NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012
Note 1Summary of significant accounting policies:
Nature of our business
NL Industries, Inc. (NYSE: NL) is primarily a holding company. We operate in
the component products industry through our majority-owned subsidiary, CompX International Inc. (NYSE Amex: CIX). We operate in the chemicals industry through our noncontrolling interest in Kronos Worldwide, Inc. (NYSE: KRO).
Organization
At December 31, 2012, (i) Valhi, Inc. (NYSE: VHI) held approximately 83% of our outstanding
common stock and (ii) Contran Corporation and its subsidiaries held an aggregate of approximately 93% of Valhis outstanding common stock. Substantially all of Contrans outstanding voting stock is held by trusts established for the
benefit of certain children and grandchildren of Harold C. Simmons (for which Mr. Simmons is the sole trustee), or is held by Mr. Simmons or other persons or companies related to Mr. Simmons. Consequently, Mr. Simmons may be
deemed to control Contran, Valhi and us.
Unless otherwise indicated, references in this report to we,
us or our refer to NL Industries, Inc. and its subsidiaries and affiliate, Kronos, taken as a whole.
Managements estimates
In preparing our financial statements in conformity with accounting principles generally
accepted in the United States of America (GAAP), we are required to make estimates and assumptions that affect the reported amounts of our assets and liabilities and disclosures of contingent assets and liabilities at each balance sheet date and the
reported amounts of our revenues and expenses during each reporting period. Actual results may differ significantly from previously-estimated amounts under different assumptions or conditions.
Principles of consolidation
Our consolidated financial statements include the financial position, results of
operations and cash flows of NL and our wholly-owned and majority-owned subsidiaries, including CompX. We account for the 13% of CompX stock we do not own as a noncontrolling interest. We eliminate all material intercompany accounts and balances.
Changes in ownership of our wholly-owned and majority-owned subsidiaries are accounted for as equity transactions with no gain or loss recognized on the transaction unless there is a change in control.
Currency translation
The financial statements of our non-U.S. subsidiaries are translated to U.S. dollars. The
functional currency of our non-U.S. subsidiaries is generally the local currency of their country. Accordingly, we translate the assets and liabilities at year-end rates of exchange, while we translate their revenues and expenses at average exchange
rates prevailing during the year. We accumulate the resulting translation adjustments in stockholders equity as part of accumulated other comprehensive income, net of related deferred income taxes and noncontrolling interest. We recognize
currency transaction gains and losses in income. In December 2012 we sold CompXs Furniture Components business, which comprised all of CompXs subsidiaries whose functional currency was not the U.S. dollar. See Note 2.
F-12
Cash and cash equivalents
We classify bank time deposits and government
and commercial notes and bills with original maturities of three months or less as cash equivalents.
Restricted cash
equivalents
We classify cash equivalents that have been segregated or are otherwise limited in use as restricted. To the extent the restricted amount relates to a recognized liability, we classify such restricted amount as either a
current or noncurrent asset to correspond with the classification of the liability. To the extent the restricted amount does not relate to a recognized liability, we classify restricted cash as a current asset. See Note 10.
Marketable securities and securities transactions
We carry marketable securities at fair value. ASC Topic 820,
Fair
Value Measurements and Disclosures
, establishes a consistent framework for measuring fair value and, with certain exceptions, this framework is generally applied to all financial statement items required to be measured at fair value. The
standard requires fair value measurements to be classified and disclosed in one of the following three categories:
|
|
Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
|
|
|
Level 2
Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the
assets or liability; and
|
|
|
Level 3
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.
|
We accumulate unrealized gains and losses on available-for-sale securities as part of accumulated other
comprehensive income, net of related deferred income taxes and noncontrolling interest. We calculate realized gains and losses by the specific identification of securities sold. See Note 6.
Accounts receivable
We provide an allowance for doubtful accounts for known and estimated potential losses arising
from sales to customers based on a periodic review of these accounts.
Inventories and cost of sales
We
state inventories at the lower of cost or market, net of allowance for obsolete and slow-moving inventories. We generally base inventory costs for all inventory categories on an average cost that approximates the first-in, first-out method.
Inventories include the costs for raw materials, the cost to manufacture the raw materials into finished goods and overhead. Depending on the inventorys stage of completion, our manufacturing costs can include the costs of packing and
finishing, utilities, maintenance and depreciation, shipping and handling, and salaries and benefits associated with our manufacturing process. We allocate fixed manufacturing overhead based on normal production capacity. Unallocated overhead costs
resulting from periods with abnormally low production levels are charged to expense as incurred. As inventory is sold to third parties, we recognize the cost of sales in the same period that the sale occurs. We periodically review our inventory for
estimated obsolescence or instances when inventory is no longer marketable for its intended use and we record any write-down equal to the difference between the cost of inventory and its estimated net realizable value based on assumptions about
alternative uses, market conditions and other factors.
F-13
Investment in Kronos Worldwide, Inc.
We account for our 30%
non-controlling interest in Kronos by the equity method. See Note 7.
Goodwill and other intangible assets; amortization
expense
Goodwill represents the excess of cost over fair value of individual net assets acquired in business combinations. Goodwill is not subject to periodic amortization. We amortize other intangible assets, consisting principally of
certain acquired patents and tradenames, using the straight-line method over their estimated lives and state them net of accumulated amortization. We evaluate goodwill for impairment annually, or when circumstances indicate the carrying value may
not be recoverable. We evaluate other intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. See Notes 8 and 10.
Property and equipment; depreciation expense
We state property and equipment, including purchased computer software
for internal use, at cost. We compute depreciation of property and equipment for financial reporting purposes principally by the straight-line method over the estimated useful lives of 15 to 40 years for buildings and 3 to 20 years for equipment and
software. We use accelerated depreciation methods for income tax purposes, as permitted. Depreciation expense was $4.0 million in 2010, $3.6 million in 2011, and $3.2 million in 2012. Upon sale or retirement of an asset, the related cost and
accumulated depreciation are removed from the accounts and any gain or loss is recognized in income currently. Expenditures for maintenance, repairs and minor renewals are expensed; expenditures for major improvements are capitalized.
We perform impairment tests when events or changes in circumstances indicate the carrying value may not be recoverable. We consider all
relevant factors. We perform impairment tests by comparing the estimated future undiscounted cash flows associated with the asset to the assets net carrying value to determine whether impairment exists.
Employee benefit plans
Accounting and funding policies for our retirement and post retirement benefits other than
pensions (OPEB) plans are described in Note 16.
Income taxes
We, Valhi and our qualifying subsidiaries are
members of Contrans consolidated U.S. federal income tax group (the Contran Tax Group) and we and certain of our qualifying subsidiaries also file consolidated unitary state income tax returns with Contran in qualifying U.S. jurisdictions. As
a member of the Contran Tax Group, we are jointly and severally liable for the federal income tax liability of Contran and the other companies included in the Contran Tax Group for all periods in which we are included in the Contran Tax Group. See
Note 19. We are party to a tax sharing agreement with Valhi and Contran pursuant to which we generally compute our provision for income taxes on a separate-company basis and we make payments to or receive payments from Valhi in amounts that we would
have paid to or received from the U.S. Internal Revenue Service or the applicable state tax authority had we not been a member of the Contran Tax Group. Refunds are limited to amounts previously paid under the Contran Tax Agreement unless the
individual company was entitled to a refund from the U.S. Internal Revenue Service on a separate company basis. The separate company provisions and payments are computed using the tax elections made by Contran. We received net income tax refunds
from Valhi of $.7 million in 2010, $.4 million in 2011 and $.2 million in 2012.
F-14
We recognize deferred income tax assets and liabilities for the expected future tax
consequences of temporary differences between the income tax and financial reporting carrying amounts of our assets and liabilities, including investments in our subsidiaries and affiliates who are not members of the Contran Tax Group and
undistributed earnings of non-U.S. subsidiaries which are not permanently reinvested. In addition, we recognize deferred income taxes with respect to the excess of the financial reporting carrying amount over the income tax basis of our direct
investment in Kronos common stock because the exemption under GAAP to avoid recognition of such deferred income taxes is not available to us. At December 31, 2011, we had no earnings of non-U.S. subsidiaries subject to permanent reinvestment
plans. In December 2012, we sold CompXs Furniture Components operations, which comprised all of CompXs non-U.S. operating subsidiaries. See Note 2. We periodically evaluate our deferred tax assets in the various taxing jurisdictions in
which we operate and adjust any related valuation allowance based on the estimate of the amount of such deferred tax assets which we believe do not meet the more-likely-than-not recognition criteria.
We record a reserve for uncertain tax positions where we believe it is more-likely-than-not our position will not prevail with the
applicable tax authorities. The amount of the benefit associated with our uncertain tax positions that we recognize is limited to the largest amount for which we believe the likelihood of realization is greater than 50%. We accrue penalties and
interest on the difference between tax positions taken on our tax returns and the amount of benefit recognized for financial reporting purposes. We classify our reserves for uncertain tax positions in a separate current or noncurrent liability,
depending on the nature of the tax position. See Note 15.
Environmental remediation costs
We record
liabilities related to environmental remediation obligations when estimated future expenditures are probable and reasonably estimable. We adjust these accruals as further information becomes available to us or as circumstances change. We generally
do not discount estimated future expenditures to present value. We recognize any recoveries of remediation costs from other parties when we deem their receipt probable. We expense any environmental remediation related legal costs as incurred. At
December 31, 2011 and 2012, we had not recognized any receivables for recoveries. See Note 19.
Net
sales
We record sales when products are shipped and title and other risks and rewards of ownership have passed to the customer. We include amounts charged to customers for shipping and handling costs, which are not material, in net
sales. We state sales net of price, early payment and distributor discounts and volume rebates. We report taxes assessed by a governmental authority such as sales, use, value added and excise taxes on a net basis (i.e., we do not recognize these
taxes in either our revenues or in our costs and expenses).
F-15
Selling, general and administrative expenses; advertising costs; research and
development costs
Selling, general and administrative expenses include costs related to marketing, sales, distribution, research and development, legal and administrative functions such as accounting, treasury and finance, as
well as costs for salaries and benefits, travel and entertainment, promotional materials and professional fees. Advertising costs related to continuing operations are expensed as incurred and were approximately $.3 million in 2010 and $.4 million in
each of 2011 and 2012. Research, development and certain sales technical support costs related to continuing operations, expensed as incurred, were not material in 2010, 2011 or 2012.
Corporate expenses
Corporate expenses include environmental, legal and other costs attributable to formerly-owned
business units.
Earnings per share
Basic earnings per share of common stock is based upon the weighted
average number of our common shares actually outstanding during each period. Diluted earnings per share of common stock reflects the diluted effect (if any) of our outstanding stock options. The weighted average number of outstanding stock options
excluded from the calculation of diluted earnings per share because their impact would have been anti-dilutive was not material in each of 2010, 2011 and 2012. During 2010 and 2011, 10,350 and 25,950 options were exercised, respectively. All
outstanding options had been exercised or expired by the end of 2011, and no options were issued during 2012.
Note 2Discontinued operations:
On December 28, 2012, we completed the sale of CompXs Furniture Components operations to a competitor of
that business for proceeds, net of expenses, of approximately $58.0 million in cash. We recognized a pre-tax gain of $23.7 million on the disposal of these operations ($14.5 million, or $.30 per basic and diluted share, net of income taxes and
noncontrolling interest in CompX, as shown in the table below). Such pre-tax gain includes income of $10.4 million associated with the reclassification out of accumulated other comprehensive income related to foreign currency translation. The income
taxes associated with the pre-tax gain on disposal is less than the U.S. statutory income tax rate of 35% principally due to the utilization of foreign tax credits, the benefit of which had previously not been recognized under the
more-likely-than-not recognition criteria. The Furniture Components operations primarily sold products with lower average margins and higher commodity raw material content than other operations of CompXs business. Disposing of this
business is expected to enable us to focus more effort on continuing to develop the remaining portion of CompXs business that we believe has greater opportunity for higher returns and with less volatility relating to changes in the cost of
commodity raw materials.
F-16
Selected financial data for the operations of the disposed Furniture Components business is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Income statement:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
59,125
|
|
|
$
|
59,021
|
|
|
$
|
60,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
3,447
|
|
|
$
|
9,061
|
|
|
$
|
7,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
$
|
3,490
|
|
|
$
|
9,045
|
|
|
$
|
7,284
|
|
Income tax expense
|
|
|
4,040
|
|
|
|
4,974
|
|
|
|
3,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
(550
|
)
|
|
|
4,071
|
|
|
|
3,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale
|
|
|
|
|
|
|
|
|
|
|
23,674
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
5,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
18,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations, net of tax
|
|
|
(550
|
)
|
|
|
4,071
|
|
|
|
21,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest in income (loss) from discontinued operations, net of tax
|
|
|
(50
|
)
|
|
|
542
|
|
|
|
494
|
|
Noncontrolling interest in gain on sale of discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
3,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noncontrolling interest in discontinued operations, net of tax
|
|
|
(50
|
)
|
|
|
542
|
|
|
|
4,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations, net of tax and noncontrolling interest
|
|
$
|
(500
|
)
|
|
$
|
3,529
|
|
|
$
|
17,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with generally accepted accounting principles, the assets and liabilities relating to the
Furniture Components business were eliminated from the 2012 Consolidated Balance Sheet at the date of sale. We have reclassified our Consolidated Statements of Income to reflect the disposed business as discontinued operations for all periods
presented. We have not reclassified our Consolidated Balance Sheet or our Consolidated Statement of Cash Flows to reflect discontinued operations.
F-17
Major classes of assets and liabilities of discontinued operations included in our balance
sheet at December 31, 2011 are as follows (in thousands):
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|
|
|
|
|
December 31,
2011
|
|
|
|
(in thousands)
|
|
Cash
|
|
$
|
6,337
|
|
Accounts receivables
|
|
|
6,087
|
|
Inventory
|
|
|
7,568
|
|
Other current assets
|
|
|
570
|
|
Goodwill
|
|
|
15,599
|
|
Property and equipment, net
|
|
|
17,424
|
|
Other noncurrent assets
|
|
|
312
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
53,897
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
7,858
|
|
Noncurrent liabilities
|
|
|
3,294
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
11,152
|
|
|
|
|
|
|
In conjunction with the sale of CompXs Furniture Components business, the buyer was not interested
in retaining certain undeveloped land located in Taiwan owned by our Taiwanese Furniture Component business. We had no additional use for the undeveloped land in Taiwan and therefore expected the land to be sold to a third party with CompX receiving
the net proceeds. Based on the legal form of how we completed the disposal transaction, our interest in such land is represented by a $3.0 million promissory note receivable at December 31, 2012, issued to us by our former Taiwanese business
which retained legal ownership in the land to facilitate the future sale of the land to a third party. The proceeds from the future sale of the land are required to be used to settle the note receivable. During the first quarter of 2013, an
agreement was entered into with a third party to sell the land which is expected to be substantially completed by the end of the first quarter. The value of the note receivable as of December 31, 2012 represents the expected net proceeds less
disposal costs based on the land sale agreement with the third party which represents a Level 2 input as defined by ASC 820-10-35. Such note receivable is classified as part of accounts receivable in our Consolidated Balance Sheet at
December 31, 2012.
Note 3Geographic information:
We operate in the security products industry and marine components industry through our majority ownership of CompX.
CompX manufactures and sells security products including locking mechanisms and other security products for sale to the transportation, postal, office and institutional furniture, cabinetry, tool storage, healthcare and other industries with a
facility in South Carolina and a facility shared with marine components in Illinois. CompX also manufactures and distributes stainless steel exhaust systems, gauges and throttle controls primarily for recreational boats.
F-18
For geographic information, the point of origin (place of manufacture) for all net sales is
the U.S., the point of destination for net sales is based on the location of the customer, and property and equipment are attributable to their physical location. At December 31, 2011 and 2012, the net assets of non-U.S. subsidiaries included
in consolidated net assets approximated $36.8 million and $3.1 million, respectively.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
(In millions)
|
|
Net salespoint of destination:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
72.0
|
|
|
$
|
75.6
|
|
|
$
|
78.3
|
|
Canada
|
|
|
1.9
|
|
|
|
2.0
|
|
|
|
2.2
|
|
Other
|
|
|
2.2
|
|
|
|
2.2
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
76.1
|
|
|
$
|
79.8
|
|
|
$
|
83.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
|
(In millions)
|
|
Identifiable assets
|
|
|
|
|
|
|
|
|
Net property and equipment:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
34.4
|
|
|
$
|
34.3
|
|
Canada*
|
|
|
9.7
|
|
|
|
|
|
Taiwan*
|
|
|
7.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
51.8
|
|
|
$
|
34.3
|
|
|
|
|
|
|
|
|
|
|
*
|
Denotes disposed operations. See Note 2.
|
Note 4Accounts and other receivables, net:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Trade receivables
|
|
$
|
14,647
|
|
|
$
|
8,696
|
|
Promissory note receivable
|
|
|
|
|
|
|
3,034
|
|
Accrued insurance recoveries*
|
|
|
586
|
|
|
|
476
|
|
Other receivables
|
|
|
106
|
|
|
|
51
|
|
Refundable income taxes
|
|
|
8
|
|
|
|
8
|
|
Allowance for doubtful accounts
|
|
|
(401
|
)
|
|
|
(216
|
)
|
|
|
|
|
|
|
|
|
|
Total**
|
|
$
|
14,946
|
|
|
$
|
12,049
|
|
|
|
|
|
|
|
|
|
|
*
|
The accrued insurance recoveries are discussed in Note 19.
|
**
|
Includes amounts related to disposed operations at December 31, 2011. See Note 2.
|
F-19
Note 5Inventories, net:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Raw materials
|
|
$
|
6,757
|
|
|
$
|
3,253
|
|
In process products
|
|
|
7,437
|
|
|
|
5,902
|
|
Finished products
|
|
|
5,384
|
|
|
|
2,068
|
|
|
|
|
|
|
|
|
|
|
Total*
|
|
$
|
19,578
|
|
|
$
|
11,223
|
|
|
|
|
|
|
|
|
|
|
*
|
Includes amounts related to disposed operations at December 31, 2011. See Note 2.
|
Note 6Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value
measurement
level
|
|
|
Market
value
|
|
|
Cost
basis
|
|
|
Unrealized
gains
|
|
|
|
|
|
|
(In thousands)
|
|
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets
(available-for-sale):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valhi common stock
|
|
|
1
|
|
|
$
|
289,711
|
|
|
$
|
24,347
|
|
|
$
|
265,364
|
|
TIMET common stock
|
|
|
1
|
|
|
|
21,708
|
|
|
|
7,351
|
|
|
|
14,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
311,419
|
|
|
$
|
31,698
|
|
|
$
|
279,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets
(available-for-sale):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valhi common stock
|
|
|
1
|
|
|
$
|
179,662
|
|
|
$
|
24,347
|
|
|
$
|
155,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our marketable securities consist of investments in the publicly-traded shares of our related parties:
Valhi and Titanium Metals Corporation (TIMET). We account for our investments in Valhi and TIMET common stocks as available-for-sale marketable equity securities and any unrealized gains or losses on the securities are recognized through other
comprehensive income. All of our marketable securities at December 31, 2011 and 2012 were carried at fair value based on quoted market prices, representing a Level 1 input within the fair value hierarchy.
At December 31, 2011 and 2012, we held approximately 14.4 million shares of Valhis common stock. At December 31,
2011 and 2012, the quoted market prices of Valhi common stock were $20.16 and $12.50 per share, respectively. In May 2012, Valhi implemented a 3-for-1 split of its common stock. We have adjusted all share and per-share disclosures related to our
investment in Valhi stock for all periods prior to May 2012 to give effect to the stock split. The stock split had no financial statement impact to us, and our ownership interest in Valhi did not change as a result of the split.
At December 31, 2011, we held approximately 1.4 million, or .8%, of the outstanding common stock of TIMET, and Contran,
Mr. Harold Simmons and persons and other entities related to Mr. Simmons (including us) owned a majority of TIMETs outstanding common stock. At December 31, 2011, the quoted market price of TIMET common stock was $14.98. In
December 2012, we sold all of our shares of TIMET common stock for $23.9 million ($16.50 per share) pursuant to a cash tender offer by a third party, and all of our affiliates also sold their
F-20
shares of TIMET common stock for the same price. Securities transactions in 2012 consist of a $16.6 million pre-tax gain we recognized on the sale of these TIMET shares.
The Valhi common stock we own is subject to the restrictions on resale pursuant to certain provisions of the SEC Rule 144. In addition,
as a majority-owned subsidiary of Valhi we cannot vote our shares of Valhi common stock under Delaware Corporation Law, but we do receive dividends from Valhi on these shares, when declared and paid.
Note 7Investment in Kronos Worldwide, Inc.:
At December 31, 2011 and 2012, we owned approximately 35.2 million shares of Kronos common stock. The per
share quoted market price of Kronos at December 31, 2011 and 2012 was $18.04 and $19.50 per share, respectively, or an aggregate market value of $635.3 million and $686.8 million, respectively.
In November 2010, Kronos completed a secondary public offering of 17.94 million shares of its common stock in an underwritten
offering for net proceeds of $337.6 million. The price to the public was $20.00 per share, and the underwriting discount was 5.75% (or $1.15 per share). Costs of the offering (exclusive of the underwriting discount) were approximately $.7 million.
The shares of Kronos common stock issued in the secondary offering are identical to the previously issued outstanding shares in all respects, including par value, liquidation and dividend preference. All shares were sold to third-party investors.
Upon completion of the offering our ownership of Kronos was reduced from 36.0% to 30.4%. We accounted for the reduction in our ownership interest in Kronos in accordance with ASC 323-10-40, and consequently we recognized a $78.9 million gain in the
fourth quarter of 2010, representing the increase in our proportionate interest in Kronos net assets from immediately prior to immediately following Kronos stock issuance.
At December 31, 2012, we had an aggregate of 450,000 shares of our Kronos common stock pledged in connection with certain
liabilities incurred in environmental-related settlement obligations, of which 150,000 shares were released to us in January 2013 pursuant to the terms of the applicable settlement agreement discussed in Note 19.
The change in the carrying value of our investment in Kronos during the past three years is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
(In millions)
|
|
Balance at the beginning of the year
|
|
$
|
112.8
|
|
|
$
|
231.7
|
|
|
$
|
281.3
|
|
Equity in earnings of Kronos
|
|
|
45.6
|
|
|
|
97.6
|
|
|
|
66.4
|
|
Gain on reduction in ownership interest in Kronos
|
|
|
78.9
|
|
|
|
|
|
|
|
|
|
Dividends received from Kronos
|
|
|
(4.4
|
)
|
|
|
(37.9
|
)
|
|
|
(21.1
|
)
|
Other, principally equity in Kronos other comprehensive loss
|
|
|
(1.2
|
)
|
|
|
(10.1
|
)
|
|
|
(3.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the year
|
|
$
|
231.7
|
|
|
$
|
281.3
|
|
|
$
|
323.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
Selected financial information of Kronos is summarized below:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
|
(In millions)
|
|
Current assets
|
|
$
|
865.0
|
|
|
$
|
1,223.4
|
|
Property and equipment, net
|
|
|
485.5
|
|
|
|
522.5
|
|
Investment in TiO
2
joint venture
|
|
|
89.2
|
|
|
|
109.9
|
|
Other noncurrent assets
|
|
|
384.2
|
|
|
|
171.2
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,823.9
|
|
|
$
|
2,027.0
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
328.0
|
|
|
$
|
328.4
|
|
Long-term debt
|
|
|
362.9
|
|
|
|
378.9
|
|
Accrued pension and post retirement benefits
|
|
|
140.3
|
|
|
|
203.3
|
|
Other non-current liabilities
|
|
|
68.4
|
|
|
|
54.3
|
|
Stockholders equity
|
|
|
924.3
|
|
|
|
1,062.1
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,823.9
|
|
|
$
|
2,027.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
(In millions)
|
|
Net sales
|
|
$
|
1,449.7
|
|
|
$
|
1,943.3
|
|
|
$
|
1,976.3
|
|
Cost of sales
|
|
|
1,104.4
|
|
|
|
1,194.9
|
|
|
|
1,415.9
|
|
Income from operations
|
|
|
178.4
|
|
|
|
546.5
|
|
|
|
359.6
|
|
Net income
|
|
|
130.6
|
|
|
|
321.0
|
|
|
|
218.5
|
|
Note 8Goodwill:
Substantially all of our goodwill is related to our component products operations and was generated from CompXs
acquisitions of certain business units. Prior to December 31, 2012, we also had approximately $6.4 million of goodwill which resulted from our acquisition of EWI Re, Inc., (EWI), an insurance brokerage subsidiary. EWI brokers certain insurance
policies for Contran and certain of its affiliates, including us and Kronos, as well as certain third parties. See Note 17.
We have assigned goodwill related to the component products operations to three reporting units (as that term is defined in ASC Topic
350-20-20
Goodwill
): one consisting of CompXs security products operations, one consisting of CompXs furniture components operations and one consisting of CompXs marine component operations. Prior to 2010, all of the
goodwill related to CompXs marine components operations (which aggregated $10.1 million) was impaired. Our gross goodwill at December 31, 2012 was $43.7 million.
We test for goodwill impairment at the reporting unit level. In accordance with the requirements of ASC Topic 350-20-20, we test for goodwill impairment at each of our component products reporting units
as well as the goodwill associated with the EWI reporting unit during the third quarter of each year or when circumstances arise that indicate impairment might be present. In determining the estimated fair value of the reporting units, we use
appropriate valuation techniques, such as discounted cash flows. Such discounted cash flows are a Level 3 input. If the carrying amount of goodwill exceeds its implied fair value, an impairment charge is recorded.
F-22
During 2010 and 2011, we tested our goodwill for impairment only in the third quarter of the
year in connection with our annual goodwill impairment test. We also tested our goodwill for impairment in connection with our annual goodwill impairment test during the third quarter of 2012. No impairment was indicated as part of such 2010, 2011
or 2012 annual review of goodwill. However, as a result of the December 2012 disposition of CompXs furniture components business and the December 2012 sale of all common stock of TIMET owned by Contran Corporation and its affiliates (including
us), a significant portion of EWIs insurance brokerage business was lost. Consequently, we reevaluated goodwill associated with EWI due to the triggering event caused by the significant impact these dispositions had on EWIs business and
concluded that all of our goodwill related to EWI was impaired. Accordingly, we recognized a $6.4 million goodwill impairment in December 2012. In addition, we had goodwill of approximately $14.3 million attributable to the disposed CompX furniture
components operations, see Note 2.
Changes in the carrying amount of our goodwill related to CompXs two reporting units
as well as the goodwill related to EWI during the past three years are presented in the table below. Goodwill acquired in 2011 relates to the acquisition of an ergonomic components product business included in CompXs disposed operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
(In millions)
|
|
Balance at the beginning of the year
|
|
$
|
44.3
|
|
|
$
|
44.8
|
|
|
$
|
47.6
|
|
Goodwill acquired during the year
|
|
|
|
|
|
|
3.1
|
|
|
|
|
|
Sale of disposed operations
|
|
|
|
|
|
|
|
|
|
|
(14.3
|
)
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
(6.4
|
)
|
Changes in currency exchange rates
|
|
|
.5
|
|
|
|
(.3
|
)
|
|
|
.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
44.8
|
|
|
$
|
47.6
|
|
|
$
|
27.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9Assets held for sale:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Byron Center facility
|
|
$
|
4,444
|
|
|
$
|
|
|
River Grove facility
|
|
|
1,775
|
|
|
|
1,535
|
|
Neenah land
|
|
|
430
|
|
|
|
430
|
|
|
|
|
|
|
|
|
|
|
Total assets held for sale
|
|
$
|
6,649
|
|
|
$
|
1,965
|
|
|
|
|
|
|
|
|
|
|
F-23
At December 31, 2012 our assets held for sale consisted of the River Grove facility
(land, building and building improvements) and the Neenah land, all of which were formerly used in CompXs operations. These assets were classified as assets held for sale when they ceased to be used in our operations and met all of
the applicable criteria under GAAP. In the third quarter of 2012 we obtained updated independent appraisals of the Byron Center and River Grove facilities. Based on these appraisals, we recognized write-downs in the third quarter of $.2 million on
the Byron Center facility and $.2 million on the River Grove facility to reduce the carrying value of the assets to their estimated fair value less cost to sell. We sold the Byron Center facility in December 2012 for net proceeds of $3.6 million,
which was less than the carrying amount of the assets and we therefore recognized a loss on the sale of the facility of approximately $.8 million during the fourth quarter of 2012.
In the fourth quarter of 2012, we entered into an agreement to sell the River Grove facility. The transaction closed during the first
quarter of 2013. The net proceeds from the sale approximate the carrying value of the assets as of December 31, 2012. The valuation of the River Grove facility as of December 31, 2012 is based on a sales contract with a third party which
represents a Level 2 input as defined by ASC 820-10-35.
The write-downs on assets held for sale together with the loss on the
sale of the Byron Center facility as of December 31, 2012 totaled $1.2 million for 2012. We also recognized asset held for sale write-downs of $.5 million in 2010 and $1.1 million in 2011 related to these properties, associated with obtaining
updated appraisals on the properties. These appraisals represent a Level 2 input as defined by ASC 820-10-35.
Note 10Other assets:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Patents and other intangible assets, net
|
|
$
|
2,045
|
|
|
$
|
154
|
|
Restricted cash
|
|
|
1,551
|
|
|
|
1,694
|
|
Other
|
|
|
662
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,258
|
|
|
$
|
1,889
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets are stated net of accumulated amortization of $3.8 million at December 31,
2011 and 2012. The decrease in intangible assets in 2012 is the result of the sale of CompXs Furniture Components operations. See Note 2.
Amortization of intangible assets related to continuing operations was $.6 million in 2010, $.4 million in 2011, and $.3 million 2012. Estimated aggregate intangible asset amortization over the next five
years is not significant.
F-24
Note 11Accrued liabilities:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Employee benefits
|
|
$
|
8,954
|
|
|
$
|
7,611
|
|
Professional fees and settlements
|
|
|
2,704
|
|
|
|
2,805
|
|
Other
|
|
|
2,316
|
|
|
|
1,805
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,974
|
|
|
$
|
12,221
|
|
|
|
|
|
|
|
|
|
|
Note 12Other noncurrent liabilities:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Insurance claims and expenses
|
|
$
|
594
|
|
|
$
|
586
|
|
Reserve for uncertain tax positions
|
|
|
16,832
|
|
|
|
16,832
|
|
Other
|
|
|
1,789
|
|
|
|
1,154
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,215
|
|
|
$
|
18,572
|
|
|
|
|
|
|
|
|
|
|
Our reserve for uncertain tax positions is discussed in Note 15.
Note 13Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
|
(In thousands)
|
|
NL:
|
|
|
|
|
|
|
|
|
Promissory note payable to Valhi
|
|
$
|
4,100
|
|
|
$
|
|
|
Promissory note issued in conjunction with litigation settlement
|
|
|
9,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
13,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary debt:
|
|
|
|
|
|
|
|
|
CompX credit facility
|
|
|
1,955
|
|
|
|
|
|
CompX note payable to TIMET Finance Management Company
|
|
|
22,230
|
|
|
|
18,480
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
24,185
|
|
|
|
18,480
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
37,285
|
|
|
|
18,480
|
|
Less current maturities
|
|
|
10,000
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
27,285
|
|
|
$
|
17,480
|
|
|
|
|
|
|
|
|
|
|
F-25
NL
We have a revolving promissory note with Valhi that, as amended, allows us to
borrow up to $40 million. Our borrowings from Valhi under this revolving note are unsecured, bear interest at prime rate plus 2.75% (6.00% at December 31, 2012) with all principal due on demand, but in any event no earlier than
March 31, 2014 and no later than December 31, 2014. The amount of the outstanding borrowings at any time is solely at the discretion of Valhi. See Note 17.
The promissory note issued in conjunction with a litigation settlement was paid in full in December 2012 and is discussed in Note 19.
CompXs revolving bank credit facility
At December 31, 2011 CompX had a $37.5 million revolving bank credit
facility that matured in January 2012. In January 2012, we amended and restated the terms of the credit facility to extend the maturity date to January 2015 and reduce the size of the facility from $37.5 million to $30.0 million. The credit facility
was collateralized by 65% of the ownership interests in CompXs first tier non-U.S. subsidiaries. CompX had net borrowings of $3.0 million under the credit facility in 2010, which were repaid in February 2011. In July 2011, CompX borrowed
approximately $5.3 million under the credit facility in connection with an acquisition within its Furniture Components business, and subsequently repaid $2.9 million during the remainder of 2011. The interest rate on the $2.0 million outstanding
under the credit facility at December 31, 2011 was 4.4%. The $2.0 million outstanding at December 31, 2011 was repaid in the fourth quarter of 2012 prior to the completion of the disposal of CompXs Furniture Components operations, at
which time CompX terminated the credit facility.
CompXs note payable to TIMET Finance Management
Company
Prior to 2010, CompX purchased and/or cancelled certain shares of its Class A common stock from TIMET Finance Management Company (TFMC). TFMC is a wholly-owned subsidiary of TIMET, which was one of our affiliates until
December 20, 2012 (See Note 6). We paid for the shares acquired in the form of a promissory note which, as amended, bears interest at LIBOR plus 1% (1.4% at December 31, 2012) and provides for quarterly principal repayments of $250,000,
with the balance due at maturity in September 2014. The promissory note is prepayable, in whole or in part, at any time at our option without penalty. The promissory note was subordinated to CompXs U.S. revolving bank credit facility until
such facility was terminated in December 2012. The promissory note was amended in September 2009 resulting in the deferral of interest payments until March 2011 and the postponement of the quarterly principal repayments until March 2011. We had net
repayments on this note payable of nil in 2010, $20 million in 2011, (including $15.0 million of prepayments in 2011 using cash we received upon collection of our promissory note receivable discussed in Note 19) and $3.8 million in 2012. We
recognized interest expense of approximately $.6 million in 2010, $.5 million in 2011 and $.3 million in 2012 on this promissory note. The scheduled principal repayments of CompXs promissory note are shown in the table below.
|
|
|
|
|
|
|
Amount
|
|
Years ending December 31,
|
|
(In thousands)
|
|
2013
|
|
$
|
1,000
|
|
2014
|
|
|
17,480
|
|
|
|
|
|
|
Total
|
|
$
|
18,480
|
|
|
|
|
|
|
F-26
Note 14Stockholders equity:
The shares of our common stock issued during the past three years consist of employee stock option exercises and stock
awards issued annually to members of our board of directors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
(Shares in thousands)
|
|
Common stock outstanding at the beginning of the year
|
|
|
48,612
|
|
|
|
48,631
|
|
|
|
48,663
|
|
Common stock issued
|
|
|
19
|
|
|
|
32
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock at end of the year
|
|
|
48,631
|
|
|
|
48,663
|
|
|
|
48,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term incentive compensation plan
The NL Industries, Inc. 1998 Long-Term Incentive
Plan provided for the discretionary grant of restricted common stock, stock options, stock appreciation rights (SARs) and other incentive compensation to our officers and other key employees and non-employee directors, including individuals who are
employed by Kronos. All options under this plan expired or were exercised in 2011. In 2012, we adopted the NL Industries, Inc. 2012 Director Stock Plan pursuant to which an aggregate of up to 200,000 shares of our common stock can be awarded to
members of our board of directors, and the 1998 Long-Term Incentive Plan was terminated. At December 31, 2012, 200,000 shares were available for future grants under the 2012 Director Stock Plan.
Stock option plan of subsidiaries and affiliates
CompX and Kronos each have a share based incentive compensation plan
pursuant to which an aggregate of up to 200,000 shares of their common stock can be awarded to members of their board of directors. At December 31, 2012, 200,000 shares were available for award under each of these plans.
F-27
Accumulated other comprehensive income (loss)
Changes in
accumulated other comprehensive income for 2010, 2011 and 2012 are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Accumulated other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
38,577
|
|
|
$
|
68,147
|
|
|
$
|
186,451
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) arising during the year
|
|
|
29,570
|
|
|
|
118,304
|
|
|
|
(71,184
|
)
|
Less reclassification adjustment for amounts included in realized gain
|
|
|
|
|
|
|
|
|
|
|
(9,848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
68,147
|
|
|
$
|
186,451
|
|
|
$
|
105,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
(128,753
|
)
|
|
$
|
(127,032
|
)
|
|
$
|
(133,041
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Arising during the year
|
|
|
1,721
|
|
|
|
(6,009
|
)
|
|
|
6,605
|
|
Less reclassification adjustment for amounts included in gain on disposal
|
|
|
|
|
|
|
|
|
|
|
(8,729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
(127,032
|
)
|
|
$
|
(133,041
|
)
|
|
$
|
(135,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
(52,574
|
)
|
|
$
|
(51,534
|
)
|
|
$
|
(59,478
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost and net losses included in net periodic pension cost
|
|
|
1,970
|
|
|
|
1,824
|
|
|
|
2,254
|
|
Net actuarial loss arising during year
|
|
|
(400
|
)
|
|
|
(9,768
|
)
|
|
|
(9,178
|
)
|
Plan amendment
|
|
|
(530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
(51,534
|
)
|
|
$
|
(59,478
|
)
|
|
$
|
(66,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPEB plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
(661
|
)
|
|
$
|
1,592
|
|
|
$
|
1,344
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service credit and net losses included in net periodic OPEB cost
|
|
|
(140
|
)
|
|
|
(581
|
)
|
|
|
(552
|
)
|
Net actuarial gain (loss) arising during year
|
|
|
(772
|
)
|
|
|
333
|
|
|
|
103
|
|
Plan amendment
|
|
|
3,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
1,592
|
|
|
$
|
1,344
|
|
|
$
|
895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
(143,411
|
)
|
|
$
|
(108,827
|
)
|
|
$
|
(4,724
|
)
|
Other comprehensive income (loss)
|
|
|
34,584
|
|
|
|
104,103
|
|
|
|
(90,529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
(108,827
|
)
|
|
$
|
(4,724
|
)
|
|
$
|
(95,253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The marketable securities reclassification adjustment in 2012 consists principally of the securities
transaction gain related to the sale of TIMET common stock discussed in Note 6. The currency translation reclassification adjustment in 2012 relates to CompXs disposition of its furniture components operations discussed in Note 2. See Note 16
for amounts related to our defined benefit pension plans and OPEB plans.
F-28
Note 15Income taxes:
The provision for income taxes attributable to continuing operations, the difference between such provision for income
taxes, the amount that would be expected using the U.S. federal statutory income tax rate of 35% and the comprehensive provision for income taxes are presented below. All of our pre-tax income attributable to continuing operations relates to
operations in the U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
(In millions)
|
|
Expected tax expense, at U.S. federal statutory income tax rate of 35%
|
|
$
|
37.7
|
|
|
$
|
34.4
|
|
|
$
|
27.0
|
|
Incremental U.S. tax and rate differences on equity in earnings
|
|
|
(1.3
|
)
|
|
|
(13.3
|
)
|
|
|
(7.4
|
)
|
U.S. state income taxes, net
|
|
|
.6
|
|
|
|
.3
|
|
|
|
(.7
|
)
|
Tax rate changes
|
|
|
|
|
|
|
(1.4
|
)
|
|
|
|
|
Nondeductible goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
2.2
|
|
Other, net
|
|
|
(.6
|
)
|
|
|
(.2
|
)
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
36.4
|
|
|
$
|
19.8
|
|
|
$
|
19.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
(In millions)
|
|
Components of income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Currently payable (receivable)
|
|
$
|
(1.8
|
)
|
|
$
|
.9
|
|
|
$
|
(15.0
|
)
|
Deferred income taxes
|
|
|
38.2
|
|
|
|
18.9
|
|
|
|
34.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
36.4
|
|
|
$
|
19.8
|
|
|
$
|
19.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
(In millions)
|
|
Comprehensive provision for income taxes (benefit) allocable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
36.4
|
|
|
$
|
19.8
|
|
|
$
|
19.9
|
|
Discontinued operations
|
|
|
4.1
|
|
|
|
4.9
|
|
|
|
9.1
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
|
16.2
|
|
|
|
63.8
|
|
|
|
(43.6
|
)
|
Currency translation
|
|
|
.3
|
|
|
|
(3.1
|
)
|
|
|
3.0
|
|
Pension liabilities
|
|
|
.6
|
|
|
|
(4.3
|
)
|
|
|
(3.7
|
)
|
OPEB plans
|
|
|
1.2
|
|
|
|
(.1
|
)
|
|
|
(.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58.8
|
|
|
$
|
81.0
|
|
|
$
|
(15.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-29
The components of the net deferred tax liability at December 31, 2011 and 2012 are summarized in the
following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
(In millions)
|
|
Tax effect of temporary differences related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
.9
|
|
|
$
|
|
|
|
$
|
1.0
|
|
|
$
|
|
|
Marketable securities
|
|
|
|
|
|
|
(89.0
|
)
|
|
|
|
|
|
|
(62.5
|
)
|
Property and equipment
|
|
|
|
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
(3.8
|
)
|
Accrued OPEB costs
|
|
|
1.8
|
|
|
|
|
|
|
|
1.6
|
|
|
|
|
|
Accrued pension cost
|
|
|
5.9
|
|
|
|
|
|
|
|
4.9
|
|
|
|
|
|
Accrued environmental liabilities
|
|
|
14.4
|
|
|
|
|
|
|
|
16.9
|
|
|
|
|
|
Other accrued liabilities and deductible differences
|
|
|
5.0
|
|
|
|
|
|
|
|
3.0
|
|
|
|
|
|
Other taxable differences
|
|
|
|
|
|
|
(9.8
|
)
|
|
|
|
|
|
|
(8.7
|
)
|
Investments in subsidiaries and affiliates
|
|
|
|
|
|
|
(113.0
|
)
|
|
|
|
|
|
|
(120.0
|
)
|
Tax loss and tax credit carryforwards
|
|
|
2.8
|
|
|
|
|
|
|
|
.1
|
|
|
|
|
|
Valuation allowance
|
|
|
(.3
|
)
|
|
|
|
|
|
|
(.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted gross deferred tax assets (liabilities)
|
|
|
30.5
|
|
|
|
(215.8
|
)
|
|
|
27.4
|
|
|
|
(195.0
|
)
|
Netting of items by tax jurisdiction
|
|
|
(23.3
|
)
|
|
|
23.3
|
|
|
|
(23.1
|
)
|
|
|
23.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.2
|
|
|
|
(192.5
|
)
|
|
|
4.3
|
|
|
|
(171.9
|
)
|
Less net current deferred tax asset
|
|
|
7.2
|
|
|
|
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net noncurrent deferred tax liability
|
|
$
|
|
|
|
$
|
(192.5
|
)
|
|
$
|
|
|
|
$
|
(171.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax authorities are examining certain of our U.S. and non-U.S. tax returns, including those of Kronos,
and tax authorities have or may propose tax deficiencies, including penalties and interest. We cannot guarantee that these tax matters will be resolved in our favor due to the inherent uncertainties involved in settlement initiatives and court and
tax proceedings. We believe that 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 consequence of a European
Court ruling that resulted in a favorable resolution of certain income tax issues in Germany, during the first quarter of 2010 the German tax authorities agreed to an increase in Kronos German net operating loss carryforwards. Accordingly,
Kronos recognized a non-cash income tax benefit of $35.2 million in the first quarter of 2010.
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. Kronos objects to the re-assessments and believes the position is without merit. Accordingly, the re-assessments are
being appealed. If the full amount of the proposed adjustment were ultimately to be assessed against Kronos the cash tax liability would be approximately $16.0 million. Kronos believes that it has adequate accruals for this matter.
F-30
We accrue interest and penalties on our uncertain tax positions as a component of our
provision for income taxes. The amount of interest and penalties we accrued during 2010, 2011 and 2012 was not material, and at December 31, 2011 and 2012, we had an immaterial amount accrued for interest and penalties for our uncertain
tax positions.
The following table shows the changes in the amount of our uncertain tax positions (exclusive of the effect of
interest and penalties) during 2010, 2011 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
(In millions)
|
|
Unrecognized liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of the period
|
|
$
|
17.0
|
|
|
$
|
16.8
|
|
|
$
|
16.8
|
|
Settlements with taxing authoritiescash paid
|
|
|
(.1
|
)
|
|
|
|
|
|
|
|
|
Lapse of applicable statute of limitations
|
|
|
(.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
16.8
|
|
|
$
|
16.8
|
|
|
$
|
16.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
If our uncertain tax positions were recognized, a benefit of $15.2 million would affect our effective
income tax rate in each of 2010, 2011 and 2012. We currently estimate that our unrecognized tax benefits will not change materially during the next twelve months.
We file income tax returns in various U.S. federal, state and local jurisdictions. Prior to 2012, we also filed income tax returns in various non-U.S. jurisdictions, principally in Canada and
Taiwan. Our U.S. income tax returns prior to 2009 are generally considered closed to examination by applicable tax authorities.
Note 16Employee benefit plans:
Defined contribution plans
We maintain various defined contribution pension plans
worldwide. Company contributions are based on matching or other formulas. Defined contribution plan expense attributable to continuing operations approximated $1.6 million in 2010, $1.8 million in 2011 and $1.9 million in 2012.
Accounting for defined benefit pension and postretirement benefits other than pension (OPEB) plans
We recognize all
changes in the funded status of these plans through other income. Any future changes will be recognized either in net income, to the extent they are reflected in periodic benefit cost, or through other comprehensive income.
Defined benefit plans
We maintain a defined benefit pension plan in the U.S. We also maintain a plan in the
United Kingdom related to a former disposed business unit in the U.K. The benefits under our defined benefit plans are based upon years of service and employee compensation. The plans are closed to new participants and no additional benefits accrue
to existing plan participants. Our funding policy is to contribute annually the minimum amount required under ERISA (or equivalent non-U.S.) regulations plus additional amounts as we deem appropriate.
We currently expect to contribute approximately $1.6 million to all of our defined benefit pension plans during 2013. Benefit payments to
plan participants out of plan assets are expected to be the equivalent of (in millions):
|
|
|
|
|
2013
|
|
$
|
3.5
|
|
2014
|
|
|
3.6
|
|
2015
|
|
|
3.6
|
|
2016
|
|
|
3.7
|
|
2017
|
|
|
3.8
|
|
Next 5 years
|
|
|
19.5
|
|
F-31
The funded status of our defined benefit pension plans is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Change in projected benefit obligations (PBO):
|
|
|
|
|
|
|
|
|
Balance at beginning of the year
|
|
$
|
52,643
|
|
|
$
|
57,000
|
|
Interest cost
|
|
|
2,615
|
|
|
|
2,379
|
|
Participant contributions
|
|
|
6
|
|
|
|
7
|
|
Actuarial losses, net
|
|
|
4,881
|
|
|
|
2,874
|
|
Change in currency exchange rates
|
|
|
(19
|
)
|
|
|
454
|
|
Benefits paid
|
|
|
(3,126
|
)
|
|
|
(3,299
|
)
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of the year
|
|
|
57,000
|
|
|
|
59,415
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value at beginning of the year
|
|
|
43,923
|
|
|
|
40,087
|
|
Actual return on plan assets
|
|
|
(1,272
|
)
|
|
|
6,083
|
|
Employer contributions
|
|
|
578
|
|
|
|
2,247
|
|
Participant contributions
|
|
|
6
|
|
|
|
7
|
|
Change in currency exchange rates
|
|
|
(22
|
)
|
|
|
373
|
|
Benefits paid
|
|
|
(3,126
|
)
|
|
|
(3,299
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
40,087
|
|
|
|
45,498
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(16,913
|
)
|
|
$
|
(13,917
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
Accrued pension costs:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(170
|
)
|
|
$
|
(170
|
)
|
Noncurrent
|
|
|
(16,743
|
)
|
|
|
(13,747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(16,913
|
)
|
|
$
|
(13,917
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive lossactuarial losses, net
|
|
$
|
32,027
|
|
|
$
|
31,100
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation (ABO)
|
|
$
|
57,000
|
|
|
$
|
59,415
|
|
|
|
|
|
|
|
|
|
|
The amounts shown in the table above for unrecognized actuarial losses at December 31, 2011 and 2012
have not been recognized as components of our periodic defined benefit pension cost as of those dates. These amounts will be recognized as components of our periodic defined benefit cost in future years. These amounts, net of deferred income taxes,
are recognized in our accumulated other comprehensive income (loss) at December 31, 2011 and 2012. We expect that $1.2 million of the unrecognized actuarial losses at December 31, 2012 will be recognized as a component of our periodic
defined benefit pension cost in 2013. The table below details the changes in other comprehensive income during 2010, 2011 and 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Changes in plan assets and benefit obligations recognized in other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial gain (loss) arising during the year
|
|
$
|
2,479
|
|
|
$
|
(10,360
|
)
|
|
$
|
(426
|
)
|
Amortization of unrecognized net actuarial loss
|
|
|
1,326
|
|
|
|
900
|
|
|
|
1,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,805
|
|
|
$
|
(9,460
|
)
|
|
$
|
927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
The components of our net periodic defined benefit pension cost are presented in the table
below. The amount shown below for the amortization of unrecognized actuarial losses in 2010, 2011 and 2012, net of deferred income taxes, was recognized as a component of our accumulated other comprehensive income at December 31, 2009, 2010 and
2011, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Net periodic pension cost (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost on PBO
|
|
$
|
2,674
|
|
|
$
|
2,615
|
|
|
$
|
2,379
|
|
Expected return on plan assets
|
|
|
(3,371
|
)
|
|
|
(3,905
|
)
|
|
|
(3,658
|
)
|
Amortization of unrecognized net actuarial loss
|
|
|
1,326
|
|
|
|
900
|
|
|
|
1,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
629
|
|
|
$
|
(390
|
)
|
|
$
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain information concerning our defined benefit pension plans is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
|
(In thousands)
|
|
PBO at end of the year:
|
|
|
|
|
|
|
|
|
U.S. plan
|
|
$
|
47,638
|
|
|
$
|
50,022
|
|
U.K. plan
|
|
|
9,362
|
|
|
|
9,393
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
57,000
|
|
|
$
|
59,415
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of the year:
|
|
|
|
|
|
|
|
|
U.S. plan
|
|
$
|
32,567
|
|
|
$
|
36,346
|
|
U.K. plan
|
|
|
7,520
|
|
|
|
9,152
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
40,087
|
|
|
$
|
45,498
|
|
|
|
|
|
|
|
|
|
|
Plans for which the accumulated benefit obligation exceeds plan assets:
|
|
|
|
|
|
|
|
|
PBO
|
|
$
|
57,000
|
|
|
$
|
59,415
|
|
ABO
|
|
|
57,000
|
|
|
|
59,415
|
|
Fair value of plan assets
|
|
|
40,087
|
|
|
|
45,498
|
|
The weighted-average rate assumptions used in determining the actuarial present value of our benefit
obligations as of December 31, 2011 and 2012 are 4.3% and 3.7%, respectively. Such weighted-average rates were determined using the projected benefit obligations at each date. Since our plans are closed to new participants and no new additional
benefits accrue to existing plan participants, assumptions regarding future compensation levels are not applicable. Consequently, the accumulated benefit obligations for all of our defined benefit pension plans were equal to the projected benefit
obligations at December 31, 2011 and 2012.
F-33
The weighted-average rate assumptions used in determining the net periodic pension cost for
2010, 2011 and 2012 are presented in the table below. Such weighted-average discount rates were determined using the projected benefit obligations as of the beginning of each year and the weighted-average long-term return on plan assets was
determined using the fair value of plan assets as of the beginning of each year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
Rate
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
Discount rate
|
|
|
5.7
|
%
|
|
|
5.2
|
%
|
|
|
4.3
|
%
|
Long-term return on plan assets
|
|
|
9.2
|
%
|
|
|
9.3
|
%
|
|
|
9.2
|
%
|
Variances from actuarially assumed rates will result in increases or decreases in accumulated pension
obligations, pension expense and funding requirements in future periods.
At December 31, 2011 and 2012, substantially
all of the assets attributable to our U.S. plans were invested in the Combined Master Retirement Trust (CMRT), a collective investment trust sponsored by Contran to permit the collective investment by certain master trusts that fund certain employee
benefits plans sponsored by Contran and certain of its affiliates. The CMRTs long-term investment objective is to provide a rate of return exceeding a composite of broad market equity and fixed income indices (including the S&P 500 and
certain Russell indices) while utilizing both third-party investment managers as well as investments directed by Mr. Simmons. Mr. Simmons is the sole trustee of the CMRT. The trustee of the CMRT, along with the CMRTs investment
committee, of which Mr. Simmons is a member, actively manages the investments of the CMRT.
The CMRT trustee and
investment committee do not maintain a specific target asset allocation in order to achieve their objectives, but instead they periodically change the asset mix of the CMRT based upon, among other things, advice they receive from third-party
advisors and their expectations regarding potential returns for various investment alternatives and what asset mix will generate the greatest overall return. Prior to December 2012, the CMRT had an investment in TIMET common stock; however, in
December, 2012 the CMRT sold its shares of common stock in conjunction with the tender offer discussed in Note 6. During the history of the CMRT from its inception in 1988 through December 31, 2012, the average annual rate of return has been
14%. For the years ended December 31, 2010, 2011 and 2012, the assumed long-term rate of return for plan assets invested in the CMRT was 10%. In determining the appropriateness of the long-term rate of return assumption, we primarily rely on
the historical rates of return achieved by the CMRT, although we consider other factors as well including, among other things, the investment objectives of the CMRTs managers and their expectation that such historical returns will in the
future continue to be achieved over the long-term.
The CMRT unit value is determined semi-monthly, and the plans have the
ability to redeem all or any portion of their investment in the CMRT at any time based on the most recent semi-monthly valuation. However, the plans do not have the right to individual assets held by the CMRT and the CMRT has the sole discretion in
determining how to meet any redemption request. For purposes of our plan asset disclosure, we consider the investment in the CMRT a Level 2 input because (i) the CMRT value is established semi-monthly and the plans have the right to redeem
their investment in the CMRT, in part or in
F-34
whole, at any time based on the most recent value and (ii) observable inputs from Level 1 or Level 2 were used to value approximately 83% of the assets of the CMRT at December 31, 2011
and 2012 as noted below. The aggregate fair value of all of the CMRT assets, including funds of Contran and its other affiliates that also invest in the CMRT and supplemental asset mix details of the CMRT are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
|
(In millions)
|
|
CMRT asset value
|
|
$
|
659.5
|
|
|
$
|
726.4
|
|
|
|
|
|
|
|
|
|
|
CMRT fair value input:
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
82
|
%
|
|
|
82
|
%
|
Level 2
|
|
|
1
|
|
|
|
1
|
|
Level 3
|
|
|
17
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
CMRT asset mix:
|
|
|
|
|
|
|
|
|
Domestic equities, principally publically traded
|
|
|
75
|
%
|
|
|
43
|
%
|
International equities, publically traded
|
|
|
2
|
|
|
|
2
|
|
Fixed income securities, publically traded
|
|
|
14
|
|
|
|
12
|
|
Privately managed limited partnerships
|
|
|
8
|
|
|
|
8
|
|
Other, primarily cash
|
|
|
1
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
The increase in the relative portion of the CMRT invested in cash and other assets at December 31,
2012 is the result of the CMRTs December 2012 disposition of its shares of TIMET common stock, which generated aggregate proceeds to the CMRT of $254.7 million (or approximately 35% of the CMRTs total asset value at December 31,
2012), and which funds were invested in a cash equivalent at the end of 2012. Subsequently in January 2013, the CMRT redeployed such proceeds into other investments.
The composition of our December 31, 2011 and 2012 pension plan assets by fair value level is shown in the table below. The amounts shown for plan assets invested in the CMRT include a nominal amount
of cash held by our U.S. pension plan which is not part of the plans investment in the CMRT.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
Total
|
|
|
Quoted Prices
in
Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
|
(In millions)
|
|
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
CMRT
|
|
$
|
32.6
|
|
|
$
|
.3
|
|
|
$
|
32.3
|
|
Other
|
|
|
7.5
|
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
40.1
|
|
|
$
|
7.8
|
|
|
$
|
32.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
CMRT
|
|
$
|
36.3
|
|
|
$
|
|
|
|
$
|
36.3
|
|
Other
|
|
|
9.2
|
|
|
|
9.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
45.5
|
|
|
$
|
9.2
|
|
|
$
|
36.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
Postretirement benefits other than pensions
We provide certain
health care and life insurance benefits for eligible retired employees. These plans are closed to new participants, and no additional benefits accrue to existing plan participants. The majority of all retirees are required to contribute a portion of
the cost of their benefits and certain current and future retirees are eligible for reduced health care benefits at age 65. We have no OPEB plan assets, rather, we fund postretirement benefits as they are incurred, net of any contributions by the
retiree. At December 31, 2012, we currently expect to contribute approximately $.6 million to all OPEB plans during 2013. Contribution to our OPEB plans to cover benefit payments, net of estimated Medicare Part D subsidy of approximately
$50,000 per year, expected to be paid to OPEB plan participants are summarized in the table below:
|
|
|
|
|
2013
|
|
$
|
.6 million
|
|
2014
|
|
|
.6 million
|
|
2015
|
|
|
.5 million
|
|
2016
|
|
|
.5 million
|
|
2017
|
|
|
.4 million
|
|
Next 5 years
|
|
|
1.5 million
|
|
The funded status of our OPEB plans is presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Actuarial present value of accumulated OPEB obligations:
|
|
|
|
|
|
|
|
|
Balance at beginning of the year
|
|
$
|
6,348
|
|
|
$
|
5,106
|
|
Interest cost
|
|
|
236
|
|
|
|
157
|
|
Actuarial gain
|
|
|
(949
|
)
|
|
|
(282
|
)
|
Net benefits paid
|
|
|
(529
|
)
|
|
|
(476
|
)
|
|
|
|
|
|
|
|
|
|
Obligations at end of the year
|
|
|
5,106
|
|
|
|
4,505
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(5,106
|
)
|
|
$
|
(4,505
|
)
|
|
|
|
|
|
|
|
|
|
Accrued OPEB costs recognized in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(733
|
)
|
|
$
|
(644
|
)
|
Noncurrent
|
|
|
(4,373
|
)
|
|
|
(3,861
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(5,106
|
)
|
|
$
|
(4,505
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Unrecognized net actuarial losses
|
|
$
|
741
|
|
|
$
|
558
|
|
Unrecognized prior service credit
|
|
|
(3,192
|
)
|
|
|
(2,494
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(2,451
|
)
|
|
$
|
(1,936
|
)
|
|
|
|
|
|
|
|
|
|
The amounts shown in the table above for unrecognized actuarial losses and prior service credit at
December 31, 2011 and 2012 have not been recognized as components of our periodic OPEB cost as of those dates. These amounts will be recognized as components of our periodic OPEB cost in future years. These amounts, net of deferred income
taxes, are now recognized in our accumulated other comprehensive income at December 31, 2011 and 2012. We expect to recognize approximately $.7 million of the prior service credit and approximately $.1 million of actuarial gains as a component
of our periodic OPEB cost in 2013.
F-36
The table below details the changes in other comprehensive income during 2010, 2011 and
2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Changes in benefit obligations recognized in other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial gain (loss) arising during the year
|
|
$
|
(839
|
)
|
|
$
|
949
|
|
|
$
|
282
|
|
Plan amendment
|
|
|
3,646
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial gain
|
|
|
|
|
|
|
|
|
|
|
(99
|
)
|
Prior service credit
|
|
|
(179
|
)
|
|
|
(800
|
)
|
|
|
(698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,628
|
|
|
$
|
149
|
|
|
$
|
(515
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the fourth quarter of 2010, we amended our benefit formula for most participants of the plan effective
January 1, 2011, resulting in a prior service credit of approximately $3.6 million as of December 31, 2010. Key assumptions including the health care cost trend rate as of December 31, 2010 now reflect these plan revisions to the
benefit formula.
The components of our periodic OPEB cost are presented in the table below. The amounts shown below for the
amortization of unrecognized actuarial losses and prior service credit in 2011 and 2012, net of deferred income taxes, were recognized as components of our accumulated other comprehensive income at December 31, 2010, 2011 and 2012 respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Net periodic OPEB cost (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
436
|
|
|
$
|
236
|
|
|
$
|
157
|
|
Amortization of actuarial gain
|
|
|
|
|
|
|
|
|
|
|
(99
|
)
|
Amortization of prior service credit
|
|
|
(179
|
)
|
|
|
(800
|
)
|
|
|
(698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
257
|
|
|
$
|
(564
|
)
|
|
$
|
(640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of our key actuarial assumptions used to determine the net benefit obligation as of
December 31, 2011 and 2012 follows:
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
Health care inflation:
|
|
|
|
|
|
|
|
|
Initial rate
|
|
|
8.0
|
%
|
|
|
7.5
|
%
|
Ultimate rate
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Year of ultimate rate achievement
|
|
|
2018
|
|
|
|
2018
|
|
|
|
|
Discount rate
|
|
|
3.3
|
%
|
|
|
2.5
|
%
|
F-37
The assumed health care cost trend rates have an effect on the amount we report for health
care plans. A one-percent change in assumed health care cost trend rates would not have a material effect on the net periodic OPEB cost for 2012 or on the accumulated OPEB obligation at December 31, 2012.
|
|
|
|
|
|
|
|
|
|
|
1% Increase
|
|
|
1% Decrease
|
|
|
|
(In thousands)
|
|
Effect on net OPEB cost during 2012
|
|
$
|
3
|
|
|
$
|
(3
|
)
|
Effect at December 31, 2012 on Postretirement obligation
|
|
|
127
|
|
|
|
(117
|
)
|
The weighted average discount rate used in determining the net periodic OPEB cost for 2012 was 3.3% (the
rate was 4.0% in 2011 and 4.9% in 2010). The weighted average rate was determined using the projected benefit obligation as of the beginning of each year.
Note 17Related party transactions:
We may be deemed to be controlled by Harold C. Simmons. See Note 1. We and other entities that may be deemed to be
controlled by or affiliated with Mr. Simmons sometimes engage in (a) intercorporate transactions such as guarantees, management and expense sharing arrangements, shared fee arrangements, joint ventures, partnerships, loans, options,
advances of funds on open account and sales, leases and exchanges of assets, including securities issued by both related and unrelated parties and (b) common investment and acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other acquisitions and dispositions) of subsidiaries, divisions or other business units, which transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a publicly-held noncontrolling equity interest in another related party. We periodically consider, review and evaluate, and understand that Contran and related entities consider,
review and evaluate such transactions. Depending upon the business, tax and other objectives then relevant, it is possible that we might be a party to one or more such transactions in the future.
Current receivables from and payables to affiliates are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Current receivables from affiliates:
|
|
|
|
|
|
|
|
|
Income taxes receivable from Valhi
|
|
$
|
214
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Current payables to affiliates:
|
|
|
|
|
|
|
|
|
Income taxes payable to Valhi
|
|
$
|
|
|
|
$
|
270
|
|
Othertrade items
|
|
|
20
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20
|
|
|
$
|
528
|
|
|
|
|
|
|
|
|
|
|
From time to time, we will have loans and advances outstanding between us and various related parties,
pursuant to term and demand notes. We generally enter into these loans and advances for cash management purposes. When we loan funds to related parties, we are generally able to earn a higher rate of return on the loan than the lender would earn if
the funds were invested in other instruments. While certain of such loans may be of a lesser credit quality
F-38
than cash equivalent instruments otherwise available to us, we believe that we have evaluated the credit risks involved and reflected those credit risks in the terms of the applicable loans. When
we borrow from related parties, we are generally able to pay a lower rate of interest than we would pay if we borrowed from unrelated parties. In this regard, in June 2010, we entered into a promissory note with Valhi, whereby, as subsequently
amended, we may borrow up to $40 million. As of December 31, 2012 we had no borrowings under this note (December 31, 2011 - $4.1 million). See Note 13. Interest expense on our promissory note to Valhi aggregated approximately $.2 million
in 2010 and approximately $.3 million in each of 2011 and 2012.
Under the terms of various intercorporate services agreements
(ISAs) we enter into with Contran, employees of Contran will provide certain management, tax planning, financial and administrative services to the other company on a fee basis. Such charges are based upon estimates of the time devoted by the
Contran employees to our affairs and the compensation and other expenses associated with those persons. Because of the large number of companies affiliated with Contran, we believe we benefit from cost savings and economies of scale gained by not
having certain management, financial and administrative staffs duplicated at each entity, thus allowing certain Contran employees to provide services to multiple companies but only be compensated by Contran. The net ISA fees charged to us by
Contran, (including amounts attributable to Kronos for all periods), approved by the independent members of the applicable board of directors, aggregated approximately $16.3 million, $18.2 million and $21.2 million in 2010, 2011 and 2012,
respectively. This agreement is renewed annually, and we expect to pay approximately $24.0 million under the ISA during 2013.
Tall Pines Insurance Company and EWI RE, Inc. provide for or broker certain insurance policies for Contran and certain of its
subsidiaries and affiliates, including ourselves. Tall Pines and EWI are subsidiaries of Valhi. Consistent with insurance industry practices, Tall Pines and EWI receive commissions from insurance and reinsurance underwriters and/or assess
fees for the policies that they provide or broker. These amounts principally included payments for insurance and reinsurance premiums paid to third parties, but also included commissions paid to Tall Pines and EWI. Tall Pines purchases
reinsurance from third-party insurance carriers with an A.M. Best Company rating of generally at least A- (excellent) for substantially all of the risks it underwrites. We expect these relationships with Tall Pines and EWI will continue in
2013.
Contran and certain of its subsidiaries and affiliates, including us, purchase certain of their insurance policies as a
group, with the costs of the jointly-owned policies being apportioned among the participating companies. With respect to certain of such policies, it is possible that unusually large losses incurred by one or more insured party during a given policy
period could leave the other participating companies without adequate coverage under that policy for the balance of the policy period. As a result, Contran and certain of its subsidiaries and affiliates, including us, have entered into a loss
sharing agreement under which any uninsured loss is shared by those entities who have submitted claims under the relevant policy. We believe the benefits in the form of reduced premiums and broader coverage associated with the group coverage for
such policies justifies the risk associated with the potential for any uninsured loss.
Note 18Other operating income (expense):
We have agreements with certain insurance carriers pursuant to which the carriers reimburse us for a portion of our
past lead pigment and asbestos litigation defense costs. Insurance recoveries include amounts we received
F-39
from these insurance carriers. The majority of the $16.9 million of insurance recoveries we recognized in 2011 relate to a new settlement we reached with one of our insurance carriers in
September 2011 in which they agreed to reimburse us for a portion of our past litigation defense costs.
The agreements with
certain of our insurance carriers also include reimbursement for a portion of our future 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. Accordingly, these insurance recoveries are recognized when the receipt is probable and the amount is determinable. Substantially all of the insurance recoveries
received in 2012 are reimbursement for ongoing litigation defense costs. See Note 19.
In addition to insurance recoveries
discussed above, our insurance recoveries in 2010 include an insurance recovery recognized in the first quarter in connection with the litigation settlement discussed in Note 19. We had insurance coverage for a portion of the litigation settlement
expense, and a substantial portion of the insurance recoveries we recognized in 2010 relates to such coverage.
The litigation
settlement gains we recognized in 2010 and 2012 are discussed in Note 19. Other operating income, net, in 2012 includes $3.2 million from the sale of certain real property owned by us for which we had a nominal carrying value.
Note 19Commitments and contingencies:
Lead pigment litigation
Our former operations included the manufacture of lead pigments for use in paint and lead-based paint. We, 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 in favor of either the defendants or the plaintiffs. In addition, various other cases (in which we
F-40
are not a defendant) are pending that seek recovery for injury allegedly caused by lead pigment and lead-based paint. Although we are not a defendant in these cases, the outcome of these cases
may have an impact on cases that might be filed against us in the future.
We believe that these actions are without merit,
and we intend to continue to deny all allegations of wrongdoing and liability and to defend against all actions vigorously. We do not believe it is probable that we have incurred any liability with respect to all of the lead pigment litigation cases
to which we are a party, and liability to us that may result, if any, in this regard cannot be reasonably estimated, because:
|
|
|
we have never settled any of the market share, risk contribution, 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 us, and
|
|
|
|
we have never ultimately been found liable with respect to any such litigation matters, including over 100 cases over a twenty-year period for which we
were previously a party and for which we have been dismissed without any finding of liability.
|
Accordingly,
we have not accrued any amounts for any of the pending lead pigment and lead-based paint litigation cases. 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.
New cases may continue to be filed against us. We cannot assure you that we will not incur liability in the future in respect of any of the pending or possible litigation in view of the inherent
uncertainties involved in court and jury rulings. 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
F-41
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 our 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 Agencys (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 also a party to a number of personal injury lawsuits filed in various jurisdictions alleging claims
related to environmental conditions alleged to have resulted from our operations.
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,
|
|
|
|
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
F-42
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 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, 2011 and 2012, we have not recognized any receivables for recoveries.
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 past three years. The amount charged to expense is included in corporate expense on our consolidated statements of income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
(In thousands)
|
|
Balance at the beginning of the year
|
|
$
|
45,846
|
|
|
$
|
40,400
|
|
|
$
|
41,637
|
|
Additions charged to expense, net
|
|
|
425
|
|
|
|
11,326
|
|
|
|
14,467
|
|
Settlement agreement
|
|
|
(1,979
|
)
|
|
|
|
|
|
|
|
|
Payments, net
|
|
|
(3,892
|
)
|
|
|
(10,089
|
)
|
|
|
(8,098
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the year
|
|
$
|
40,400
|
|
|
$
|
41,637
|
|
|
$
|
48,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liability
|
|
$
|
8,206
|
|
|
$
|
7,301
|
|
|
$
|
5,667
|
|
Noncurrent liability
|
|
|
32,194
|
|
|
|
34,336
|
|
|
|
42,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
40,400
|
|
|
$
|
41,637
|
|
|
$
|
48,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the $11.3 million net additions charged to expense in 2011, $5.6 million relates to certain payments
which have been discounted to their present value because the timing and amounts of such payments are fixed and determinable. Such payments aggregate $6.0 million on an undiscounted basis ($2.0 million that was paid in 2012 and $1.0 million due in
each of 2013 through 2016) and were discounted to present value using a 3.0% discount rate. The aggregate $.4 million discount is being charged to expense using the interest method in 2011 through 2016, and the amount of such discount charged to
expense in any individual year is not material.
F-43
On a quarterly basis, we evaluate the potential range of our liability for environmental
remediation and related costs at sites where we have been named as a PRP or defendant, including sites for which our wholly-owned environmental management subsidiary, NL Environmental Management Services, Inc., (EMS), has contractually assumed our
obligations. At December 31, 2012, we had accrued approximately $48 million related to approximately 50 sites associated with remediation and related matters that we believe are at the present time and/or in their current phase reasonably
estimable. The upper end of the range of reasonably possible costs to us for remediation and related matters for which we believe it is possible to estimate costs is approximately $144 million, including the amount currently accrued. Other than as
indicated above, these accruals have not been discounted to present value.
We believe that it is not possible to estimate the
range of costs for certain sites. At December 31, 2012, there were approximately 5 sites for which we are not currently able to estimate a range of costs. For these sites, generally the investigation is in the early stages, and we are unable to
determine whether or not we actually had any association with the site, the nature of our responsibility, if any, for the contamination at the site and the extent of contamination at 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, we have received general and special notices of liability
from the EPA and/or state agencies alleging that we, 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 we, along with
any other 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.
In July 2010, we entered into a settlement agreement with another PRP pursuant to which, among other things, the other PRP reimbursed us for certain remediation costs we had previously incurred for
certain sites related to one of our former business units, and such PRP also affirmed its full responsibility to indemnify us for all claims (environmental or otherwise) with respect to certain specified sites related to such former business unit as
well as indemnify us for any future claims that may arise related to such former business unit. As a result of the July 2010 settlement agreement, in the third quarter of 2010 we recognized a litigation settlement gain of $5.3 million, consisting of
$3.2 million related to the PRPs cash reimbursement of prior remediation costs, $2.0 million related to a reduction in our accrued environmental remediation costs and $.1 million reversal of legal settlement costs resulting from the PRPs
agreement to indemnify us.
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.
F-44
We have agreements with three 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.
In addition to insurance recoveries discussed above, in September 2011 we reached a settlement with one of our insurance carriers in
which they agreed to reimburse us for a portion of our past lead pigment litigation defense costs. Substantially all of the $16.9 million in insurance recoveries we recognized in 2011 relate to this settlement.
In October 2005 we were served with a complaint in
OneBeacon American Insurance Company v. NL Industries, Inc., et al
. (Supreme
Court of the State of New York, County of New York, Index No. 603429-05). The plaintiff, a former insurance carrier, sought a declaratory judgment of its obligations to us under insurance policies issued to us by the plaintiffs
predecessor with respect to certain lead pigment lawsuits filed against us. In March 2006, the trial court denied our motion to dismiss. In April 2006, we filed a notice of appeal of the trial courts ruling, and in September 2007, the Supreme
Court Appellate Division (First Department) reversed and ordered that the OneBeacon complaint be dismissed. The Appellate Division did not dismiss the counterclaims and cross claims.
In February 2006, we were served with a complaint in
Certain Underwriters at Lloyds, London v. Millennium Holdings LLC
et al.
(Supreme Court of the State of New York, County of New York, Index No. 06/60026). The plaintiff, a former insurance carrier of ours, sought a declaratory judgment of its obligations to us under insurance policies issued to us by the plaintiff
with respect to certain lead pigment lawsuits. This case is currently stayed.
Prior to 2010, we reached partial settlements
with the plaintiffs in the two cases discussed above, pursuant to which the two former insurance carriers paid us an aggregate of approximately $7.2 million in settlement of certain counter-claims related to past lead pigment and asbestos defense
costs. In connection with these partial settlements, we agreed to dismiss the case captioned
NL Industries, Inc. v. OneBeacon America Insurance Company, et al.
(District Court for Dallas County, Texas, Case No. 05-11347), and in January
2009 we filed a notice of non-suit without prejudice in that matter. In March 2010, we filed a complaint in
NL Industries, Inc. v. OneBeacon America Insurance Company
(Supreme Court of the State of New York, County of New York, Index
No. 108881-2009), to address the remaining claims from the New York state cases. This case is proceeding in the trial court.
Other
litigation
In 2005, certain real property we owned that is subject to environmental remediation was taken from us in a
condemnation proceeding by a governmental authority in New Jersey. The condemnation proceeds, the adequacy of which we disputed, were placed into escrow with a court in New Jersey. Because the funds were in escrow with the court and were beyond our
control, we never gave recognition to such condemnation proceeds for financial reporting purposes. In October 2008 we reached a definitive
F-45
settlement agreement with such governmental authority and a real estate developer, among others, pursuant to which, among other things, we would receive certain agreed-upon amounts in
satisfaction of our claim to just compensation for the taking of our property in the condemnation proceeding at three separate closings, and we would be indemnified against certain environmental liabilities related to such property, in exchange for
the release of our equitable lien on specified portions of the property at each closing. At the initial October 2008 closing, we received aggregate proceeds of $54.6 million, comprising $39.6 million in cash plus a promissory note in the amount of
$15.0 million in exchange for the release of our equitable lien on a portion of the property. The $15.0 million promissory note bore interest at LIBOR plus 2.75%, with interest payable monthly and all principal due no later than October 2011. In
April 2009, the second closing was completed, pursuant to which we received an aggregate of $11.8 million in cash. In October 2011, we collected the full $15.0 million due to us under the promissory note issued in connection with the first closing.
In May 2012, we reached an agreement with the New Jersey governmental authority and the real estate developer pursuant to
which we received an aggregate of $15.6 million cash for the third and final closing contemplated by the October 2008 settlement agreement associated with certain real property NL formerly owned in New Jersey. Upon receipt of these cash
proceeds, our equitable lien on a portion of such property was released. For financial reporting purposes, we have accounted for the consideration received in each of the first, second and third closings contemplated by the October 2008
settlement agreement by the full accrual method of accounting for real estate sales (since the settlement agreement arose out of a dispute concerning the adequacy of the condemnation proceeds of our former real property in New Jersey). Under this
method, we recognized a pre-tax gain of $15 million in the second quarter of 2012 related to the third and final closing, based on the excess of the $15.6 million cash received over our carrying value of the property from which our equitable lien
was released. Similarly, the cash consideration we received in each closing is reflected as an investing activity in our Consolidated Statement of Cash Flows.
In June 2010, the case captioned
Contran Corporation, et al. v. Terry S. Casey, et al.
(Case
No. 07-04855, 192
nd
Judicial District Court, Dallas
County, Texas) was dismissed with prejudice in accordance with the previously-reported settlement agreement. In May 2010, pursuant to such agreement, we paid $26.0 million in cash and we issued an $18.0 million principal amount promissory note, of
which $9.0 million principal amount was repaid in each of 2011 and 2012. For financial reporting purposes, we classified $32.2 million of the aggregate amount payable under the settlement agreement as a litigation settlement expense in respect of
certain claims made by plaintiffs in the litigation. We had insurance coverage for a portion of such litigation settlement, and a substantial portion of the insurance recoveries we recognized in the first quarter of 2010 relates to such coverage.
With respect to the other claim of the plaintiffs as it relates to the repurchase of their EMS noncontrolling interest, the resulting $2.5 million increase over our previous estimate of such payment is accounted for as a reduction in additional
paid-in capital in accordance with GAAP.
We have been named as a defendant in various lawsuits in several jurisdictions,
alleging personal injuries as a result of occupational exposure primarily to products manufactured by 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 us. There are 1,125 of these types of cases pending, involving a total of approximately 1,945 plaintiffs. In addition, the claims of approximately 8,125 plaintiffs have been
administratively
F-46
dismissed or placed on the inactive docket in Ohio, Indiana and Texas state courts. We do not expect these claims will be re-opened unless the plaintiffs meet the courts medical criteria
for asbestos-related claims. We have not accrued any amounts for this litigation because of the uncertainty of liability and inability to reasonably estimate the liability, if any. To date, we have not been adjudicated liable in any of these
matters. Based on information available to us, including:
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facts concerning historical operations,
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the rate of new claims,
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the number of claims from which we have been dismissed and
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our prior experience in the defense of these matters.
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We believe that the range of reasonably possible outcomes of these matters will be consistent with our historical costs (which are not material). Furthermore, we do not expect any reasonably possible
outcome would involve amounts material to our consolidated financial position, results of operations or liquidity. We have sought and will continue to vigorously seek, dismissal and/or a finding of no liability from each claim. In addition,
from time to time, we have received notices regarding asbestos or silica claims purporting to be brought against former subsidiaries, including notices provided to insurers with which we have entered into settlements extinguishing certain insurance
policies. These insurers may seek indemnification from us.
In addition to the litigation described above, we and our
affiliate are also involved in various other environmental, contractual, product liability, patent (or intellectual property), employment and other claims and disputes incidental to present and former businesses. In certain cases, we have insurance
coverage for these items, although we do not expect additional material insurance coverage for environmental matters.
We
currently believe the disposition of all of these various other claims and disputes, individually and in the aggregate, should not have a material adverse effect on our consolidated financial position, results of operations or liquidity beyond the
accruals already provided.
Concentrations of credit risk
Component products are sold primarily in North America to original equipment manufacturers. The ten largest customers related to our
continuing operations accounted for approximately 38% in 2010, 39% in 2011 and 38% in 2012. Harley Davidson, a customer of CompXs Security Products business, accounted for approximately 12%, 13%, 12% of total sales in 2010, 2011 and 2012,
respectively. San Mateo Postal Data, also a customer of CompXs Security Products business, accounted for 11% in 2010.
Other
Rent expense related to continuing operations, principally for CompX operating facilities and equipment was $.2
million in each of 2010 and 2011 and $.1 million in 2012. At December 31, 2012, future minimum rentals under noncancellable operating leases are not significant.
Income taxes
We and Valhi have agreed to a policy providing for the
allocation of tax liabilities and tax payments as described in Note 1. Under applicable law, we, as well as every other member of the Contran Tax Group, are each
F-47
jointly and severally liable for the aggregate federal income tax liability of Contran and the other companies included in the Contran Tax Group for all periods in which we are included in the
Contran Tax Group. Valhi has agreed, however, to indemnify us for any liability for income taxes of the Contran Tax Group in excess of our tax liability computed in accordance with the tax allocation policy.
Note 20Financial instruments:
The following table summarizes the valuation of our short-term investments and marketable securities, all classified as
a noncurrent asset, by the ASC Topic 820 categories as of December 31, 2011 and 2012:
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Fair Value Measurements
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Total
|
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Quoted
Prices in
Active
Markets
(Level 1)
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Significant
Other
Observable
Inputs
(Level 2)
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Significant
Unobservable
Inputs
(Level 3)
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(in millions)
|
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December 31, 2011
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|
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|
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|
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Marketable securities
|
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$
|
311.4
|
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|
$
|
311.4
|
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|
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December 31, 2012
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Marketable securities
|
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179.7
|
|
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|
179.7
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The following table presents the financial instruments that are not carried at fair value but which
require fair value disclosure as December 31, 2011 and 2012:
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December 31, 2011
|
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|
December 31, 2012
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Carrying
Amount
|
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|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
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|
|
(in millions)
|
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Cash and cash equivalents, restricted cash equivalents and current marketable securities
|
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$
|
16.5
|
|
|
$
|
16.5
|
|
|
$
|
85.0
|
|
|
$
|
85.0
|
|
CompX promissory note payable to TFMC
|
|
|
22.2
|
|
|
|
22.2
|
|
|
|
18.5
|
|
|
|
18.5
|
|
CompX bank credit facility
|
|
|
2.0
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
Promissory note payable
|
|
|
9.0
|
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest in CompX common stock
|
|
|
11.0
|
|
|
|
24.0
|
|
|
|
13.3
|
|
|
|
23.4
|
|
NL stockholders equity
|
|
|
415.0
|
|
|
|
631.2
|
|
|
|
374.8
|
|
|
|
557.3
|
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The fair value of our noncurrent marketable securities, noncontrolling interest in CompX and NL
stockholders equity are based upon quoted market prices at each balance sheet date, which represent Level 1 inputs as defined by ASC Topic 820-10-35. The fair value of our promissory notes payable and our variable interest rate debt represent
Level 2 inputs and are deemed to approximate book value. Due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value.
F-48
Note 21Recent accounting pronouncements:
In June 2011 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-05,
Presentation of Comprehensive Income
. ASU 2011-05 eliminates the option of presenting comprehensive income as a component of the Consolidated Statement of Stockholders Equity and instead requires comprehensive income to be
presented as a component of the Consolidated Statement of Income or in a separate Consolidated Statement of Comprehensive Income immediately following the Consolidated Statement of Income. In accordance with ASU 2011-05, we now present our
comprehensive income in a separate Condensed Consolidated Statement of Comprehensive Income. Additionally, ASU 2011-05 would have required us to present on the face of our financial statements the effect of reclassifications out of accumulative
other comprehensive income on the components of net income and other comprehensive income. However, in December 2011 the FASB issued ASU 2011-12,
Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation
of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05
. ASU 2011-12 defers the effective date for the requirement to present on the face of our financial statements the effects
of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. Adoption of ASU 2011-05, as amended by ASU 2011-12, did not have a material effect on our Consolidated Financial
Statements.
In February 2013 the FASB issued ASU 2013-02,
Reporting of Amounts Reclassified out of Accumulated Other
Comprehensive Income
. ASU 2013-02 does not change current financial reporting requirements, instead an entity is required to cross-reference to other required disclosures that provide additional detail about amounts reclassified out of
accumulated other comprehensive income. In addition, ASU 2013-02 requires an entity to present significant amounts reclassified out of accumulated other comprehensive income by line item of net income if the amount reclassified is required to be
reclassified to net income in its entirety in the same reporting period. Adoption of this standard is required for periods beginning after December 15, 2013; however, as permitted by the standard, we have elected to adopt ASU 2013-02 beginning
with this report, see Note 14. The adoption of ASU 2013-02 did not have a material effect on our Consolidated Financial Statements.
Note 22Earnings per share:
Earnings per share is based on the weighted average number of common shares outstanding during each period. A
reconciliation of the numerator used in the calculation of earnings per share is presented in the following table:
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Years ended December 31,
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2010
|
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2011
|
|
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2012
|
|
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|
(In thousands)
|
|
Net income attributable to NL stockholders
|
|
$
|
70,381
|
|
|
$
|
81,657
|
|
|
$
|
74,536
|
|
Paid-in capital adjustment
|
|
|
(2,513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Adjusted net income attributable to NL stockholders
|
|
$
|
67,868
|
|
|
$
|
81,657
|
|
|
$
|
74,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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The paid-in capital adjustment is discussed in Note 19.
F-49
Note 23Quarterly results of operations (unaudited):
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|
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|
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Quarter ended
|
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|
|
March 31
|
|
|
June 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
|
(In millions, except per share data)
|
|
Year ended December 31, 2011
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
19.9
|
|
|
$
|
21.1
|
|
|
$
|
20.1
|
|
|
$
|
18.7
|
|
Gross margin
|
|
|
6.1
|
|
|
|
6.5
|
|
|
|
6.0
|
|
|
|
5.5
|
|
|
|
|
|
|
Net income
|
|
|
17.7
|
|
|
|
17.1
|
|
|
|
27.8
|
|
|
|
20.1
|
|
|
|
|
|
|
Amounts attributable to NL stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
14.6
|
|
|
$
|
16.7
|
|
|
$
|
27.1
|
|
|
$
|
19.7
|
|
Income from discontinued operations
|
|
|
2.6
|
|
|
|
.2
|
|
|
|
.6
|
|
|
|
.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to NL stockholders
|
|
$
|
17.2
|
|
|
$
|
16.9
|
|
|
$
|
27.7
|
|
|
$
|
19.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
.30
|
|
|
$
|
.35
|
|
|
$
|
.56
|
|
|
$
|
.40
|
|
Discontinued operations
|
|
|
.05
|
|
|
|
|
|
|
|
.01
|
|
|
|
.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to NL stockholders
|
|
$
|
.35
|
|
|
$
|
.35
|
|
|
$
|
.57
|
|
|
$
|
.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
|
(In millions, except per share data)
|
|
Year ended December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
20.4
|
|
|
$
|
22.2
|
|
|
$
|
21.3
|
|
|
$
|
19.3
|
|
Gross margin
|
|
|
6.0
|
|
|
|
6.5
|
|
|
|
6.3
|
|
|
|
5.5
|
|
|
|
|
|
|
Net income
|
|
|
21.2
|
|
|
|
26.2
|
|
|
|
10.3
|
|
|
|
21.4
|
|
|
|
|
|
|
Amounts attributable to NL stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
20.5
|
|
|
$
|
25.1
|
|
|
$
|
8.4
|
|
|
$
|
2.6
|
|
Income from discontinued operations
|
|
|
.5
|
|
|
|
.9
|
|
|
|
1.6
|
|
|
|
14.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to NL stockholders
|
|
$
|
21.0
|
|
|
$
|
26.0
|
|
|
$
|
10.0
|
|
|
$
|
17.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
.42
|
|
|
$
|
.51
|
|
|
$
|
.18
|
|
|
$
|
.05
|
|
Discontinued operations
|
|
|
.01
|
|
|
|
.02
|
|
|
|
.03
|
|
|
|
.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to NL stockholders
|
|
$
|
.43
|
|
|
$
|
.53
|
|
|
$
|
.21
|
|
|
$
|
.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-50
The sum of the quarterly per share amounts may not equal the annual per share amounts due to
relative changes in the weighted average number of shares used in the per share computations.
We recognized the following
amounts in 2011 related to continuing operations:
|
|
$1.1 million pre-tax write-down on assets held for sale, see Note 9 and
|
|
|
$16.0 pre-tax million in the third quarter of 2011 relates to a new settlement we reached with one of our insurance carriers in which they agreed to reimburse us for a
portion of our past litigation defense costs, see Note 19.
|
We recognized the following amounts in 2011 related
to discontinued operations:
|
|
$7.5 million pre-tax patent litigation settlement in the first quarter 2011, see Note 19 and
|
|
|
$2.0 million pre-tax in facility consolidation costs.
|
We recognized the following amounts in 2012 related to continuing operations:
|
|
$15.0 million pre-tax gain in the second quarter related to a settlement agreement for certain environmental properties, see Note 19,
|
|
|
$1.4 million ($.9 million net of tax) included in our equity in net income of Kronos in the second quarter related to Kronos charge for the early extinguishment
of its remaining 6.5% Senior Notes due 2013,
|
|
|
$3.2 million pre-tax gain on the sale of certain real property in the fourth quarter, see Note 18,
|
|
|
$16.6 million pre-tax gain on the sale of TIMET common stock in the fourth quarter, See Note 6 and
|
|
|
$6.4 million pre-tax loss on the write-off of goodwill related to our insurance brokerage subsidiary in the fourth quarter, see Note 8.
|
We recognized the following amounts in 2012 related to discontinued operations:
|
|
$21.9 million pretax gain on the sale of CompXs Furniture Components operations in the fourth quarter, See Note 2.
|
F-51