10-Q 1 vhi-10q_20170331.htm 10-Q vhi-10q_20170331.htm

 

 

 

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, 2017

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:

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 and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark 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      No  

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Large accelerated filer      Accelerated filer       Non-accelerated filer      Smaller reporting company  

Emerging growth company  

If an emerging  growth company, indicate by check mark if the registrant has elected not to use the  extended  transition period for complying with any new or revised  financial accounting  standards provided  pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  

Number of shares of the Registrant’s common stock outstanding on April 28, 2017: 339,158,949

 

 

 

 

 


 

VALHI, INC. AND SUBSIDIARIES

INDEX

 

 

 

 

 

 

 

Page
number

 

 

 

 

 

 

 

 

Part I.

 

FINANCIAL INFORMATION

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 1.

  

Financial Statements

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Condensed Consolidated Balance Sheets – December 31, 2016 and March 31, 2017 (unaudited)

  

 

3

  

 

 

 

 

 

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Operations (unaudited) – Three  months ended March 31, 2016 and 2017

  

 

5

  

 

 

 

 

 

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) – Three  months ended March 31, 2016 and 2017

  

 

6

  

 

 

 

 

 

 

 

 

 

 

 

 

  

Condensed Consolidated Statements of Cash Flows (unaudited) – Three months ended March 31, 2016 and 2017

  

 

7

  

 

 

 

 

 

 

 

 

 

 

 

 

  

Condensed Consolidated Statement of Equity (unaudited) – Three months ended March 31, 2017

  

 

8

  

 

 

 

 

 

 

 

 

 

 

 

 

  

Notes to Condensed Consolidated Financial Statements (unaudited)

  

 

9

  

 

 

 

 

 

 

 

 

 

 

 

Item 2.

  

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

  

 

28

 

 

 

 

 

 

 

 

 

 

 

 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

 

46

 

 

 

 

 

 

 

 

 

 

 

 

Item 4.

  

Controls and Procedures

  

 

47

 

 

 

 

 

 

 

 

 

 

Part II.

 

OTHER INFORMATION

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 1.

  

Legal Proceedings

  

 

48

 

 

 

 

 

 

 

 

 

 

 

 

Item 1A.

  

Risk Factors

  

 

48

 

 

 

 

 

 

 

 

 

 

 

 

Item 6.

  

Exhibits

  

 

49

 

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,
2016

 

 

March 31,
2017

 

 

 

 

 

(unaudited)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

159.8

 

 

$

200.6

 

Restricted cash equivalents

 

12.5

 

 

 

11.1

 

Marketable securities

 

4.4

 

 

 

1.0

 

Accounts and other receivables, net

 

272.2

 

 

 

303.0

 

Inventories, net

 

360.6

 

 

 

378.1

 

Land held for development

 

10.9

 

 

 

12.6

 

Other current assets

 

17.0

 

 

 

14.6

 

Total current assets

 

837.4

 

 

 

921.0

 

 

Other assets:

 

 

 

 

 

 

 

Marketable securities

 

253.5

 

 

 

255.2

 

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

 

78.9

 

 

 

82.0

 

Goodwill

 

379.7

 

 

 

379.7

 

Deferred income taxes

 

1.2

 

 

 

1.2

 

Other noncurrent assets

 

238.0

 

 

 

246.3

 

Total other assets

 

951.3

 

 

 

964.4

 

Property and equipment:

 

 

 

 

 

 

 

Land

 

45.4

 

 

 

46.2

 

Buildings

 

237.5

 

 

 

238.9

 

Treatment, storage and disposal facility

 

159.6

 

 

 

159.6

 

Equipment

 

1,070.6

 

 

 

1,094.6

 

Mining properties

 

35.1

 

 

 

30.2

 

Construction in progress

 

41.8

 

 

 

37.4

 

 

 

1,590.0

 

 

 

1,606.9

 

Less accumulated depreciation

 

935.5

 

 

 

950.0

 

 

Net property and equipment

 

654.5

 

 

 

656.9

 

Total assets

$

2,443.2

 

 

$

2,542.3

 

 

 

 

 

 

 

 

- 3 -


 

VALHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)

(In millions)

 

 

December 31,
2016

 

 

March 31,
2017

 

 

 

 

 

(unaudited)

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current maturities of long-term debt

$

7.8

 

 

$

7.6

 

Accounts payable and accrued liabilities

 

281.2

 

 

 

302.8

 

Income taxes

 

5.1

 

 

 

9.6

 

Total current liabilities

 

294.1

 

 

 

320.0

 

 

Noncurrent liabilities:

 

 

 

 

 

 

 

Long-term debt

 

957.2

 

 

 

993.2

 

Deferred income taxes

 

275.0

 

 

 

280.6

 

Accrued pension costs

 

240.2

 

 

 

244.7

 

Accrued environmental remediation and related costs

 

107.3

 

 

 

110.2

 

Accrued postretirement benefits costs

 

11.1

 

 

 

11.0

 

Other liabilities

 

113.9

 

 

 

116.4

 

Total noncurrent liabilities

 

1,704.7

 

 

 

1,756.1

 

 

Equity:

 

 

 

 

 

 

 

Valhi stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock

 

667.3

 

 

 

667.3

 

Common stock

 

3.6

 

 

 

3.6

 

Additional paid-in capital

 

 

 

 

 

Retained deficit

 

(198.5

)

 

 

(192.6

)

Accumulated other comprehensive loss

 

(221.9

)

 

 

(214.3

)

Treasury stock

 

(49.6

)

 

 

(49.6

)

Total Valhi stockholders’ equity

 

200.9

 

 

 

214.4

 

 

 

 

 

 

 

 

 

Noncontrolling interest in subsidiaries

 

243.5

 

 

 

251.8

 

Total equity

 

444.4

 

 

 

466.2

 

Total liabilities and equity

$

2,443.2

 

 

$

2,542.3

 

 

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,

 

 

2016

 

 

2017

 

 

 

(unaudited)

 

Revenues and other income:

 

 

 

 

 

 

 

Net sales

$

353.5

 

 

$

426.9

 

Other income, net

 

11.4

 

 

 

7.6

 

Total revenues and other income

 

364.9

 

 

 

434.5

 

 

Costs and expenses:

 

 

 

 

 

 

 

Cost of sales

 

311.5

 

 

 

308.0

 

Selling, general and administrative

 

63.2

 

 

 

71.1

 

Contract related intangible asset impairment

 

5.1

 

 

 

 

Interest

 

15.7

 

 

 

15.6

 

Total costs and expenses

 

395.5

 

 

 

394.7

 

 

Income (loss) before income taxes

 

(30.6

)

 

 

39.8

 

 

Income tax expense (benefit)

 

(8.6

)

 

 

18.0

 

Net income (loss)

 

(22.0

)

 

 

21.8

 

 

Noncontrolling interest in net income (loss) of subsidiaries

 

(2.5

)

 

 

9.1

 

Net income (loss) attributable to Valhi stockholders

$

(19.5

)

 

$

12.7

 

 

Amounts attributable to Valhi stockholders:

 

 

 

 

 

 

 

Basic and diluted net income (loss) per share

$

(.06

)

 

$

.04

 

 

Cash dividends per share

$

.02

 

 

$

.02

 

 

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,

 

 

2016

 

 

2017

 

 

(unaudited)

Net income (loss)

$

(22.0

)

 

$

21.8

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

Currency translation

 

11.9

 

 

 

7.5

 

Interest rate swap

 

(2.3

)

 

 

.5

 

Marketable securities

 

(.3

)

 

 

(.3

)

Defined benefit pension plans

 

2.6

 

 

 

2.8

 

Other postretirement benefit plans

 

(.3

)

 

 

(.2

)

Total other comprehensive income (loss), net

 

11.6

 

 

 

10.3

 

Comprehensive income (loss)

 

(10.4

)

 

 

32.1

 

Comprehensive income (loss) attributable to noncontrolling interest

 

.5

 

 

 

11.8

 

Comprehensive income (loss) attributable to Valhi stockholders

$

(10.9

)

 

$

20.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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,

 

 

2016

 

 

2017

 

 

(unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

$

(22.0

)

 

$

21.8

 

Depreciation and amortization

 

17.0

 

 

 

16.6

 

Benefit plan expense greater than cash funding

 

1.5

 

 

 

3.4

 

Deferred income taxes

 

(9.4

)

 

 

2.5

 

Contributions to Ti02 manufacturing joint venture, net

 

(.8

)

 

 

(3.1

)

Contract related intangible asset impairment

 

5.1

 

 

 

 

Other, net

 

(1.6

)

 

 

.8

 

Change in assets and liabilities:

 

 

 

 

 

 

 

Accounts and other receivables, net

 

(17.5

)

 

 

(27.7

)

Inventories, net

 

20.1

 

 

 

(12.4

)

Land held for development, net

 

(1.0

)

 

 

(1.1

)

Accounts payable and accrued liabilities

 

(10.3

)

 

 

16.1

 

Accounts with affiliates

 

(15.6

)

 

 

4.7

 

Income taxes

 

(3.5

)

 

 

4.7

 

Other, net

 

4.9

 

 

 

10.2

 

Net cash provided by (used in) operating activities

 

(33.1

)

 

 

36.5

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

(16.4

)

 

 

(13.7

)

Capitalized permit costs

 

(.8

)

 

 

(.3

)

Purchases of marketable securities

 

(1.5

)

 

 

(2.8

)

Disposals of marketable securities

 

2.1

 

 

 

4.6

 

Other, net

 

.2

 

 

 

.1

 

Net cash used in investing activities

 

(16.4

)

 

 

(12.1

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Indebtedness:

 

 

 

 

 

 

 

Borrowings

 

30.9

 

 

 

53.3

 

Principal payments

 

(11.3

)

 

 

(18.1

)

Deferred financing costs paid

 

 

 

 

(.2

)

Valhi cash dividends paid

 

(6.8

)

 

 

(6.8

)

Distributions to noncontrolling interest in subsidiaries

 

(3.5

)

 

 

(3.5

)

Other

 

 

 

 

.1

 

Net cash provided by financing activities

 

9.3

 

 

 

24.8

 

Cash, cash equivalents and restricted cash and cash equivalents - net change from:

 

 

 

 

 

 

 

Operating, investing and financing activities

 

(40.2

)

 

 

49.2

 

Effect of exchange rate on cash

 

1.3

 

 

 

1.2

 

Balance at beginning of period

 

229.1

 

 

 

196.5

 

Balance at end of period

$

190.2

 

 

$

246.9

 

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

Interest, net of capitalized interest

$

14.9

 

 

$

14.7

 

Income taxes, net

 

3.7

 

 

 

4.5

 

Noncash investing activities:

 

 

 

 

 

 

 

Change in accruals for capital expenditures

 

2.3

 

 

 

4.2

 

Noncash financing activities:

 

 

 

 

 

 

 

Indebtedness borrowings paid directly to lender to settle refinanced indebtedness

 

 

 

 

9.3

 

Indebtedness principal payments paid directly by lender

 

 

 

 

(8.4

)

Indebtedness borrowings paid directly to lender for debt issuance costs

 

 

 

 

(.9

)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

- 7 -


 

VALHI, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

Three months ended March 31, 2017

(In millions)

(unaudited)

 

 

Valhi Stockholders’ Equity

 

 

 

 

 

 

 

 

Preferred
stock

 

  

Common
stock

 

  

Additional
paid-in
capital

 

  

Retained deficit

 

 

Accumulated
other
comprehensive
loss

 

 

Treasury
stock

 

 

Non-
controlling
interest

 

 

Total
equity

 

Balance at December 31, 2016

$

667.3

  

  

$

3.6

  

  

$

  

  

$

(198.5

)  

 

$

(221.9

 

$

(49.6

 

$

243.5

  

 

$

444.4

  

Net income

 

  

  

 

  

  

 

  

  

 

12.7

 

 

 

  

 

 

  

 

 

9.1

 

 

 

21.8

 

Other comprehensive income, net

 

  

  

 

  

  

 

  

  

 

  

 

 

7.6

 

 

 

  

 

 

2.7

  

 

 

10.3

 

Cash dividends

 

  

  

 

  

  

 

 

  

 

(6.8

)

 

 

  

 

 

  

 

 

(3.5

)

 

 

(10.3

)

Balance at March 31, 2017

$

667.3

  

  

$

3.6

  

  

$

  

  

$

(192.6

)

 

$

(214.3

)

 

$

(49.6

)

 

$

251.8

  

 

$

466.2

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

- 8 -


 

VALHI, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(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 93% of our outstanding common stock at March 31, 2017. All of Contran's outstanding voting stock is held by a family trust established for the benefit of Lisa K. Simmons and Serena Simmons Connelly and their children, for which Ms. Simmons and Ms. Connelly are co-trustees, or is held directly by Ms. Simmons and Ms. Connelly or entities related to them.  Consequently, Ms. Simmons and Ms. Connelly 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, 2016 that we filed with the SEC on March 13, 2017 (the “2016 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, 2016 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, 2016) 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, 2017 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 2016 Consolidated Financial Statements contained in our 2016 Annual Report.

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

 

 

Note 2—Business segment information:

 

Business segment

  

Entity

  

% controlled at
March 31, 2017

 

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. We own 63% of BMI.  Our control of LandWell includes the 27% we hold directly and 50% held by BMI.  

 

 

Three months ended
March 31,

 

 

 

2016

 

 

 

2017

 

 

(unaudited)

 

Net sales:

 

 

 

 

 

 

 

Chemicals

$

318.5

 

 

$

369.8

 

Component products

 

27.1

 

 

 

29.9

 

Waste management

 

5.2

 

 

 

21.5

 

Real estate management and development

 

2.7

 

 

 

5.7

 

Total net sales

$

353.5

 

 

$

426.9

 

Cost of sales:

 

 

 

 

 

 

 

Chemicals

$

278.5

 

 

$

266.8

 

Component products

 

18.9

 

 

 

20.3

 

Waste management

 

11.7

 

 

 

16.7

 

Real estate management and development

 

2.4

 

 

 

4.2

 

Total cost of sales

$

311.5

 

 

$

308.0

 

Gross margin:

 

 

 

 

 

 

 

Chemicals

$

40.0

 

 

$

103.0

 

Component products

 

8.2

 

 

 

9.6

 

Waste management

 

(6.5

)

 

 

4.8

 

Real estate management and development

 

.3

 

 

 

1.5

 

Total gross margin

$

42.0

 

 

$

118.9

 

Operating income (loss):

 

 

 

 

 

 

 

Chemicals

$

3.0

 

 

$

55.0

 

Component products

 

3.4

 

 

 

4.5

 

Waste management

 

(10.8

)

 

 

.6

 

Real estate management and development

 

(5.9

)

 

 

.6

 

Total operating income (loss)

 

(10.3

)

 

 

60.7

 

General corporate items:

 

 

 

 

 

 

 

Securities earnings

 

6.8

 

 

 

7.0

 

Insurance recoveries

 

.1

 

 

 

.1

 

General expenses, net

 

(11.5

)

 

 

(12.4

)

Interest expense

 

(15.7

)

 

 

(15.6

)

Income (loss) before income taxes

$

(30.6

)

 

$

39.8

 

Segment results we report may differ from amounts separately reported by our various subsidiaries 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’s operating loss in the first quarter of 2016 includes a $5.1 million contract related intangible asset impairment loss which is included in the determination of its operating income, see Note 7.  Our Chemicals Segment’s operating income in the first quarter of 2016 includes $2.0 million in business interruption insurance proceeds which is included in the determination of its operating income, see Note 12.

 

 

- 10 -


 

Note 3—Business disposition —  Waste Control Specialists LLC:

On November 18, 2015, we entered into an agreement with Rockwell Holdco, Inc. ("Rockwell"), for the sale of WCS to Rockwell. The agreement, as amended, is for $270 million in cash plus the assumption of all of WCS’ third-party indebtedness incurred prior to the date of the agreement.  Additionally, Rockwell and its affiliates will assume all financial assurance obligations related to the WCS business.  Rockwell is the parent company of EnergySolutions, Inc.   Completion of the sale is subject to certain customary closing conditions, including the receipt of U.S. anti-trust approval.  On November 16, 2016, the U.S. Department of Justice filed an anti-trust action in the U.S. federal district court for the District of Delaware styled United States of America vs. Energy Solutions, Inc., et al (Case No. 1:16-cv-01056-UNA), seeking an injunction to enjoin completion of the sale of WCS.  Pursuant to our agreement with Rockwell, Rockwell and its affiliates are required, with our cooperation and assistance, to vigorously contest and resist such antitrust action. Trial before the federal district court was completed on May 5, 2017.  Assuming all closing conditions are satisfied, including the receipt of U.S. anti-trust approval, the sale is expected to close by sometime in the third quarter of 2017.  There can be no assurance, however, that the parties will be successful in contesting and resisting such antitrust action, that receipt of U.S. anti-trust approval will be obtained, that all closing conditions will be satisfied, or that any such sale of WCS would be completed.  Due to, among other things, the size of our WCS business relative to our other businesses in terms of both net sales and asset size, the disposal of WCS would not constitute a strategic shift that would have a major effect on our consolidated operations and financial results under the guidance in ACS 205-20.  Accordingly, assuming the sale of WCS is completed, WCS would not be presented as discontinued operations in our Condensed Consolidated Financial Statements.   See Note 2 for additional information regarding the operations of the Waste Management Segment.  Significant items included in our Condensed Consolidated Balance Sheets related to WCS at December 31, 2016 and March 31, 2017 included:

 

 

  

December 31,
2016

 

  

March 31,
2017

 

 

  

(In millions)

 

ASSETS

  

 

 

 

  

 

 

 

Current assets

  

$

17.2

  

  

$

14.4

  

Operating permits

  

 

42.9

  

  

 

42.4

  

Restricted cash

 

 

21.6

 

 

 

23.0

 

Property and equipment, net

 

 

138.5

 

 

 

135.9

 

LIABILITIES

  

 

 

 

  

 

 

 

Current portion of long-term debt

  

$

3.3

  

  

$

3.2

  

Payable to Contran

 

 

31.4

 

 

 

32.5

 

Long-term debt

 

 

68.0

 

 

 

67.2

 

Accrued noncurrent closure and post closure costs

 

 

29.4

 

 

 

30.0

 

 

 

Note 4—Accounts and other receivables, net:

 

 

December 31,
2016

 

 

March 31,
2017

 

 

(In millions)

 

Trade accounts receivable:

 

 

 

 

 

 

 

Kronos

$

224.8

 

 

$

255.9

 

CompX

 

10.4

 

 

 

13.1

 

WCS

 

14.0

 

 

 

12.4

 

BMI and LandWell

 

1.3

 

 

 

1.6

 

VAT and other receivables

 

18.6

 

 

 

16.7

 

Refundable income taxes

 

1.0

 

 

 

.7

 

Receivable from affiliates:  

 

 

 

 

 

 

 

    Contran – trade items

 

.4

 

 

 

.5

 

    Other – trade items

 

2.8

 

 

 

3.3

 

Allowance for doubtful accounts

 

(1.1

)

 

 

(1.2

)

Total

$

272.2

 

 

$

303.0

 

 

 

- 11 -


 

Note 5—Inventories, net:

 

 

December 31,
2016

 

 

March 31,
2017

 

 

(In millions)

 

Raw materials:

 

 

 

 

 

 

 

Chemicals

$

68.7

 

 

$

79.1

 

Component products

 

2.7

 

 

 

2.8

 

Total raw materials

 

71.4

 

 

 

81.9

 

Work in process:

 

 

 

 

 

 

 

Chemicals

 

22.3

 

 

 

22.1

 

Component products

 

9.0

 

 

 

9.8

 

Total in-process products  

 

31.3

 

 

 

31.9

 

Finished products:

 

 

 

 

 

 

 

Chemicals

 

196.4

 

 

 

200.0

 

Component products

 

3.2

 

 

 

2.8

 

Total finished products

 

199.6

 

 

 

202.8

 

Supplies (primarily chemicals)

 

58.3

 

 

 

61.5

 

Total

$

360.6

 

 

$

378.1

 

 

 

Note 6—Marketable securities:

 

 

Market
value

 

 

Cost
basis

 

 

Unrealized
losses, net

 

 

(In millions)

 

December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

Current assets

$

4.4

 

 

$

4.4

 

 

$

 

Noncurrent assets:

 

 

 

 

 

 

 

 

 

 

 

The Amalgamated Sugar Company LLC

$

250.0

 

 

$

250.0

 

 

$

 

Other

 

3.5

 

 

 

3.7

 

 

 

(.2

)

Total

$

253.5

 

 

$

253.7

 

 

$

(.2

)

March 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

Current assets

$

1.0

 

 

$

1.0

 

 

$

 

Noncurrent assets:

 

 

 

 

 

 

 

 

 

 

 

The Amalgamated Sugar Company LLC

$

250.0

 

 

$

250.0

 

 

$

 

Other

 

5.2

 

 

 

5.3

 

 

 

(.1

)

Total

$

255.2

 

 

$

255.3

 

 

$

(.1

)

 

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 investment in Amalgamated is measured using significant unobservable inputs, which are Level 3 inputs. Please refer to Note 6 in our 2016 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.

 

 

- 12 -


 

Note 7—Other noncurrent assets:

 

 

December 31,
2016

 

 

March 31,
2017

 

 

(In millions)

 

Other noncurrent assets:

 

 

 

 

 

 

 

Land held for development

$

138.1

 

 

$

136.7

 

Waste disposal site operating permits, net

 

42.9

 

 

 

42.4

 

Restricted cash

 

24.2

 

 

 

35.2

 

IBNR receivables

 

7.1

 

 

 

7.4

 

Capital lease deposit

 

6.2

 

 

 

6.2

 

Pension asset

 

1.6

 

 

 

1.7

 

Other

 

17.9

 

 

 

16.7

 

Total

$

238.0

 

 

$

246.3

 

 

WCS submitted a license application in April 2016 for consolidated interim storage license for the storage of high level waste, which was docketed for formal review by the Nuclear Regulatory Commission (“NRC”) in January 2017.  Consistent with our accounting policies disclosed in Note 1 to our 2016 Annual Report we capitalize direct costs related to the acquisition of operating permits.  Through March 31, 2017 we had capitalized an aggregate of $3.3 million related to the acquisition of such proposed interim storage license.  Due to a substantial increase in licensing review and related costs and the inability to reach an agreement in April 2017 to extend the cost-sharing arrangement WCS had in place with one of its partners, we sent a letter to the NRC on April 18, 2017 requesting that the NRC temporarily suspend all safety and environmental reviews as well as all public participation activities associated with the application until the completion of the pending sale of WCS.  We do not know if or when we would request the NRC to resume licensing review activities with regard to such proposed interim storage license.  As a result, we expect to recognize an impairment charge in the second quarter of 2017 related to the write-off of interim storage license application costs previously capitalized, as we now believe it is no longer probable we would receive such license.    

Upon acquiring a controlling interest in our Real Estate Management and Development Segment in December 2013, we recognized an indefinite-lived customer relationship intangible asset of $5.1 million for long-term contracts related to water delivery services to the City of Henderson, Nevada and various other users through a water system owned by BMI.  Aggregate revenues associated with water delivered under the City of Henderson contract have historically represented approximately 70% of the Segment’s aggregate water delivery revenues.  These contracts generally span many years and feature automatic renewing provisions.  The initial City of Henderson water delivery contract extended for a period of 25 years, and contained an automatic renewal provision.  In January 2016, the water delivery contract with the City of Henderson was amended.  As part of such amendment, required minimum volumes were reduced, pricing was lowered, the automatic renewal provision of the contract was eliminated, and the contract term now runs through June 2040.  The amendment to the City of Henderson water delivery contract represents an event or change in circumstance which triggered the need to perform a quantitative impairment analysis with respect to the intangible asset in the first quarter of 2016, in accordance with the guidance in ASC 350-30-35.  Accordingly, as a result of a quantitative impairment analysis performed in the first quarter of 2016 we have concluded that the $5.1 million contract related intangible asset primarily related to the City of Henderson water delivery contract has been fully impaired as a result of the amended contract (with its reduced minimum volumes and lower pricing), and we recognized an aggregate $5.1 million contract related intangible asset impairment loss in the first quarter of 2016.  

 

 

- 13 -


 

Note 8—Long-term debt:

 

 

December 31,
2016

 

 

March 31,
2017

 

 

(In millions)

 

Valhi:

 

 

 

 

 

 

 

Snake River Sugar Company

$

250.0

 

 

$

250.0

 

Contran credit facility

 

278.9

 

 

 

278.9

 

Total Valhi debt

 

528.9

 

 

 

528.9

 

Subsidiary debt:

 

 

 

 

 

 

 

Kronos:

 

 

 

 

 

 

 

Term loan

 

335.9 

 

 

 

335.4

 

North American revolving credit facility

 

 

 

 

26.0

 

WCS:

 

 

 

 

 

 

 

Financing capital lease

 

64.0

 

 

 

63.6

 

Tremont:

 

 

 

 

 

 

 

Promissory note payable

 

14.5

 

 

 

14.5

 

BMI:

 

 

 

 

 

 

 

Bank note payable – Meadows Bank

 

8.4

 

 

 

 

Bank loan – Western Alliance Bank

 

 

 

 

19.5

 

LandWell:

 

 

 

 

 

 

 

Note payable to the City of Henderson

 

2.9

 

 

 

2.9

 

Other

 

10.4

 

 

 

10.0

 

Total subsidiary debt

 

436.1

 

 

 

471.9

 

Total debt

 

965.0

 

 

 

1,000.8

 

Less current maturities

 

7.8

 

 

 

7.6

 

Total long-term debt

$

957.2

 

 

$

993.2

 

Valhi Contran credit facility – During the first three months of 2017, we had no borrowings or repayments under our Contran credit facility. The average interest rate on the existing balance as of and for the quarter ended March 31, 2017 was 5.0% and 4.8%, respectively. At March 31, 2017, the equivalent of $46.1 million was available for borrowing under this facility.

Kronos – Term loan – During the first three months of 2017, Kronos made its required quarterly principal payment of $.9 million.  The average interest rate on the term loan borrowings as of and for the quarter ended March 31, 2017 was 4.0%.  The carrying value of the term loan at March 31, 2017 is stated net of unamortized original issue discount of $.8 million and debt issuance costs of $3.3 million.  See Note 17 for a discussion of the interest rate swap we entered into in 2015 pursuant to our interest rate risk strategy.

North American revolving credit facility – In January 2017, Kronos extended the maturity date of its North American revolving credit facility to the earlier of (i) January 30, 2022 or (ii) 90 days prior to the maturity date of our existing term loan indebtedness (or 90 days prior to the maturity date of any indebtedness incurred in a permitted refinancing of such existing term loan indebtedness).  Based on the February 2020 maturity date of our existing term loan, the maturity date of the North American revolving credit facility is currently November 2019.

During the first three months of 2017, Kronos borrowed a net $26.0 million under its North American revolving credit facility.  The average interest rate on outstanding borrowings as of and for the quarter ended March 31, 2017 was 4.75% and 4.72%, respectively.  At March 31, 2017 approximately $74.9 million was available for additional borrowing under this revolving credit facility.

European revolving credit facility – Kronos’ European revolving credit facility requires the maintenance of certain financial ratios, and one of such requirements is based on the ratio of net debt to last twelve months earnings before income tax, interest, depreciation and amortization expense (EBITDA) of the borrowers.  Based upon the borrowers’ last twelve months EBITDA as of March 31, 2017 and the net debt to EBITDA financial test, Kronos’ borrowing availability at March 31, 2017 is approximately 69% of the credit facility, or €82.7 million ($88.3 million).  We expect to extend the maturity date of this facility on or prior to its maturity date in September 2017.

Other In February 2017, a wholly-owned subsidiary of BMI entered into a $20.5 million loan agreement with Western Alliance Bank.  The proceeds were used to refinance the $8.5 million outstanding bank note payable to Meadows Bank and to finance improvements to BMI’s water delivery system. The agreement requires semi-annual payments of principal and interest on June 1 and December 1 aggregating $1.9 million annually beginning on June 1, 2017 through the maturity date in June 2032 (except during 2017

- 14 -


 

which calls for prorated aggregate principal and interest payments of $1.6 million). The agreement bears interest at 5.34% and is collateralized by certain real property, including the water delivery system, and revenue streams under the City of Henderson water contract. Debt issuance costs were approximately $1.0 million, and the carrying value of the banknote payable at March 31, 2017 is stated net of such unamortized debt issuance costs.  

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, 2017.

 

 

Note 9—Accounts payable and accrued liabilities:

 

 

December 31,
2016

 

 

March 31,
2017

 

 

(In millions)

 

Accounts payable:

 

 

 

 

 

 

 

Kronos

$

84.9

 

 

$

101.5

 

CompX

 

2.6

 

 

 

3.7

 

WCS

 

1.6

 

 

 

1.5

 

BMI and LandWell

 

2.2

 

 

 

2.5

 

NL

 

2.4

 

 

 

1.3

 

Other

 

.7

 

 

 

.5

 

Payable to affiliates:

 

 

 

 

 

 

 

Contran – trade items

 

31.4

 

 

 

32.5

 

Contran – income taxes

 

5.5

 

 

 

11.1

 

LPC – trade items

 

14.7

 

 

 

14.1

 

Employee benefits

 

29.2

 

 

 

25.1

 

Deferred income

 

32.0

 

 

 

28.9

 

Accrued sales discounts and rebates

 

22.6

 

 

 

19.2

 

Environmental remediation and related costs

 

15.3

 

 

 

14.7

 

Reserve for uncertain tax positions

 

3.3

 

 

 

3.3

 

Accrued workforce reduction costs

 

1.2

 

 

 

.2

 

Interest rate swap

 

2.8

 

 

 

2.2

 

Other

 

28.8

 

 

 

40.5

 

Total

$

281.2

 

 

$

302.8

 

 

See Note 17 for a discussion of the interest rate swap contract.

 

 

Note 10—Other noncurrent liabilities:

 

 

December 31,
2016

 

 

March 31,
2017

 

 

(In millions)

 

Reserve for uncertain tax positions

$

35.7

 

 

$

36.6

 

Asset retirement obligations

 

30.7

 

 

 

31.4

 

Deferred income

 

12.6

 

 

 

11.9

 

Employee benefits

 

7.6

 

 

 

7.7

 

Insurance claims and expenses

 

9.5

 

 

 

9.7

 

Deferred payment obligation

 

9.0

 

 

 

9.1

 

Other

 

8.8

 

 

 

10.0

 

Total

$

113.9

 

 

$

116.4

 

 

 

- 15 -


 

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,

 

 

2016

 

 

2017

 

 

(In millions)

 

Service cost

$

2.5

  

 

$

2.7

  

Interest cost

 

4.4

  

 

 

3.8

  

Expected return on plan assets

 

(4.5

)

 

 

(3.2

)

Amortization of unrecognized prior service cost

 

.2

  

 

 

.1

  

Recognized actuarial losses

 

3.2

  

 

 

3.6

  

Total

$

5.8

  

 

$

7.0

  

 

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

 

 

Three months ended
March 31,

 

 

2016

 

 

2017

 

 

(In millions)

 

Interest cost

$

.2

 

 

$

.1

 

Amortization of prior service credit

 

(.5

)

 

 

(.2

)

Recognized actuarial gains

 

(.1

)

 

 

(.1

)

Total

$

(.4

)

 

$

(.2

)

 

Contributions – We expect to contribute the equivalent of $15.1 million and $1.1 million, respectively, to all of our defined benefit pension plans and other postretirement benefit plans during 2017.

 

 

Note 12—Other income, net:

 

 

Three months ended
March 31,

 

 

2016

 

 

2017

 

 

(In millions)

 

Securities earnings:

 

 

 

 

 

 

 

Dividends and interest

$

6.7

 

 

$

7.0

 

Securities transactions, net

 

.1

 

 

 

 

Total

 

6.8

 

 

 

7.0

 

Currency transactions, net

 

2.3

 

 

 

(.2

)

Insurance recoveries

 

.1

 

 

 

.1

 

Business interruption insurance proceeds

 

2.0

 

 

 

 

Other, net

 

.2

 

 

 

.7

 

Total

$

11.4

 

 

$

7.6

 

 

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. See Note 16.

We recognized $2.0 million in income related to cash Kronos received in the first quarter of 2016 from settlement of a business interruption insurance claim arising in 2014.  Kronos collected an additional $1.4 million related to this same claim in April 2016. 

 

 

- 16 -


 

Note 13—Income taxes:

 

 

Three months ended
March 31,

 

 

2016

 

 

2017

 

 

(In millions)

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

$

(10.7

)

 

$

13.9

 

Incremental net tax on earnings and losses of non-U.S. and U.S. subsidiaries

 

2.4

 

 

 

11.2

 

Non-U.S. tax rates

 

.2

 

 

 

(2.4

)

Valuation allowance

 

 

 

 

(5.0

)

Adjustment to the reserve for uncertain tax positions, net

 

.2

 

 

 

.5

 

Nondeductible expenses

 

.1

 

 

 

.5

 

Domestic production activities deduction

 

(.3

)

 

 

(.6

)

U.S. state income taxes and other, net

 

(.5

)

 

 

(.1

)

Income tax expense (benefit)

$

(8.6

)

 

$

18.0

 

 

 

 

Comprehensive provision for income taxes allocable to:

 

 

Net income (loss)

$

(8.6

)

 

$

18.0

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

Marketable securities

 

(.2

)

 

 

(.2

)

Currency translation

 

2.8

 

 

 

1.7

 

Interest rate swap

 

(2.1

)

 

 

.4

 

Pension plans

 

.8

 

 

 

.9

 

OPEB plans

 

(.2

)

 

 

(.1

)

Total

$

(7.5

)

 

$

20.7

 

 

The amount shown in the above table of our income tax rate reconciliation for non-U.S. tax rates represents the result determined by multiplying the pre-tax earnings or losses of each of our non-U.S. subsidiaries by the difference between the applicable statutory income tax rate for each non-U.S. jurisdiction and the U.S. federal statutory tax rate of 35%.  The amount shown on such table for incremental net tax on earnings and losses on non-U.S. and U.S. subsidiaries includes, as applicable, (i) current income taxes (including withholding taxes, if applicable), if any, associated with any current-year earnings of our Chemicals Segment’s non-U.S. subsidiaries to the extent such current-year earnings were distributed to us in the current year, (ii) deferred income taxes (or deferred income tax benefit) associated with the current-year change in the aggregate amount of undistributed earnings of our Chemicals Segment’s Canadian subsidiary, which earnings are not subject to a permanent reinvestment plan, in an amount representing the current-year change in the aggregate current income tax that would be generated (including withholding taxes, if applicable) when such aggregate undistributed earnings are distributed to us, (iii) current U.S. income taxes (or current income tax benefit), including U.S. personal holding company tax, as applicable, attributable to current-year income (losses) of one of Kronos’ non-U.S. subsidiaries, which subsidiary is treated as a dual resident for U.S. income tax purposes, to the extent the current-year income (losses) of such subsidiary is subject to U.S. income tax under the U.S. dual-resident provisions of the Internal Revenue Code, (iv) deferred income taxes associated with our direct investment in Kronos (beginning in the second quarter of 2015) and (v) current and deferred income taxes associated with distributions and earnings from our investment in LandWell and BMI.

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.  We believe we have adequate accruals for additional taxes and related interest expense which could ultimately result from tax examinations.  We believe the ultimate disposition of tax examinations should not have a material adverse effect on our consolidated financial position, results of operations or liquidity.  As a result of ongoing audits in certain jurisdictions, in 2008 Kronos filed Advance Pricing Agreement Requests with the tax authorities in the U.S., Canada and Germany.  These requests have been under review with the respective tax authorities since 2008 and prior to 2016, it was uncertain whether an agreement would be reached between the tax authorities and whether we would agree to execute and finalize such agreements.  During 2016, Contran, as the ultimate parent of our U.S. Consolidated income tax group, executed and finalized an Advance Pricing Agreement with the U.S. Internal Revenue Service and our Canadian subsidiary executed and finalized an Advance Pricing Agreement with the Competent Authority for Canada (collectively, the “U.S.-Canada APA”) effective for tax years 2005 - 2015.  Pursuant to the terms of the U.S.-Canada APA, the U.S. and Canadian tax authorities agreed to certain prior year changes to taxable income of Kronos’ U.S. and Canadian subsidiaries.  As a result of such agreed-upon changes, Kronos’ Canadian subsidiary will incur a cash income tax payment of approximately CAD $3 million (USD $2.3 million) related to the U.S.-Canada APA, but such payment was fully offset by previously provided accruals (such USD $2.3 million has not been paid as of March 31, 2017, and is classified as part of income taxes

- 17 -


 

payable at such date).  We currently expect the Advance Pricing Agreement between Canada and Germany (collectively, the “Canada-Germany APA”) to be executed and finalized within the next twelve months.  We believe we have adequate accruals to cover any cash income tax payment which might result from the finalization of the Canada-Germany APA, and accordingly we do not expect the execution of such APA to have a material adverse effect on our consolidated financial position, results of operations or liquidity.    

Kronos has substantial net operating loss (“NOL”) carryforwards in Germany and Belgium, the benefit of which Kronos had previously recognized under the more-likely-than-not recognition criteria.  In the second quarter of 2015, Kronos determined that such losses did not meet the more-likely-than-not recognition criteria, and as a result Kronos recognized a non-cash deferred income tax  expense as a valuation allowance against Kronos’ net deferred income tax assets in such jurisdictions.  We continued to conclude such losses did not meet the more-likely-than-not recognition criteria through March 31, 2017.  During the first quarter of 2017, Kronos recognized an aggregate non-cash deferred income tax benefit of $5.0 million as a result of a net decrease in such deferred income tax asset valuation allowance, due to utilizing a portion of both the German and Belgium NOLs during the period.  

We believe we have adequate accruals for additional taxes and related interest expense which could ultimately result from tax examinations.  We believe the ultimate disposition of tax examinations should not have a material adverse effect  on our consolidated financial position, results of operations or liquidity.  We currently estimate that our unrecognized tax benefits will decrease by approximately $14.4 million during the next twelve months primarily due to certain adjustments to our prior year returns and the expiration of certain statutes of limitations.

 

 

Note 14—Noncontrolling interest in subsidiaries:

 

 

December 31,
2016

 

 

March 31,
2017

 

 

(In millions)

 

Noncontrolling interest in net assets:

 

 

 

 

 

 

 

Kronos Worldwide

$

134.5

 

 

$

140.7

 

NL Industries

 

44.3

 

 

 

45.9

 

CompX International

 

16.4

 

 

 

16.7

 

BMI

 

24.6

 

 

 

24.7

 

LandWell

 

23.7

 

 

 

23.8

 

Total

$

243.5

 

 

$

251.8

 

 

 

 

Three months ended March 31,

 

 

2016

 

 

2017

 

 

(In millions)

 

Noncontrolling interest in net income (loss) of subsidiaries:

 

 

 

 

 

 

 

Kronos Worldwide

$

(.8

)

 

$

7.2

 

NL Industries

 

(.4

)

 

 

1.4

 

CompX International

 

.3

 

 

 

.4

 

BMI

 

(1.4

)

 

 

 

LandWell

 

(.2

)

 

 

.1

 

Total

$

(2.5

)

 

$

9.1

 

 

 

- 18 -


 

Note 15—Accumulated other comprehensive income (loss):

Changes in accumulated other comprehensive income (loss) attributable to Valhi stockholders for the three months ended March 31, 2016 and 2017 are presented in the table below.

 

 

Three months ended
March 31,

 

 

 

2016

 

 

 

2017

 

 

(In millions)

Accumulated other comprehensive income (loss), net of tax

   and noncontrolling interest:

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

Balance at beginning of period

$

1.6

 

 

$

1.7

 

Other comprehensive loss – unrealized losses arising during the period

 

 

 

 

 

Balance at end of period

$

1.6

 

 

$

1.7

 

Interest rate swap:

 

 

 

 

 

 

 

Balance at beginning of period

$

(1.3

)

 

$

(1.2

)

Other comprehensive loss:

 

 

 

 

 

 

 

Unrealized losses arising during year

 

(2.0

)

 

 

 

Less reclassification adjustment for amounts included in interest expense

 

.3

 

 

 

.4

 

Balance at end of period

$

(3.0

)

 

$

(.8

)

Currency translation adjustment:

 

 

 

 

 

 

 

Balance at beginning of period

$

(78.1

)

 

$

(88.5

)

Other comprehensive income (loss)

 

8.7

 

 

 

5.4

 

Balance at end of period

$

(69.4

)

 

$

(83.1

)

Defined benefit pension plans:

 

 

 

 

 

 

 

Balance at beginning of period

$

(123.0

)

 

$

(137.0

)

Other comprehensive income— amortization of prior service cost and net losses included in net periodic pension cost

 

1.9

 

 

 

2.0

 

Balance at end of period

$

(121.1

)

 

$

(135.0

)

OPEB plans:

 

 

 

 

 

 

 

Balance at beginning of period

$

3.8

 

 

$

3.1

 

Other comprehensive loss – amortization of prior service credit and net losses included in net periodic OPEB cost

 

(.3

)

 

 

(.2

)

Balance at end of period

$

3.5

 

 

$

2.9

 

Total accumulated other comprehensive loss:

 

 

 

 

 

 

 

Balance at beginning of period

$

(197.0

)

 

$

(221.9

)

Other comprehensive income (loss)

 

8.6

 

 

 

7.6

 

Balance at end of period

$

(188.4

)

 

$

(214.3

)

 

See Note 11 for amounts related to our defined benefit pension plans and OPEB plans and Note 17 for a discussion of our interest rate swap contract.

 

 

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Note 16—Commitments and contingencies:

Lead pigment litigation—NL

NL’s former operations included the manufacture of lead pigments for use in paint and lead-based paint.  NL, other former manufacturers of lead pigments for use in paint and lead-based paint (together, the “former pigment manufacturers”), and the Lead Industries Association (“LIA”), which discontinued business operations in 2002, have been named as defendants in various legal proceedings seeking damages for personal injury, property damage and governmental expenditures allegedly caused by the use of lead-based paints. Certain of these actions have been filed by or on behalf of states, counties, cities or their public housing authorities and school districts, and certain others have been asserted as class actions. These lawsuits seek recovery under a variety of theories, including public and private nuisance, negligent product design, negligent failure to warn, strict liability, breach of warranty, conspiracy/concert of action, aiding and abetting, enterprise liability, market share or risk contribution liability, intentional tort, fraud and misrepresentation, violations of state consumer protection statutes, supplier negligence and similar claims.

The plaintiffs in these actions generally seek to impose on the defendants responsibility for lead paint abatement and health concerns associated with the use of lead-based paints, including damages for personal injury, contribution and/or indemnification for medical expenses, medical monitoring expenses and costs for educational programs. To the extent the plaintiffs seek compensatory or punitive damages in these actions, such damages are generally unspecified. In some cases, the damages are unspecified pursuant to the requirements of applicable state law. 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 or a trial verdict in favor of either the defendants or the plaintiffs.

NL believes that these actions are without merit, and NL intends to continue to deny all allegations of wrongdoing and liability and to defend against all actions vigorously. NL does not believe it is probable that it has incurred any liability with respect to all of the lead pigment litigation cases to which NL is a party, and liability to us that may result, if any, in this regard cannot be reasonably estimated, because:

 

NL has never settled any of the market share, intentional tort, fraud, nuisance, supplier negligence, breach of warranty, conspiracy, misrepresentation, aiding and abetting, enterprise liability, or statutory cases,

 

no final, non-appealable adverse verdicts have ever been entered against NL, and

 

NL has never ultimately been found liable with respect to any such litigation matters, including over 100 cases over a twenty-year period for which NL was previously a party and for which NL has been dismissed without any finding of liability.

Accordingly, neither we nor NL have accrued any amounts for any of the pending lead pigment and lead-based paint litigation cases filed by or on behalf of states, counties, cities or their public housing authorities and school districts, or those asserted as class actions. In addition, we have determined that liability to us which may result, if any, cannot be reasonably estimated because there is no prior history of a loss of this nature on which an estimate could be made and there is no substantive information available upon which an estimate could be based.

In one of these lead pigment cases, in April 2000 NL was served with a complaint in County of Santa Clara v. Atlantic Richfield Company, et al. (Superior Court of the State of California, County of Santa Clara, Case No. 1-00-CV-788657) brought by a number of California government entities against the former pigment manufacturers, the LIA and certain paint manufacturers. The County of Santa Clara sought to recover compensatory damages for funds the plaintiffs have expended or would in the future expend for medical treatment, educational expenses, abatement or other costs due to exposure to, or potential exposure to, lead paint, disgorgement of profit, and punitive damages. In July 2003, the trial judge granted defendants’ motion to dismiss all remaining claims. Plaintiffs appealed and the intermediate appellate court reinstated public nuisance, negligence, strict liability, and fraud claims in March 2006.  A fourth amended complaint was filed in March 2011 on behalf of The People of California by the County Attorneys of Alameda, Ventura, Solano, San Mateo, Los Angeles and Santa Clara, and the City Attorneys of San Francisco, San Diego and Oakland. That complaint alleged that the presence of lead paint created a public nuisance in each of the prosecuting jurisdictions and sought its abatement. In July and August 2013, the case was tried. In January 2014, the Judge issued a judgment finding NL, The Sherwin Williams Company and ConAgra Grocery Products Company jointly and severally liable for the abatement of lead paint in pre-1980 homes, and ordered the defendants to pay an aggregate $1.15 billion to the people of the State of California to fund such abatement. In February 2014, NL filed a motion for a new trial, and in March 2014 the court denied the motion. Subsequently in March 2014, we filed a notice of appeal with the Sixth District Court of Appeal for the State of California and the appeal is proceeding with the appellate court.  NL believes that this judgment is inconsistent with California law and is unsupported by the evidence, and we will defend vigorously against all claims.

The Santa Clara case is unusual in that this is the second time that an adverse verdict in the lead pigment litigation has been entered against NL (the first adverse verdict against NL was ultimately overturned on appeal). We have concluded that the likelihood

- 20 -


 

of a loss in this case has not reached a standard of “probable” as contemplated by ASC 450, given (i) the substantive, substantial and meritorious grounds on which the adverse verdict in the Santa Clara case will be appealed, (ii) the uniqueness of the Santa Clara verdict (i.e. no final, non-appealable verdicts have ever been rendered against NL, or any of the other former lead pigment manufacturers, based on the public nuisance theory of liability or otherwise), and (iii) the rejection of the public nuisance theory of liability as it relates to lead pigment matters in many other jurisdictions (no jurisdiction in which a plaintiff has asserted a public nuisance theory of liability has ever successfully been upheld). In addition, liability that may result, if any, cannot be reasonably estimated, as NL continues to have no basis on which an estimate of liability could be made, as discussed above. However, as with any legal proceeding, there is no assurance that any appeal would be successful, and it is reasonably possible, based on the outcome of the appeals process, that NL may in the future incur some liability resulting in the recognition of a loss contingency accrual that could have a material adverse impact on our results of operations, financial position and liquidity.

New cases may continue to be filed against NL. We cannot assure you that we will not incur liability in the future in respect of any of the pending or possible litigation in view of the inherent uncertainties involved in court and jury rulings. In the future, if new information regarding such matters becomes available to us (such as a final, non-appealable adverse verdict against us or otherwise ultimately being found liable with respect to such matters), at that time we would consider such information in evaluating any remaining cases then-pending against us as to whether it might then have become probable we have incurred liability with respect to these matters, and whether such liability, if any, could have become reasonably estimable. The resolution of any of these cases could result in the recognition of a loss contingency accrual that could have a material adverse impact on our net income for the interim or annual period during which such liability is recognized and a material adverse impact on our consolidated financial condition and liquidity.

Environmental matters and litigation

Our operations are governed by various environmental laws and regulations. Certain of our businesses are and have been engaged in the handling, manufacture or use of substances or compounds that may be considered toxic or hazardous within the meaning of applicable environmental laws and regulations. As with other companies engaged in similar businesses, certain of our past and current operations and products have the potential to cause environmental or other damage. We have implemented and continue to implement various policies and programs in an effort to minimize these risks. Our policy is to maintain compliance with applicable environmental laws and regulations at all of our plants and to strive to improve environmental performance. From time to time, we may be subject to environmental regulatory enforcement under U.S. and non-U.S. statutes, the resolution of which typically involves the establishment of compliance programs. It is possible that future developments, such as stricter requirements of environmental laws and enforcement policies, could adversely affect our production, handling, use, storage, transportation, sale or disposal of such substances. We believe that all of our facilities are in substantial compliance with applicable environmental laws.

Certain properties and facilities used in NL’s former operations, including divested primary and secondary lead smelters and former mining locations, are the subject of civil litigation, administrative proceedings or investigations arising under federal and state environmental laws and common law. Additionally, in connection with past operating practices, we are currently involved as a defendant, potentially responsible party (“PRP”) or both, pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act (“CERCLA”), and similar state laws in various governmental and private actions associated with waste disposal sites, mining locations, and facilities that we or our predecessors, our subsidiaries or their predecessors currently or previously owned, operated or used, certain of which are on the United States Environmental Protection Agency’s (“EPA”) Superfund National Priorities List or similar state lists. These proceedings seek cleanup costs, damages for personal injury or property damage and/or damages for injury to natural resources. Certain of these proceedings involve claims for substantial amounts. Although we may be jointly and severally liable for these costs, in most cases we are only one of a number of PRPs who may also be jointly and severally liable, and among whom costs may be shared or allocated. In addition, we are occasionally named as a party in a number of personal injury lawsuits filed in various jurisdictions alleging claims related to environmental conditions alleged to have resulted from our operations.

Obligations associated with environmental remediation and related matters are difficult to assess and estimate for numerous reasons including the:

 

complexity and differing interpretations of governmental regulations,

 

number of PRPs and their ability or willingness to fund such allocation of costs,

 

financial capabilities of the PRPs and the allocation of costs among them,

 

solvency of other PRPs,

 

multiplicity of possible solutions,

 

number of years of investigatory, remedial and monitoring activity required,

- 21 -


 

 

uncertainty over the extent, if any, to which our former operations might have contributed to the conditions allegedly giving rise to such personal injury, property damage, natural resource and related claims, and

 

number of years between former operations and notice of claims and lack of information and documents about the former operations.

In addition, the imposition of more stringent standards or requirements under environmental laws or regulations, new developments or changes regarding site cleanup costs or the allocation of costs among PRPs, solvency of other PRPs, the results of future testing and analysis undertaken with respect to certain sites or a determination that we are potentially responsible for the release of hazardous substances at other sites, could cause our expenditures to exceed our current estimates. We cannot assure you that actual costs will not exceed accrued amounts or the upper end of the range for sites for which estimates have been made, and we cannot assure you that costs will not be incurred for sites where no estimates presently can be made. Further, additional environmental and related matters may arise in the future. If we were to incur any future liability, this could have a material adverse effect on our consolidated financial statements, results of operations and liquidity.

We record liabilities related to environmental remediation and related matters (including costs associated with damages for personal injury or property damage and/or damages for injury to natural resources) when estimated future expenditures are probable and reasonably estimable. We adjust such accruals as further information becomes available to us or as circumstances change. Unless the amounts and timing of such estimated future expenditures are fixed and reasonably determinable, we generally do not discount estimated future expenditures to their present value due to the uncertainty of the timing of the payout. We recognize recoveries of costs from other parties, if any, as assets when their receipt is deemed probable. At December 31, 2016 and March 31, 2017, receivables for recoveries were not significant.

We do not know and cannot estimate the exact time frame over which we will make payments for our accrued environmental and related costs. The timing of payments depends upon a number of factors, including but not limited to the timing of the actual remediation process; which in turn depends on factors outside of our control. At each balance sheet date, we estimate the amount of our accrued environmental and related costs which we expect to pay within the next twelve months, and we classify this estimate as a current liability. We classify the remaining accrued environmental costs as a noncurrent liability.

The table below presents a summary of the activity in our accrued environmental costs during the first three months of 2017 are presented below.

 

 

Amount

 

 

(In millions)

 

Balance at the beginning of the year

$

122.6

  

Additions charged to expense, net

 

3.1

  

Payments, net

 

(.9

)

Currency and other

 

.1

 

Balance at the end of period

$

124.9

  

 

Amounts recognized in our Condensed Consolidated Balance Sheet at the end of the period:

 

 

 

Current liabilities

$

14.7

  

Noncurrent liabilities

 

110.2

  

Total

$

124.9

  

 

NL – On a quarterly basis, NL evaluates the potential range of its liability for environmental remediation and related costs at sites where it has been named as a PRP or defendant. At March 31, 2017, NL had accrued approximately $119 million related to approximately 41 sites associated with remediation and related matters that it believes are at the present time and/or in their current phase reasonably estimable. The upper end of the range of reasonably possible costs to NL for remediation and related matters for which we believe it is possible to estimate costs is approximately $160 million, including the amount currently accrued.

NL believes that it is not reasonably possible to estimate the range of costs for certain sites. At March 31, 2017, there were approximately 5 sites for which NL is not currently able to estimate a range of costs. For these sites, generally the investigation is in the early stages, and NL is unable to determine whether or not NL actually had any association with the site, the nature of its responsibility, if any, for the contamination at the site and the extent of contamination at and cost to remediate the site. The timing and availability of information on these sites is dependent on events outside of our control, such as when the party alleging liability provides information to us. At certain of these previously inactive sites, NL has received general and special notices of liability from the EPA and/or state agencies alleging that NL, sometimes with other PRPs, are liable for past and future costs of remediating environmental contamination allegedly caused by former operations. These notifications may assert that NL, along with any other

- 22 -


 

alleged PRPs, are liable for past and/or future clean-up costs. As further information becomes available to us for any of these sites which would allow us to estimate a range of costs, we would at that time adjust our accruals. Any such adjustment could result in the recognition of an accrual that would have a material effect on our consolidated financial statements, results of operations and liquidity.

WCS – Effective December 2015, WCS entered an Agreed Order with the TCEQ with regard to the disposition of certain U.S. Department of Energy (“DOE”) waste currently stored at the WCS facility. WCS entered into the Agreed Order as the licensee of the storage facility, and DOE entered into a similar order with the TCEQ as the owner of the waste.  WCS asserts that the alleged violations set forth in the orders are due to the acts and omissions of DOE and its contractor.  WCS expects to work with TCEQ and DOE to develop a compliance plan regarding the stored waste.  While the cost of the compliance plan is not currently estimable, the amount of such compliance costs could be material. On October 21, 2015 the U.S. Nuclear Regulatory Commission (“NRC”) Office of Investigations commenced an investigation of WCS’s handling of the DOE waste described above. WCS cooperated fully, and the matter was concluded with no formal demands or claims by the NRC. WCS believes the DOE or its contractor is required to reimburse WCS for its cost to comply with the Agreed Order and the NRC investigation under the terms of the storage contract and pursuant to law, and as such we believe the cost of compliance with the Agreed Order and the NRC investigation should not have a material effect on our consolidated financial condition, results of operations or liquidity. DOE has generally paid for the costs to comply. On April 28, 2016 WCS filed with the DOE an administrative claim under the Federal Tort Claims Act related to this matter.

OtherWe have also accrued approximately $5.6 million at March 31, 2017 for other environmental cleanup matters. This accrual is near the upper end of the range of our estimate of reasonably possible costs for such matters.

Insurance coverage claims

We are involved in certain legal proceedings with a number of our former insurance carriers regarding the nature and extent of the carriers’ obligations to us under insurance policies with respect to certain lead pigment and asbestos lawsuits. The issue of whether insurance coverage for defense costs or indemnity or both will be found to exist for our lead pigment and asbestos litigation depends upon a variety of factors and we cannot assure you that such insurance coverage will be available.

We have agreements with certain of our former insurance carriers pursuant to which the carriers reimburse us for a portion of our future lead pigment litigation defense costs, and one such carrier reimburses us for a portion of our future asbestos litigation defense costs. We are not able to determine how much we will ultimately recover from these carriers for defense costs incurred by us because of certain issues that arise regarding which defense costs qualify for reimbursement. While we continue to seek additional insurance recoveries, we do not know if we will be successful in obtaining reimbursement for either defense costs or indemnity. Accordingly, we recognize insurance recoveries in income only when receipt of the recovery is probable and we are able to reasonably estimate the amount of the recovery.

For additional discussion of certain litigation involving NL and certain of its former insurance carriers, please refer to our 2016 Annual Report.

Other litigation

NL—– NL has been named as a defendant in various lawsuits in several jurisdictions, alleging personal injuries as a result of occupational exposure primarily to products manufactured by our former operations containing asbestos, silica and/or mixed dust. In addition, some plaintiffs allege exposure to asbestos from working in various facilities previously owned and/or operated by NL. There are 103 of these types of cases pending, involving a total of approximately 588 plaintiffs. In addition, the claims of approximately 8,687 plaintiffs have been administratively dismissed or placed on the inactive docket in Ohio courts. We do not expect these claims will be re-opened unless the plaintiffs meet the courts’ medical criteria for asbestos-related claims. We have not accrued any amounts for this litigation because of the uncertainty of liability and inability to reasonably estimate the liability, if any. To date, we have not been adjudicated liable in any of these matters. Based on information available to us, including:

 

facts concerning historical operations,

 

the rate of new claims,