Other postretirement benefit plans

 

 

(.2

)

 

 

(.4

)

Total other comprehensive loss, net

 

 

(19.2

)

 

 

(18.1

)

Comprehensive loss

 

 

(67.4

)

 

 

(13.5

)

Comprehensive loss attributable to noncontrolling interest

 

 

(7.7

)

 

 

(12.7

)

Comprehensive loss attributable to Valhi stockholders

 

$

(59.7

)

 

$

(.8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

- 6 -


 

VALHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 

 

Three months ended
March 31,

 

 

2013

 

 

2014

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

$

(48.2

)  

 

$

4.6

 

Depreciation and amortization

 

18.6

  

 

 

19.5

 

Loss on prepayment of debt

 

6.6

  

 

 

 

Benefit plan expense greater (less) than cash funding requirements:

 

 

 

 

 

 

 

Defined benefit pension expense

 

1.3

 

 

 

(1.6

)

Other postretirement benefit expense

 

(.4

 

 

(.7

)

Deferred income taxes

 

(34.9

)  

 

 

(3.4

)

Distributions from Ti02 manufacturing joint venture, net

 

9.8

 

 

 

4.5

 

Other, net

 

2.8

  

 

 

1.6

 

Change in assets and liabilities:

 

 

 

 

 

 

 

Accounts and other receivables, net

 

(89.4

 

 

(61.6

)

Land held for development, net

 

 

 

 

(1.8

)

Inventories, net

 

92.4

 

 

 

6.6

 

Accounts payable and accrued liabilities

 

29.2

  

 

 

11.4

 

Accounts with affiliates

 

(45.4

)  

 

 

11.8

 

Income taxes

 

16.4

 

 

 

1.1

 

Other, net

 

6.9

  

 

 

2.2

 

Net cash used in operating activities

 

(34.3

)

 

 

(5.8

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

(20.2

 

 

(19.9

)

Capitalized permit costs

 

(.2

 

 

(.2

)

Purchases of marketable securities

 

(3.8

 

 

(4.2

)

Proceeds from:

 

 

 

 

 

 

 

Disposal of marketable securities

 

4.0

  

 

 

1.7

 

Disposal of assets held for sale

 

1.6

  

 

 

 

Collection of note receivable

 

1.8

  

 

 

 

Change in restricted cash equivalents, net

 

.8

 

 

 

(2.1

)

Other, net

 

(.3

)  

 

 

(.3

)

Net cash used in investing activities

 

(16.3

 

 

(25.0

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Indebtedness:

 

 

 

 

 

 

 

Borrowings

 

214.8

 

 

 

457.6

 

Principal payments

 

(327.9

)

 

 

(281.8

)

Deferred financing costs paid

 

 

 

 

(6.0

)

Valhi cash dividends paid

 

(17.0

)

 

 

(17.0

)

Distributions to noncontrolling interest in subsidiaries

 

(4.7

)

 

 

(8.5

)

Other, net

 

.2

 

 

 

 

Net cash provided by (used in) financing activities

 

(134.6

)

 

 

144.3

 

Cash and cash equivalents – net change from:

 

 

 

 

 

 

 

Operating, investing and financing activities

 

(185.2

)

 

 

113.5

 

Effect of exchange rate on cash

 

(2.0

)

 

 

(.1

)

Cash and cash equivalents at beginning of period

 

366.9

 

 

 

142.8

 

Cash and cash equivalents at end of period

$

179.7

 

 

$

256.2

 

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid (received) for:

 

 

 

 

 

 

 

Interest, net of capitalized interest

$

14.9

 

 

$

12.7

 

Income taxes, net

 

(1.6

)

 

 

5.7

 

Noncash investing activities:

 

 

 

 

 

 

 

Accrual for capital expenditures

 

4.4

 

 

 

4.5

 

Accrual for land development costs

 

 

 

 

2.3

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

- 7 -


 

VALHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

Three months ended March 31, 2014

(In millions)

(unaudited)

 

 

Valhi Stockholders’ Equity

 

 

 

 

 

 

 

 

Preferred
stock

 

  

Common
stock

 

  

Additional
paid-in
capital

 

  

Accumulated
deficit

 

 

Accumulated
other
comprehensive
loss

 

 

Treasury
stock

 

 

Non-
controlling
interest

 

 

Total
equity

 

Balance at December 31, 2013

$

667.3

  

  

$

3.6

  

  

$

27.6

  

  

$

(39.6

)  

 

$

(8.0

 

$

(49.6

 

$

391.5

  

 

$

992.8

  

Net income

 

  

  

 

  

  

 

  

  

 

.8

 

 

 

  

 

 

  

 

 

3.8

 

 

 

4.6

 

Other comprehensive loss, net

 

  

  

 

  

  

 

  

  

 

  

 

 

(1.6

 

 

  

 

 

(16.5

)  

 

 

(18.1

Cash dividends

 

  

  

 

  

  

 

(17.0

)

  

 

 

 

 

  

 

 

  

 

 

(8.5

)

 

 

(25.5

)

Other, net

 

  

  

 

  

  

 

.1

 

  

 

 

 

 

  

 

 

  

 

 

(.1

)

 

 

 

Balance at March 31, 2014

$

667.3

  

  

$

3.6

  

  

$

10.7

  

  

$

(38.8

)

 

$

(9.6

)

 

$

(49.6

)

 

$

370.2

  

 

$

953.8

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

- 8 -


 

VALHI, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2014

(unaudited)

 

Note 1—Organization and basis of presentation:

Organization We are majority owned by a wholly-owned subsidiary of Contran Corporation (“Contran”), which owns approximately 94% of our outstanding common stock at March 31, 2014. Substantially all of Contran’s outstanding voting stock is held by family trusts established for the benefit of Lisa K. Simmons and Serena Simmons Connelly, daughters of Harold C. Simmons, and their children (for which Ms. Lisa Simmons and Ms. Connelly are co-trustees) or is held directly by Ms. Lisa Simmons and Ms. Connelly or persons or entities related to them, including their step-mother Annette C. Simmons, the widow of Mr. Simmons.  Prior to his death in December 2013, Mr. Simmons served as sole trustee of the family trusts.  Under a voting agreement entered into by all of the voting stockholders of Contran, effective in February 2014 and as amended, the size of the board of directors of Contran was fixed at five members, Ms. Lisa Simmons, Ms. Connelly and Ms. Annette Simmons (and in the event of their death, their heirs) each has the right to designate one of the five members of the Contran board and the remaining two members of the Contran board must consist of members of Contran management.  Ms. Lisa Simmons, Ms. Connelly, and Ms. Annette Simmons each serve as members of the Contran board.  The voting agreement expires in February 2017 (unless Ms. Lisa Simmons, Ms. Connelly and Ms. Annette Simmons otherwise mutually agree), and the ability of Ms. Lisa Simmons, Ms. Connelly, and Ms. Annette Simmons to each designate one member of the Contran board is dependent upon each of their continued beneficial ownership of at least 5% of the combined voting stock of Contran.  Consequently, Ms. Lisa Simmons, Ms. Connelly and Ms. Annette Simmons may be deemed to control Contran and us.

Basis of Presentation—Consolidated in this Quarterly Report are the results of our majority-owned and wholly-owned subsidiaries, including NL Industries, Inc., Kronos Worldwide, Inc., CompX International Inc., Waste Control Specialists LLC (“WCS”), Tremont LLC, Basic Management, Inc. (“BMI”) and The LandWell Company (“LandWell”).  Kronos (NYSE: KRO), NL (NYSE: NL), and CompX (NYSE MKT: CIX) 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, 2013 that we filed with the SEC on March 17, 2014 (the “2013 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, 2013 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, 2013) 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 period ended March 31, 2014 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 2013 Consolidated Financial Statements contained in our 2013 Annual Report.

In May 2014, after considering our results of operations, financial conditions, cash requirements for our businesses and our current expectations regarding reduced aggregate dividend distributions to be received from our subsidiaries; our Board of Directors reduced our regular quarterly dividend to $.02 per share effective with the second quarter 2014 dividend payment.  The declaration and payment of future dividends, and the amount thereof, is discretionary and is dependent upon these and other factors deemed relevant by our Board of Directors.

Unless otherwise indicated, references in this report to “we,” “us” or “our” refer to Valhi, Inc and its subsidiaries (NYSE: VHI), taken as a whole.

 

Note 2—Business segment information:

 

Business segment

  

Entity

  

% controlled at
March 31, 2014

 

Chemicals

  

Kronos

  

 80

Component products

  

CompX

  

 87

Waste management

  

WCS

  

 100

Real estate management and development

 

BMI and LandWell

 

63% - 77

%

- 9 -


 

Our control of Kronos includes 50% we hold directly and 30% held directly by NL. We own 83% of NL. Our control of CompX is through NL. Our control of LandWell includes the 27% we hold directly and 50% held by BMI.  

 

 

Three months ended
March 31,

 

 

2013

 

 

2014

 

 

(unaudited)

 

Net sales:

 

 

 

 

 

 

 

Chemicals

$

463.6

 

 

$

420.1

 

Component products

 

21.5

 

 

 

25.8

 

Waste management

 

14.1

 

 

 

7.0

 

Real estate management and development

 

 

 

 

9.5

 

Total net sales

$

499.2

 

 

$

462.4

 

Cost of sales:

 

 

 

 

 

 

 

Chemicals

$

460.3

 

 

$

340.2

 

Component products

 

15.5

 

 

 

18.0

 

Waste management

 

10.5

 

 

 

10.7

 

Real estate management and development

 

 

 

 

7.7

 

Total cost of sales

$

486.3

 

 

$

376.6

 

Gross margin:

 

 

 

 

 

 

 

Chemicals

$

3.3

 

 

$

79.9

 

Component products

 

6.0

 

 

 

7.8

 

Waste management

 

3.6

 

 

 

(3.7

)

Real estate management and development

 

 

 

 

1.8

 

Total gross margin

$

12.9

 

 

$

85.8

 

Operating income (loss):

 

 

 

 

 

 

 

Chemicals

$

(45.1

)

 

$

27.6

 

Component products

 

1.5

 

 

 

3.3

 

Waste management

 

(1.6

)

 

 

(8.5

)

Real estate management and development

 

 

 

 

.4

 

Total operating income (loss)

 

(45.2

)

 

 

22.8

 

Equity in earnings of investees

 

(.3

)

 

 

 

General corporate items:

 

 

 

 

 

 

 

Securities earnings

 

6.6

 

 

 

6.8

 

Insurance recoveries

 

.6

 

 

 

.8

 

Loss on prepayment of debt

 

(6.6

)

 

 

 

General expenses, net

 

(9.7

)

 

 

(8.3

)

Interest expense

 

(15.4

)

 

 

(13.7

)

Income (loss) before income taxes

$

(70.0

)

 

$

8.4

 

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.  Our Real Estate Management and Development Segment consists of BMI and LandWell.  We acquired a controlling interest in BMI and LandWell in December 2013, see Note 3.  We commenced consolidating the results of operations and cash flows of BMI and LandWell beginning January 1, 2014.

 

Note 3—Business combinations:

Basic Management, Inc. and The LandWell Company

Prior to December 2013, we owned a 32% interest in BMI, which among other things provides utility services to an industrial park located in Henderson, Nevada, and is responsible for the delivery of water to the city of Henderson and various other users through a water distribution system owned by BMI. We also had a 12% interest in LandWell, which is actively engaged in efforts to develop certain real estate in Henderson, Nevada. BMI owns an additional 50% interest in LandWell. We accounted for our 32% interest in BMI and LandWell by the equity method of accounting.  See Note 7 to our 2013 Annual Report.  Three other entities owned the remaining ownership interest in BMI (a 32% interest, a 31% interest and a 5% interest) and LandWell (a 21% interest, a 15% interest and a 2% interest).  Provisions in the governing documents of BMI and LandWell give BMI and LandWell and their owners a right of first refusal upon any proposed transfer of an ownership interest in BMI and LandWell.

- 10 -


 

Prior to November 2010, the 31% ownership interest in BMI and the 15% ownership interest in LandWell indicated above were held by Tronox Incorporated, which among other things conducted operations at the Henderson industrial complex.  Tronox filed for bankruptcy protection in January 2009.  As part of Tronox’s plan of reorganization, in November 2010 such BMI and LandWell interests were transferred to the Nevada Environmental Response Trust (“NERT”), with the consent of BMI and LandWell and its owners (including us), and the parties agreed to negotiate to establish the price at which such BMI and LandWell interests would be transferred to BMI and LandWell or their owners. Such negotiations continued until February 2012, when the parties reached agreement as to the basic monetary terms of such transfer. Further negotiations over all of the terms and conditions of a definitive agreement continued until December 2013, when the parties reached agreement as to all terms and conditions, including the fact that we would acquire the BMI and LandWell interests formerly owned by Tronox, with the consent of BMI and LandWell and their other owners (who elected not to exercise their right-of-first-refusal rights).  

As a result, in December 2013 we completed the acquisition of the 31% ownership interest in BMI and the 15% ownership interest in LandWell held by NERT.  We completed this acquisition because it allowed us to obtain control of BMI and LandWell (with the consent of BMI and LandWell and their other owners), which increased our direct ownership interest of BMI to 63% and our direct ownership of LandWell to 27%, which also resulted in our control of 77% of LandWell (given BMI’s 50% ownership interest in LandWell, our controlling ownership of BMI and our 27% direct ownership of LandWell). The other owners did not exercise their first refusal or participation rights and accordingly did not participate in the acquisition of the additional interest of the BMI and LandWell interests.   As part of this transaction with NERT, we also acquired one parcel of real property located in Henderson, and acquired an option to purchase four additional parcels of real property located in Henderson, at our option, without the payment of additional consideration to NERT.  These five additional parcels, which NERT had also acquired as part of Tronox’s plan of reorganization, are not part of the land currently being developed by LandWell but are located in or are adjacent to the industrial park.  The aggregate fair value of the total consideration we gave for the acquisition of BMI and LandWell interest, the parcel of real property acquired and the option to acquire the four other parcels was $32.6 million consisting of $5.3 million in cash, a $19.1 million promissory note secured by the real property acquired, and a $11.1 million deferred payment obligation (which was discounted to present value of $8.2 million, as discussed below).  The acquisition of the BMI and LandWell interests, the parcel of real property and the option for the four additional parcels is accounted for as a business combination under GAAP.  The application of the purchase method of accounting for business combinations requires us to use significant estimates and assumptions in the determination of the estimated fair value of assets acquired and liabilities assumed; it also requires us to remeasure our existing ownership interest in BMI and LandWell to their estimated fair value. Our estimates of the fair values of assets acquired and liabilities assumed are based upon assumptions we believe are reasonable, and when appropriate, includes assistance from independent third-party valuation firms.

The $19.1 million promissory note bears interest at 3% per annum, with interest payable annually and all principal due in December 2023.  The promissory note is collateralized by the BMI and LandWell interests acquired as well as the real property acquired as part of the transaction.  The note may be prepaid at any time, without penalty.  We must make mandatory prepayments on the note in specified amounts whenever we receive distributions from BMI or LandWell, or in the event we sell any of the real property acquired.  The acquisition date estimated fair value of this promissory note is equal to its $19.1 million face amount.

The $11.1 million deferred payment obligation bears interest at 3% per annum, commencing in December 2023, and is collateralized by the BMI and LandWell interests acquired.  The deferred payment obligation has no specified maturity date.  We are required to make repayments on the deferred payment obligation, in specified amounts, whenever we receive distributions from BMI and LandWell, and we may make voluntary repayments on the deferred payment obligation at any time, in each case without any penalty, but in any case only after the promissory note discussed above has been repaid in full.  For financial reporting purposes, the acquisition date estimated fair value of the deferred payment obligation is approximately $8.2 million, which was determined by discounting the $11.1 million face amount to its present value using a 3% discount rate from December 2023 (when it becomes interest bearing at 3%).

Upon gaining ownership of the BMI and LandWell interests formerly held by Tronox in 2010, NERT concluded that it would not be appropriate to take part in any corporate activities of BMI and LandWell, due to (i) the inherent conflict of interest associated with the fact that NERT was responsible to the Nevada Department of Environmental Protection with respect to the remediation of property NERT had acquired as a result of the Tronox plan of reorganization (including the five parcels of real property discussed above as well as other real property formerly owned by Tronox in Nevada), (ii) BMI and LandWell were involved in certain environmental remediation activities associated with the real property owned by LandWell which was under development, and (iii) NERT was also charged with maximizing the value of its assets, including the interests in BMI and LandWell as well as the real property it held directly.  Accordingly, NERT never appointed any representatives to the board of directors of BMI, representatives of NERT never attended any BMI and LandWell board meetings, and at NERT’s request NERT was not provided any financial statements or other information regarding BMI and LandWell and their respective activities.  In addition NERT (which received some cash and other assets at its formation as part of the Tronox plan of reorganization and also received the BMI/LandWell interests as well as the real property formerly owned by Tronox) knew it would need to raise funds in order to continue the environmental remediation obligation it assumed as part of its formation because the cash it received at its formation was substantially less than the amount it would need in order to continue such remediation. We believe that due to these conflicts and its desire to raise cash, NERT

- 11 -


 

determined it needed to divest itself of the BMI and LandWell interests as soon as was practicable.  And given the provisions of the governing documents of BMI and LandWell that gave BMI and LandWell and their other owners a right-of-first-refusal, there were a limited number of potential buyers for the BMI and LandWell interests held by NERT.

In January 2014, we engaged an independent third-party valuation firm to assist us with the overall fair value determination for a portion of the assets acquired for financial reporting purposes in accordance with Accounting Standards Codification (“ASC”) 805.  The third-party valuation firm assisted us in the valuation of the land held for development we acquired, substantially all of the property, plant and equipment acquired and a portion of the other noncurrent assets acquired. The land held for development we acquired consisted of approximately 2,100 acres zoned for residential/planned community purposes and approximately 400 acres zoned for commercial and light industrial use.  In estimating the value of the land held for development we acquired, the valuation firm used a sales comparison (or market) approach, in which the value of each parcel acquired was estimated by comparing it to similar properties that had recently been sold or were currently being marketed for sale,  The firm consulted local brokers, appraisers and databases for recent sales of comparable property within the Henderson, Nevada area.  The available market data was then investigated, analyzed and compared to each parcel.  The material factors considered by the valuation firm when investigating, analyzing and comparing the recent sales include characteristics of such other sales (e.g., type of property rights conveyed, non-market oriented financing (if any), any atypical conditions of the sale) and the physical characteristics of the property underlying such sales (e.g., location, topography, configuration, exposure/frontage, condition, zoning).  As applicable, the valuation firm made appropriate adjustments to such factors for any dissimilar characteristics between such other sales and LandWell’s land held for development.  In addition, we (as well as management of BMI and LandWell) reviewed the fair value amounts we received from such valuation firm to determine that such fair values were reasonable and consistent with our knowledge and experience with the local market, including the consideration of certain acreage in the residential/ planned community that was under contract with homebuilders in December 2013 or in the final stages of negotiation with homebuilders in December 2013 and subsequently became under contract in early 2014.  

For financial reporting purposes, the assets acquired and liabilities assumed of BMI and LandWell have been included in our Condensed Consolidated Balance Sheet as of December 31, 2013, and the results of the operations and cash flows of BMI and LandWell are included in our Condensed Consolidated Statements of Operations and Cash Flows beginning January 1, 2014.  Our costs associated with the acquisition are not material.

We remeasured our existing ownership interests in BMI and LandWell to their estimated fair value at the acquisition date in accordance with ASC 805-10-25, for a business combination which occurs in stages (because we previously had an ownership interest in BMI and LandWell).    As a result of such remeasurement, we recognized a pre-tax gain of $26.6 million in December 2013, representing the difference between the $43.4 million estimated fair value of our existing ownership interests in BMI and LandWell at the acquisition date and their aggregate $16.8 million carrying value at the acquisition date.  

Under ASC 805-30-25, a “bargain purchase” occurs when the acquisition-date amounts for the identifiable net assets acquired (measured as required by applicable GAAP) exceeds the sum of (i) the fair value of the consideration transferred to gain control of the acquiree, (ii) the fair value of any previously-held ownership interests in the acquiree and (iii) the fair value of any noncontrolling interest in the acquiree that exits at the acquisition date.  If a bargain purchase is initially identified, the acquirer is to reassess whether all of the assets acquired and liabilities assumed have been appropriately identified, recognized and measured, and whether the fair value of the consideration transferred, previously-held ownership interests and noncontrolling interests that exist at the acquisition date have been appropriately measured.  If after this reassessment, a bargain purchase is still indicated, it is recognized as a gain in earnings.  After performing such reassessment with respect to this acquisition, we determined a bargain purchase exists.  We believe this acquisition gave rise to a bargain purchase because of NERT’s decision to sell the BMI and LandWell interests it acquired as part of the Tronox plan of reorganization (for the reasons discussed above), the right-of-first-refusal rights granted to BMI and LandWell and their owners under the governing documents of BMI and LandWell and the time (22 months) it took to reach agreement on the terms and conditions of a definitive agreement after reaching agreement on the basic monetary terms.    In addition following the 2008 economic downturn, LandWell’s sales were substantially reduced as compared to prior years and LandWell did not recognize any material land sales in the 2008 to 2013 time period.  As a result, we recognized a pre-tax bargain purchase gain of $28.0 million in December 2013.

  The following table summarizes the aggregate fair value of the consideration we paid to gain control of BMI and LandWell, the one parcel of real property acquired and the option to acquire the remaining four parcels of real property (which collectively are estimated to have a fair value of $14.9 million),  and our current estimates for the fair value of our existing ownership interests in BMI and LandWell, the gain on bargain purchase recognized (which along with the gain on remeasurement of our existing investment in BMI and LandWell, aggregated $54.6 million and was recognized in the fourth quarter of 2013), the amounts assigned to the identifiable assets acquired and liabilities assumed at the acquisition date and the fair value of the noncontrolling interest in BMI and LandWell that exists as the acquisition date.  The purchase price allocation for BMI and LandWell indicated below is preliminary, and is based in part upon a preliminary fair value appraisal issued by the independent valuation firm.  Such purchase price allocation is subject to further refinement as management’s estimates of the valuation of certain assets acquired and liabilities assumed, including but not limited to the land held for development, certain property, plant and equipment, is not yet completed pending issuance by the

- 12 -


 

independent valuation firm of its final fair value appraisal.  Accordingly, the amounts we ultimately assign to the assets acquired and liabilities assumed and the noncontrolling interest in BMI and LandWell at the acquisition date may change, and the amount of the gain we recognized from remeasurement of our existing ownership interest in BMI and LandWell, and the bargain purchase gain we recognized, may similarly change once our preliminary purchase allocation is finalized.  Any such change in the amount of the gain from remeasurement and the bargain purchase gain recognized would be accounted for retrospectively, in accordance with ASC 805-10-25.  Our final purchase price allocation will be based upon the final fair value appraisal of the assets acquired and liabilities assumed of BMI and LandWell, including the fair value of the noncontrolling interest in BMI and LandWell at the acquisition date, using the fair value measurement principles of ASC 820.  Such independent appraisal is considered a Level 3 input under ASC 820.

Based on our preliminary analysis of the provisional amounts of the transaction at December 31, 2013 we recognized the following:  

 

 

    Amount    

 

(In millions)

Consideration:

 

 

 

Cash

$

5.3

  

Promissory note payable

 

19.1

  

Deferred payment, obligation ($11.1 million face value)

 

8.2

  

Total fair value of consideration

 

32.6

  

Fair value of existing equity interest in BMI and LandWell

 

43.4

 

Bargain purchase gain recognized

 

28.0

  

Preliminary total

$

104.0

  

Preliminary allocation of purchase price to identifiable assets acquired and liabilities assumed:

 

 

 

Cash

$

 27.4

 

Land held for development:

 

 

 

Current

 

14.3

 

Noncurrent

 

158.1

 

Other current assets

 

9.4

 

Property, plant and equipment

 

29.0

 

Other noncurrent assets

 

8.5

 

Long-term debt

 

(14.3

)

Other liabilities

 

(66.9

Total net identifiable assets

 

165.5

 

Noncontrolling interest in BMI and LandWell

 

(61.5

)

Preliminary total

$

104.0

 

 

The pro forma effect on our Condensed Consolidated Statement of Operations for the three months ended March 31, 2013, assuming the acquisition of BMI and LandWell had occurred at the beginning of such period, is not material.

 

Note 4—Marketable securities:

 

 

Market
value

 

 

Cost
basis

 

 

Unrealized
gains, net

 

 

(In millions)

 

December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

Current assets

$

3.8

 

 

$

3.8

 

 

$

—  

 

Noncurrent assets:

 

 

 

 

 

 

 

 

 

 

 

The Amalgamated Sugar Company LLC

$

250.0

 

 

$

250.0

 

 

$

—  

 

Other

 

3.3

 

 

 

3.3

 

 

 

—  

 

Total

$

253.3

 

 

$

253.3

 

 

$

—  

 

March 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

Current assets

$

4.1

 

 

$

4.1

 

 

$

 

Noncurrent assets:

 

 

 

 

 

 

 

 

 

 

 

The Amalgamated Sugar Company LLC

$

250.0

 

 

$

250.0

 

 

$

 

Other

 

5.6

 

 

 

5.6

 

 

 

 

Total

$

255.6

 

 

$

255.6

 

 

$

 

- 13 -


 

All of our marketable securities are accounted for as available-for-sale, which are carried at fair value, with any unrealized gains or losses recognized through accumulated other comprehensive income. Our marketable securities are carried at fair value using quoted market prices, primarily Level 1 inputs as defined by ASC Topic 820, Fair Value Measurements and Disclosures, except for our investment in The Amalgamated Sugar Company LLC (“Amalgamated”). Our current marketable securities are included with “other current assets” on our Condensed Consolidated Balance Sheets. Our investment in Amalgamated is measured using significant unobservable inputs, which are Level 3 inputs. Please refer to Note 4 in our 2013 Annual Report for a complete description of the valuation methodology for our investment in Amalgamated. There have been no changes to the carrying value of this investment during the periods presented. See Note 17.

 

Note 5—Accounts and other receivables, net:

 

 

December 31,
2013

 

 

March 31,
2014

 

 

(In millions)

 

Trade accounts receivable:

 

 

 

 

 

 

 

Kronos

$

226.1

 

 

$

286.8

 

CompX

 

8.7

 

 

 

12.9

 

WCS

 

7.2

 

 

 

5.5

 

BMI and LandWell

 

 

 

 

1.4

 

VAT and other receivables

 

32.7

 

 

 

29.3

 

Refundable income taxes

 

15.2

 

 

 

13.6

 

Receivable from affiliates:  

 

 

 

 

 

 

 

    LPC – trade items

 

14.2

 

 

 

 

   Other

 

.5

 

 

 

.6

 

Allowance for doubtful accounts

 

(1.3

)

 

 

(1.3

)

Total

$

303.3

 

 

$

348.8

 

 

Note 6—Inventories, net:

 

 

December 31,
2013

 

 

March 31,
2014

 

 

(In millions)

 

Raw materials:

 

 

 

 

 

 

 

Chemicals

$

66.6

 

 

$

67.6

 

Component products

 

3.6

 

 

 

2.8

 

Total raw materials

 

70.2

 

 

 

70.4

 

Work in process:

 

 

 

 

 

 

 

Chemicals

 

18.0

 

 

 

21.9

 

Component products

 

6.7

 

 

 

9.6

 

Total in-process products

 

24.7

 

 

 

31.5

 

Finished products:

 

 

 

 

 

 

 

Chemicals

 

263.3

 

 

 

247.3

 

Component products

 

3.0

 

 

 

2.7

 

Total finished products

 

266.3

 

 

 

250.0

 

Supplies (Chemicals)

 

69.4

 

 

 

69.0

 

Total

$

430.6

 

 

$

420.9

 

 

- 14 -


 

Note 7—Investment in affiliates and other assets:

 

 

December 31,
2013

 

 

March 31,
2014

 

 

(In millions)

 

Investment in affiliates:

 

 

 

 

 

 

 

TiO2 manufacturing joint venture, Louisiana Pigment Company, L.P. (“LPC”)

$

102.3

 

 

$

97.8

 

Other assets:

 

 

 

 

 

 

 

Land held for development

$

158.1

 

 

$

156.5

 

Waste disposal site operating permits, net

 

59.5

 

 

 

58.0

 

Restricted cash

 

33.3

 

 

 

33.3

 

Deferred financing costs

 

2.6

 

 

 

8.4

 

IBNR receivables

 

6.9

 

 

 

7.0

 

Capital lease deposit

 

6.2

 

 

 

6.2

 

Intangible assets

 

5.2

 

 

 

5.1

 

Pension asset

 

.6

 

 

 

.6

 

Other

 

64.9

 

 

 

40.0

 

Total

$

337.3

 

 

$

315.1

 

    The land held for development relates to BMI and LandWell and is discussed in Note 3.  Such land held for development includes the one parcel of real property we directly acquired and the option to directly acquire four other parcels of real property, as discussed in Note 3. Revenue from sales of land held for development is recognized in accordance with the criteria set forth in ASC Topic 976.

A portion of our restricted cash relates to our Waste Management Segment, as discussed in Notes 7 and 17 to our 2013 Annual Report.  In April 2014, $18.0 million of such restricted cash was released to WCS, see Note 16.

 

Note 8—Accounts payable and accrued liabilities:

 

 

December 31,
2013

 

 

March 31,
2014

 

 

(In millions)

 

Accounts payable

$

133.2

 

 

$

165.1

 

Payable to affiliates:

 

 

 

 

 

 

 

Contran – income taxes, net

 

4.3

 

 

 

4.0

 

Contran – trade items

 

26.1

 

 

 

26.2

 

LPC – trade items

 

21.1

 

 

 

17.1

 

Deferred income

 

36.9

 

 

 

43.0

 

Employee benefits

 

36.1

 

 

 

32.5

 

Accrued litigation settlement

 

35.0

 

 

 

15.0

 

Accrued sales discounts and rebates

 

16.7

 

 

 

14.4

 

Environmental remediation and related costs

 

9.1

 

 

 

9.2

 

Reserve for uncertain tax positions

 

3.1

 

 

 

3.1

 

Other

 

51.3

 

 

 

49.3

 

Total

$

372.9

 

 

$

378.9

 

The accrued litigation settlement relates to Kronos, please see Note 17 of our 2013 Annual Report.

 

- 15 -


 

Note 9—Other noncurrent liabilities:

 

 

December 31,
2013

 

 

March 31,
2014

 

 

(In millions)

 

Reserve for uncertain tax positions

$

49.8

 

 

$

49.8

 

Asset retirement obligations

 

25.6

 

 

 

26.1

 

Employee benefits

 

12.2

 

 

 

12.2

 

Insurance claims and expenses

 

9.5

 

 

 

9.6

 

Deferred payment obligation

 

8.2

 

 

 

8.3

 

Deferred income

 

1.3

 

 

 

1.1

 

Other

 

3.6

 

 

 

3.5

 

Total

$

110.2

 

 

$

110.6

 

 

Note 10—Long-term debt:

 

 

December 31,
2013

 

 

March 31,
2014

 

 

(In millions)

 

Valhi:

 

 

 

 

 

 

 

Snake River Sugar Company

$

250.0

 

 

$

250.0

 

Contran credit facility

 

206.5

 

 

 

217.7

 

Total Valhi debt

 

456.5

 

 

 

467.7

 

Subsidiary debt:

 

 

 

 

 

 

 

Kronos:

 

 

 

 

 

 

 

Term loan

 

—   

 

 

 

348.3 

 

Note payable to Contran

 

170.0 

 

 

 

 

Revolving North American credit facility

 

11.1 

 

 

 

 

WCS:

 

 

 

 

 

 

 

Financing capital lease

 

68.6

 

 

 

68.2

 

6% promissory notes

 

2.4

 

 

 

2.4

 

Tremont:

 

 

 

 

 

 

 

Promissory note payable

 

19.1

 

 

 

17.4

 

BMI:

 

 

 

 

 

 

 

Bank note payable

 

11.2

 

 

 

10.9

 

LandWell:

 

 

 

 

 

 

 

Note payable to the City of Henderson

 

3.1

 

 

 

3.1

 

Other

 

10.5

 

 

 

11.0

 

Total subsidiary debt

 

296.0

 

 

 

461.3

 

Total debt

 

752.5

 

 

 

929.0

 

Less current maturities

 

10.7

 

 

 

11.8

 

Total long-term debt

$

741.8

 

 

$

917.2

 

Valhi Contran credit facility – During the first three months of 2014, we had net borrowings of $11.2 million under our Contran credit facility. The average interest rate on the existing balance as of and for the three months ended March 31, 2014 was 4.25%. At March 31, 2014, the equivalent of $57.3 million was available for borrowing under this facility.

Kronos – Term loan – In February 2014, Kronos entered into a new $350 million term loan.  Kronos used $170 million of the net proceeds of the new term loan to prepay the outstanding principal balance of its note payable to Contran (along with accrued and unpaid interest through the prepayment date), and such note payable was cancelled.  The term loan was issued at 99.5% of the principal amount, or an aggregate of $348.25 million.  The remaining $172.8 million net proceeds of the term loan are available for Kronos’ general corporate purposes.  The new term loan:

·

bears interest, at Kronos’ option, at LIBOR (with LIBOR no less than 1.0%) plus 3.75%, or the base rate, as defined in the agreement, plus 2.75%;

- 16 -


 

·

requires quarterly principal repayments of $875,000 commencing in June 2014, other mandatory principal repayments of formula-determined amounts under specified conditions with all remaining principal balance due in February 2020.  Voluntary principal prepayments are permitted at any time, provided that a call premium of 1% of the principal amount of such prepayment applies to any voluntary prepayment made on or before February 2015 (there is no prepayment penalty applicable to any voluntary prepayment after February 2015);

·

is collateralized by, among other things, a first priority lien on (i) 100% of the common stock of certain of Kronos' U.S. wholly-owned subsidiaries, (ii) 65% of the common stock or other ownership interest of Kronos' Canadian subsidiary (Kronos Canada, Inc.) and certain first-tier European subsidiaries (Kronos Titan GmbH and Kronos Denmark ApS) and (iii) a $395.7 million unsecured promissory note issued by Kronos’ wholly-owned subsidiary, Kronos International, Inc. (KII) to Kronos;

·

is also collateralized by a second priority lien on all of the U.S. assets which collateralize Kronos' new North American revolving facility;

·

contains a number of covenants and restrictions which, among other things, restrict Kronos’ ability to incur additional debt, incur liens, pay dividends or merge or consolidate with, or sell or transfer substantially all of Kronos’ assets to, another entity, contains other provisions and restrictive covenants customary in lending transactions of this type (however, there are no ongoing financial maintenance covenants); and

·

contains customary default provisions, including a default under any of Kronos’ other indebtedness in excess of $50 million.

The average interest rate on the term loan borrowings as of and for the period of issuance to March 31, 2014 was 4.75%.  The carrying value of the term loan at March 31, 2014 includes unamortized original issue discount of $1.7 million.

In 2013, Kronos voluntarily repaid its entire $400 million term loan that was issued in June 2012.  Kronos prepaid an aggregate $290 million principal amount in February 2013 and we recognized a non-cash pre-tax interest charge of $6.6 million in the first quarter of 2013 related to this prepayment consisting of the write-off of unamortized original issue discount costs and deferred financing costs associated with such prepayment.  Funds for such $290 million prepayment were provided by $100 million of cash on hand as well as borrowings of $190 million under a 2013 loan agreement from Contran as described below.  In July 2013, Kronos voluntarily prepaid the remaining $100 million principal amount outstanding under such term loan.

Note payable to Contran – As discussed above, in February 2013 Kronos entered into a promissory note with Contran. This loan from Contran contained terms and conditions similar to the terms and conditions of the prior $400 million term loan, except that the loan from Contran was unsecured and contained no financial maintenance covenant. The independent members of Kronos’ board of directors approved the terms and conditions of the loan from Contran.  As discussed above, in February 2014 Kronos used $170 million of the proceeds from its new term loan and prepaid the remaining balance owed to Contran under this note payable (without penalty), and the note payable to Contran was cancelled.  The average interest rate on these borrowings for the year-to-date period ended February 18, 2014 (the payoff date) was 7.375%

Revolving European credit facility - During the first three months of 2014, Kronos had no borrowings or repayments under its European credit facility.  At March 31, 2014, there were no outstanding borrowings under this facility.  Kronos’ European credit facility requires the maintenance of certain financial ratios.  At September 30, 2013, and based on the earnings before income tax, interest, depreciation and amortization expense (EBITDA) of the borrowers, Kronos would not have met the financial covenant test if the borrowers had any net debt outstanding.  In December 2013, the lenders under Kronos’ European revolving credit facility granted a waiver until June 30, 2014 with respect to the financial test, but its ability to borrow any amounts under the facility is subject to the requirement that the borrowers maintain a specified level of EBITDA.  At March 31, 2014 Kronos is in compliance with the minimum EBITDA set forth in the waiver, and its borrowing availability was 75% of the credit facility, or €90 million ($123.4 million).

Revolving North American credit facility – During the first three months of 2014, Kronos borrowed $81.0 million and repaid $92.1 million under its North American revolving credit facility. The average interest rate on outstanding borrowings for the year-to-date period ended February 18, 2014 when the outstanding balances was repaid  was 3.75%. At March 31, 2014 approximately $107 million was available for borrowing under this revolving facility.

Canada – At March 31, 2014, an aggregate of Cdn. $7.9 million letters of credit were outstanding under Kronos’ Canadian subsidiary’s loan agreement with the Bank of Montreal which exists solely for the issuance of up to Cdn. $10.0 million in letters of credit.

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At March 31, 2014, an aggregate Cdn. $1.8 million (USD $1.6 million) was outstanding under its Canadian subsidiary’s agreement with an economic development agency of the Province of Quebec, Canada. Borrowings under the agreement are non-interest bearing.

Tremont – Promissory note payable – In January 2014, and following Tremont’s receipt of a dividend distribution from BMI and LandWell, Tremont prepaid (without penalty) $1.7 million principal amount on the note as required under the terms of the note agreement, see Note 3.

Restrictions and other Certain of the credit facilities with unrelated, third-party lenders described above require the respective borrowers to maintain minimum levels of equity, require the maintenance of certain financial ratios, limit dividends and additional indebtedness and contain other provisions and restrictive covenants customary in lending transactions of this type. We are in compliance with all of our debt covenants at March 31, 2014.

 

Note 11—Employee benefit plans:

Defined benefit plans – The components of our net periodic defined benefit pension cost are presented in the table below.

 

 

Three months ended
March 31,

 

 

2013

 

 

2014

 

 

(In millions)

 

Service cost

$

3.3

 

 

$

2.6

  

Interest cost

 

6.1

 

 

 

6.3

  

Expected return on plan assets

 

(6.1

 

 

(6.2

)

Amortization of unrecognized:

 

 

 

 

 

 

 

Prior service cost

 

.4

  

 

 

.2

  

Net transition obligations

 

.1

  

 

 

  

Recognized actuarial losses

 

3.4

  

 

 

2.8

  

Total

$

7.2

  

 

$

5.7

  

Other postretirement benefits – The components of our net periodic other postretirement benefit cost are presented in the table below.

 

 

Three months ended
March 31,

 

 

2013

 

 

2014

 

 

(In millions)

 

Service cost

$

.1

  

 

$

 

Interest cost

 

.2

  

 

 

.2

 

Amortization of prior service credit

 

(.5

 

 

(.5

)

Total

$

(.2

 

$

(.3

)

Contributions – We expect to contribute the equivalent of $27.4 million and $1.5 million, respectively, to all of our defined benefit pension plans and other postretirement benefit plans during 2014.

 

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Note 12—Other income, net:

 

 

Three months ended
March 31,

 

 

2013

 

 

2014

 

 

(In millions)

 

Securities earnings:

 

 

 

 

 

 

 

Dividends and interest

$

6.5

 

 

$

6.7

 

Securities transactions, net

 

.1

 

 

 

.1

 

Total

 

6.6

 

 

 

6.8

 

Equity in earnings of investees

 

(.3

)

 

 

(.1

)

Currency transactions, net

 

1.7

 

 

 

(2.7

)

Insurance recoveries

 

.6

 

 

 

.8

 

Other, net

 

.2

 

 

 

.3

 

Total

$

8.8

 

 

$

5.1

 

Insurance recoveries reflect, in part, amounts NL received from certain of its former insurance carriers and relate to the recovery of prior lead pigment and asbestos litigation defense costs incurred by NL.

Equity in earnings of investees in 2013 primarily related to our investment in BMI and LandWell, see Note 3.

 

Note 13—Income taxes:

 

 

 

Three months ended
March 31,

 

 

2013

 

 

2014

 

 

(In millions)

 

Expected tax expense benefit, at U.S. federal statutory income tax rate of 35%

$

(24.5

)

 

$

2.9

 

Incremental tax (benefit) on earnings of non-U.S. and non-tax group companies

 

(1.4

)

 

 

(.1

)

Non-U.S. tax rates

 

(.4

)

 

 

(.7

)

Adjustment to the reserve for uncertain tax positions, net

 

2.0

 

 

 

.3

 

Nondeductible expenses

 

2.5

 

 

 

.3

 

U.S. state income taxes and other, net

 

 

 

 

1.1

 

Income tax expense (benefit)

$

(21.8

)

 

$

3.8

 

 

 

Three months ended
March 31,

 

 

2013

 

 

2014

 

Comprehensive provision for income taxes (benefit) allocable to:

 

 

 

 

 

 

 

Net income (loss)

$

(21.8

)

 

$

3.8

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

Marketable securities

 

3.6

 

 

 

(8.8

)

Currency translation

 

(3.8

)

 

 

(.7

)

Pension plans

 

1.2

 

 

 

1.0

 

OPEB plans

 

(.2

)

 

 

(.2

)

Total

$

(21.0

)

 

$

(4.9

)

Tax authorities are examining certain of our U.S. and non-U.S. tax returns and have or may propose tax deficiencies, including penalties and interest. Because of the inherent uncertainties involved in settlement initiatives and court and tax proceedings, we cannot guarantee that these matters will be resolved in our favor, and therefore our potential exposure, if any, is also uncertain. In 2011 and 2012, Kronos received notices of re-assessment from the Canadian federal and provincial tax authorities related to the years 2002 through 2004. We object to the re-assessments and believe the position is without merit. Accordingly, we are appealing the re-assessments and in connection with such appeal we were required to post letters of credit aggregating Cdn. $7.9 million (see Note 10). If the full amount of the proposed adjustment were ultimately to be assessed against us, the cash tax liability would be approximately $15.2 million. We believe we have adequate accruals for additional taxes and related interest expense which could ultimately result from tax examinations. We believe the ultimate disposition of tax examinations should not have a material adverse effect on our

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consolidated financial position, results of operations or liquidity. We currently estimate that our unrecognized tax benefits may change by $13.0 million during the next twelve months related to certain adjustments to our prior year returns and the expiration of certain statutes of limitations.

Our 2014 provision for income taxes includes a $1.0 million provision ($.9 million, net of noncontrolling interest) which is a correction of amounts that should have been recognized in the fourth quarter of 2012, and is not material to any current or prior periods.

 

Note 14—Noncontrolling interest in subsidiaries:

 

 

December 31,
2013

 

 

March 31,
2014

 

 

(In millions)

 

Noncontrolling interest in net assets:

 

 

 

 

 

 

 

Kronos

$

241.9

 

 

$

239.0

 

NL

 

74.5

 

 

 

60.8

 

CompX

 

13.6

 

 

 

13.8

 

BMI

 

33.7