We have audited the accompanying consolidated balance sheets of NL Industries, Inc. and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America.
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
Note 1 - Summary 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 MKT: CIX). We operate in the chemicals industry through our noncontrolling interest in Kronos Worldwide, Inc. (NYSE: KRO).
Organization
-
At December 31, 2017, Valhi, Inc. (NYSE: VHI) held approximately 83% of our outstanding common stock and a wholly-owned subsidiary of
Contran Corporation held approximately 93% of Valhi’s outstanding common stock.
All of Contran’s outstanding voting stock is held by a family trust established for the benefit of Lisa K. Simmons and Serena Simmons Connelly and their children for which Ms. Simmons and Ms. Connelly are co-trustees, or is held directly by Ms. Simmons and Ms. Connelly or entities related to them. Consequently, Ms. Simmons and Ms. Connelly may be deemed to control Contran, 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.
Management’s 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 Kronos’ non-U.S. subsidiaries are translated to U.S. dollars. The functional currency of Kronos’ non-U.S. subsidiaries is generally the local currency of their country. Accordingly, Kronos translates the assets and liabilities at year-end rates of exchange, while they 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 (loss), net of related deferred income taxes. Kronos recognizes currency transaction gains and losses in income which is reflected as part of our equity in earnings (losses) of Kronos.
C
ash 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. Such restrictions include cash pledged as collateral with respect to performance obligations or letters of credit required by regulatory agencies for certain environmental remediation sites, cash pledged as collateral with respect to certain workers compensation liabilities,
and cash held in trust by our insurance brokerage subsidiary pending transfer to the applicable insurance or reinsurance carrier. 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. Restricted cash equivalents classified as a current asset are presented separately on our Consolidated Balance Sheets, and restricted cash equivalents classified as a noncurrent asset are presented as a component of other assets on our Consolidated Balance Sheets, as disclosed in Note 8.
F-10
Marketable securities and securities transactions
- We carry marketable securities at fair value. Accounting Standard Codification (ASC) Topic 820,
Fair Value Me
asurements 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 va
lue 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 classify all of our marketable securities as available-for-sale and unrealized gains or losses on these securities are recognized through other comprehensive income, net of related deferred income taxes. We base realized gains and losses upon the specific identification of securities sold. See Note 5.
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 net realizable value. 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 inventory’s 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 costs 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.
Investment in Kronos Worldwide, Inc.
-
We account for our 30% non-controlling interest in Kronos by the equity method. Distributions received from Kronos are classified for statement of cash flow purposes using the “nature of distribution” approach under ASC Topic 230. See Note 6.
Goodwill
-
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 evaluate goodwill for impairment, annually, or when circumstances indicate the carrying value may not be recoverable. See Note 7.
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 $3.6 million in 2015, $3.8 million in 2016, and $3.7 million in 2017. 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.
F-11
We perform impairment tests when events or chan
ges 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 asset’s net carrying value t
o 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 11.
Income taxes
- We, Valhi and our qualifying subsidiaries are members of Contran’s 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 17. As a member of the Contran Tax Group, we are party to a tax sharing agreement with Valhi and Contran which provides that we compute our provision for income taxes on a separate-company basis using the tax elections made by Contran. Pursuant to our tax sharing agreement, 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. We made net payments to Valhi of $.6 million in 2015, less than $.1 million in 2016 and $3.1 million in 2017.
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. Deferred income tax assets and liabilities for each tax-paying jurisdiction in which we operate are netted and presented as either a noncurrent deferred income tax asset or liability as applicable. 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 account for the tax effects of a change in tax law as a component of the income tax provision related to continuing operations in the period of enactment, including the tax effects of any deferred income taxes originally established through a financial statement component other than continuing operations (i.e. other comprehensive income). Changes in applicable income tax rates over time as a result of changes in tax law, or times in which a deferred income tax asset valuation allowance is initially recognized in one year and subsequently reversed in a later year, can give rise to “stranded” tax effects in accumulated other comprehensive income in which the net accumulated income tax (benefit) remaining in accumulated other comprehensive income does not correspond to the then-applicable income tax rate applied to the pre-tax amount which resides in accumulated other comprehensive income. As permitted by GAAP, our accounting policy is to remove any such stranded tax effect remaining in accumulated other comprehensive income, by recognizing an offset to our provision for income taxes related to continuing operations, only at the time when there is no remaining pre-tax amount in accumulated other comprehensive income. For accumulated other comprehensive income related to marketable securities, this would occur whenever we would have no available-for-sale marketable securities for which unrealized gains and losses are recognized through other comprehensive income. For accumulated other comprehensive income related to foreign currency translation, this would occur only upon the sale or complete liquidation of one of our foreign subsidiaries (including foreign subsidiaries of Kronos). For defined pension benefit plans and OPEB plans, this would occur whenever we or one of our subsidiaries which previously sponsored a defined benefit pension or OPEB plan had terminated such a plan and had no future obligation or plan asset associated with such a plan.
We record a reserve for uncertain tax positions for 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 14.
F-12
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 gener
ally 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 De
cember 31, 2016 and 2017, we had not recognized any receivables for recoveries. See Note 17.
Net sales
- We record sales when products are shipped and title and other risks and rewards of ownership have passed to the customer. Amounts charged to customers for shipping and handling costs are not material. We state sales net of price, early payment and distributor discounts and volume rebates. We report taxes assessed by a governmental authority that we collect from our customers that is both imposed on and concurrent with our revenue producing activities (such as sales and use taxes) on a net basis (meaning we do not recognize these taxes in either our revenues or in our costs and expenses).
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, 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. We expense advertising costs and research and development costs as incurred. Advertising costs were not significant in any year presented.
Corporate expenses
- Corporate expenses include environmental, legal and other costs attributable to formerly-owned business units.
Earnings per share
– Basic and diluted earnings per share of common stock is based upon the weighted average number of our common shares actually outstanding during each period.
Note 2 - Geographic 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.
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.
|
Years ended December 31,
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
(in thousands)
|
|
Net sales - point of destination:
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
103,737
|
|
|
$
|
98,526
|
|
|
$
|
103,646
|
|
Canada
|
|
2,352
|
|
|
|
7,515
|
|
|
|
5,353
|
|
Other
|
|
2,905
|
|
|
|
2,879
|
|
|
|
3,036
|
|
Total
|
$
|
108,994
|
|
|
$
|
108,920
|
|
|
$
|
112,035
|
|
All of our net property and equipment is located in the United States at December 31, 2016 and 2017.
F-13
Note 3 - Accounts and other receivables, net:
|
|
December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Trade receivables - CompX
|
|
$
|
10,417
|
|
|
$
|
10,516
|
|
Accrued insurance recoveries
|
|
|
104
|
|
|
|
145
|
|
Other receivables
|
|
|
121
|
|
|
|
79
|
|
Allowance for doubtful accounts
|
|
|
(70
|
)
|
|
|
(70
|
)
|
Total
|
|
$
|
10,572
|
|
|
$
|
10,670
|
|
Accrued insurance recoveries are discussed in Note 17.
Note 4 - Inventories, net:
|
|
December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
2,743
|
|
|
$
|
2,730
|
|
Work in process
|
|
|
8,988
|
|
|
|
9,836
|
|
Finished products
|
|
|
3,243
|
|
|
|
2,816
|
|
Total
|
|
$
|
14,974
|
|
|
$
|
15,382
|
|
Note 5 - Marketable securities:
|
|
Fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
measurement
|
|
Market
|
|
|
Cost
|
|
|
Unrealized
|
|
|
|
level
|
|
value
|
|
|
basis
|
|
|
gain (loss)
|
|
|
|
|
|
(In thousands)
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valhi common stock
|
|
1
|
|
$
|
49,731
|
|
|
$
|
24,347
|
|
|
$
|
25,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valhi common stock
|
|
1
|
|
$
|
88,681
|
|
|
$
|
24,347
|
|
|
$
|
64,334
|
|
At December 31, 2016 and 2017, we held approximately 14.4 million shares of our immediate parent company, Valhi. See Note 1. We account for our investment in Valhi common stock as available-for-sale marketable equity securities and any unrealized gains or losses on the securities are recognized through other comprehensive income (loss), net of deferred income taxes. Our shares of Valhi common stock are carried at fair value based on quoted market prices, representing a Level 1 input within the fair value hierarchy. At December 31, 2016 and 2017, the quoted market prices of Valhi common stock were $3.46 and $6.17 per share, respectively.
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 General Corporation Law, but we do receive dividends from Valhi on these shares, when declared and paid.
F-14
Note 6
-
Investment in Kronos Worldwide, Inc.:
At December 31, 2016 and 2017, we owned approximately 35.2 million shares of Kronos common stock. The per share quoted market price of Kronos at December 31, 2016 and 2017 was $11.94 and $25.77 per share, respectively, or an aggregate market value of $420.5 million and $907.6 million, respectively. The change in the carrying value of our investment in Kronos during the past three years is summarized below:
|
Years ended December 31,
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
(in millions)
|
|
Balance at the beginning of the year
|
$
|
237.7
|
|
|
$
|
140.7
|
|
|
$
|
120.3
|
|
Equity in earnings (losses) of Kronos
|
|
(52.8
|
)
|
|
|
13.2
|
|
|
|
107.8
|
|
Dividends received from Kronos
|
|
(21.1
|
)
|
|
|
(21.1
|
)
|
|
|
(21.1
|
)
|
Equity in Kronos' other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
0.7
|
|
|
|
.7
|
|
|
|
.9
|
|
Currency translation
|
|
(28.0
|
)
|
|
|
(5.4
|
)
|
|
|
17.5
|
|
Interest rate swap
|
|
(0.7
|
)
|
|
|
.1
|
|
|
|
.6
|
|
Defined benefit pension plans
|
|
4.9
|
|
|
|
(7.8
|
)
|
|
|
3.6
|
|
Other postretirement benefit plans
|
|
-
|
|
|
|
(.1
|
)
|
|
|
(.2
|
)
|
Other
|
|
-
|
|
|
|
-
|
|
|
|
0.1
|
|
Balance at the end of the year
|
$
|
140.7
|
|
|
$
|
120.3
|
|
|
$
|
229.5
|
|
Selected financial information of Kronos is summarized below:
|
December 31,
|
|
|
2016
|
|
|
2017
|
|
|
(in millions)
|
|
Current assets
|
$
|
650.4
|
|
|
$
|
1,062.5
|
|
Property and equipment, net
|
|
434.0
|
|
|
|
506.4
|
|
Investment in TiO
2
joint venture
|
|
78.9
|
|
|
|
86.5
|
|
Other noncurrent assets
|
|
16.3
|
|
|
|
169.0
|
|
Total assets
|
$
|
1,179.6
|
|
|
$
|
1,824.4
|
|
Current liabilities
|
$
|
182.1
|
|
|
$
|
231.5
|
|
Long-term debt
|
|
335.4
|
|
|
|
473.8
|
|
Accrued pension and postretirement benefits
|
|
234.2
|
|
|
|
261.9
|
|
Other noncurrent liabilities
|
|
32.9
|
|
|
|
102.9
|
|
Stockholders' equity
|
|
395.0
|
|
|
|
754.3
|
|
Total liabilities and stockholders' equity
|
$
|
1,179.6
|
|
|
$
|
1,824.4
|
|
|
Years ended December 31,
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
(in millions)
|
|
Net sales
|
$
|
1,348.8
|
|
|
$
|
1,364.3
|
|
|
$
|
1,729.0
|
|
Cost of sales
|
|
1,156.5
|
|
|
|
1,107.3
|
|
|
|
1,170.1
|
|
Income (loss) from operations
|
|
(1.1
|
)
|
|
|
81.1
|
|
|
|
330.4
|
|
Income tax expense (benefit)
|
|
142.8
|
|
|
|
17.9
|
|
|
|
(48.8
|
)
|
Net income (loss)
|
|
(173.6
|
)
|
|
|
43.3
|
|
|
|
354.5
|
|
F-15
Note 7
-
Goodwill:
All of our goodwill recognized is related to our component products operations and was generated from CompX’s acquisitions of certain business units. There have been no changes in the carrying amount of our goodwill during the past three years.
We assign goodwill based on the reporting unit (as that term is defined in ASC Topic 350-20-20
Goodwill
) which corresponds to CompX’s security products operations. We test for goodwill impairment at the reporting unit level. In accordance with ASC 350-20-35, we test for goodwill impairment during the third quarter of each year or when circumstances arise that indicate an impairment might be present.
In 2015, 2016 and 2017, our goodwill was tested for impairment only in the third quarter of each year in connection with our annual testing. No impairment was indicated as part of such annual review of goodwill. As permitted by GAAP, during 2015 and 2017 we used the qualitative assessment of ASC 350-20-35 for our annual impairment test and determined it was not necessary to perform the quantitative goodwill impairment test. During 2016, we used the quantitative assessment of ASC 350-20-35 for our annual impairment test using discounted cash flows to determine the estimated fair value of our Security Products reporting unit. Such discounted cash flows are a Level 3 input as defined by ASC 820-10-35. Prior to 2015, all of the goodwill related to CompX’s marine components operations (which aggregated $10.1 million) was impaired, and all of the goodwill related to our wholly-owned subsidiary EWI Re, Inc., (EWI) an insurance brokerage and risk management services company (which aggregated $6.4 million) was impaired. Our gross goodwill at December 31, 2017 was $43.7 million.
Note 8 - Other assets:
|
December 31,
|
|
|
2016
|
|
|
2017
|
|
|
(in thousands)
|
|
Restricted cash and cash equivalents
|
$
|
1,289
|
|
|
$
|
1,255
|
|
Pension asset
|
|
1,037
|
|
|
|
2,593
|
|
Other
|
|
950
|
|
|
|
995
|
|
Total
|
$
|
3,276
|
|
|
$
|
4,843
|
|
Note 9 - Accrued and other current liabilities:
|
December 31,
|
|
|
2016
|
|
|
2017
|
|
|
(in thousands)
|
|
Employee benefits
|
$
|
8,375
|
|
|
$
|
8,269
|
|
Professional fees and settlements
|
|
613
|
|
|
|
350
|
|
Other
|
|
1,636
|
|
|
|
1,088
|
|
Total
|
$
|
10,624
|
|
|
$
|
9,707
|
|
Note 10 - Long-term debt:
In
November 2016, we entered into a financing transaction with Valhi. Previously, and in contemplation of the financing transaction described herein, we formed NLKW Holding, LLC and capitalized it with 35.2 million shares of the common stock of Kronos held by us.
The financing transaction consisted of two steps. Under the first step, NLKW entered into a $50 million revolving credit facility (the “Valhi Credit Facility”) pursuant to which NLKW can borrow up to $50 million from Valhi (with such commitment amount subject to increase from time to time at Valhi’s sole discretion). Proceeds from any borrowings by NLKW under the Valhi Credit Facility would be available for one or more loans from NLKW to us in accordance with the terms of the second step of the financing transaction: a Back-to-Back Credit Facility, as described below. Outstanding
F-16
borrowings under the Valhi Credit Facility bear interest at the prime rate plus 1.875% per annum, payable quarterly, with all amounts due on December 31, 2023. The max
imum principal amount which may be outstanding from time-to-time under the Valhi Credit Facility is limited to 50% of the amount determined by multiplying the number of shares of Kronos common stock pledged by the most recent closing price of such security
on the New York Stock Exchange. Borrowings under the Valhi Credit Facility are collateralized by the assets of NLKW (consisting primarily of the shares of Kronos common stock pledged) and 100% of the membership interest in NLKW held by us. The Valhi Cre
dit Facility contains a number of covenants and restrictions which, among other things, restrict NLKW’s ability to incur additional debt, incur liens, and merge or consolidated with, or sell or transfer substantially all of NLKW’s assets to, another entity
, and require NLKW to maintain a minimum specified level of consolidated net worth. Upon an event of default, Valhi will be entitled to terminate its commitment to make further loans to NLKW, to declare the outstanding loans (with interest) immediately du
e and payable, and, in the case of certain insolvency events with respect to NLKW or us, to exercise its rights with respect to the collateral. Such collateral rights include the right to purchase all of the shares of Kronos common stock pledged at a purc
hase price equal to the aggregate market value of such stock (with such market value
determined by an independent third-party valuation provider)
, less amounts owing to Valhi under the Valhi Credit Facility, with up to 50% of such purchase price being paya
ble by Valhi in the form of an unsecured promissory note bearing interest at the prime rate plus 2.75% per annum, payable quarterly, with all amounts due no later than five years from the date of purchase, and with the remainder of such purchase price paya
ble in cash at the date of purchase.
Contemporaneously with the entering into of the Valhi Credit Facility, NLKW entered into a $50 million revolving credit facility (the “
Back-to-Back Credit Facility
”) with us, pursuant to which we can borrow up to $50 million from NLKW (with such commitment amount subject to increase from time to time in NLKW’s sole discretion). Proceeds from any borrowings under the Back-to-Back Credit Facility would be available for our general corporate purposes, including providing resources to assist us in the resolution of certain claims and contingent liabilities which may be asserted against us. Outstanding borrowings under the Back-to-Back Credit Facility bear interest at the same rate and are payable on the same maturity date as are borrowings by NLKW under the Valhi Credit Facility. Borrowings under the Back-to-Back Credit Facility are on an unsecured basis; however, as a condition thereto, we pledged to Valhi as collateral for the Valhi Credit Facility our 100% membership interest in NLKW. Any outstanding borrowings and interest on such borrowings under the Back-to-Back Credit Facility are eliminated in the preparation of the consolidated financial statements.
We had borrowings under the Valhi Credit Facility of $0.5 million as of December 31, 2017. The average interest rate as of and for the year ended December 31, 2017 was 6.38% and 5.97%, respectively.
See Note 16. We are in compliance with all of the covenants contained in the Valhi Credit Facility at December 31, 2017.
Note 11 - Employee benefit plans:
Defined contribution plans
- We maintain various defined contribution pension plans. Company contributions are based on matching or other formulas. Defined contribution plan expense approximated $2.5 million in 2015, $2.7 million in 2016 and $2.5 million in 2017.
Defined benefit pension 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.
F-17
We expect to contribute approximately $2.1 million to all of our defined benefit pension plans during 2018. Benefit payments to all plan pa
rticipants out of plan assets are expected to be the equivalent of:
Years ending December 31,
|
|
Amount
|
|
|
|
(In thousands)
|
|
2018
|
|
$
|
3,643
|
|
2019
|
|
|
3,629
|
|
2020
|
|
|
3,641
|
|
2021
|
|
|
3,711
|
|
2022
|
|
|
3,708
|
|
Next 5 years
|
|
|
17,530
|
|
The funded status of our defined benefit pension plans is presented in the table below.
|
|
December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Change in projected benefit obligations (PBO):
|
|
|
|
|
|
|
|
|
Benefit obligations at beginning of the year
|
|
$
|
57,086
|
|
|
$
|
54,261
|
|
Interest cost
|
|
|
2,302
|
|
|
|
2,072
|
|
Participant contributions
|
|
|
6
|
|
|
|
5
|
|
Actuarial losses
|
|
|
292
|
|
|
|
596
|
|
Settlement gain
|
|
|
-
|
|
|
|
(315
|
)
|
Change in currency exchange rates
|
|
|
(1,804
|
)
|
|
|
908
|
|
Benefits paid
|
|
|
(3,621
|
)
|
|
|
(3,549
|
)
|
Benefit obligations at end of the year
|
|
|
54,261
|
|
|
|
53,978
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of the year
|
|
|
44,067
|
|
|
|
42,268
|
|
Actual return on plan assets
|
|
|
3,278
|
|
|
|
3,726
|
|
Employer contributions
|
|
|
565
|
|
|
|
1,006
|
|
Participant contributions
|
|
|
6
|
|
|
|
5
|
|
Change in currency exchange rates
|
|
|
(2,027
|
)
|
|
|
766
|
|
Benefits paid
|
|
|
(3,621
|
)
|
|
|
(3,549
|
)
|
Fair value of plan assets at end of year
|
|
|
42,268
|
|
|
|
44,222
|
|
Funded status
|
|
$
|
(11,993
|
)
|
|
$
|
(9,756
|
)
|
Amounts recognized in the balance sheet:
|
|
|
|
|
|
|
|
|
Noncurrent pension asset
|
|
$
|
1,037
|
|
|
$
|
2,593
|
|
Accrued pension costs:
|
|
|
|
|
|
|
|
|
Current
|
|
|
(156
|
)
|
|
|
(155
|
)
|
Noncurrent
|
|
|
(12,874
|
)
|
|
|
(12,194
|
)
|
Total
|
|
$
|
(11,993
|
)
|
|
$
|
(9,756
|
)
|
Accumulated other comprehensive loss - actuarial losses, net
|
|
$
|
32,514
|
|
|
$
|
30,435
|
|
Total
|
|
$
|
20,521
|
|
|
$
|
20,679
|
|
Accumulated benefit obligations (ABO)
|
|
$
|
54,261
|
|
|
$
|
53,978
|
|
F-18
The amounts shown in
the table above for actuarial losses (gains) at December 31, 2016 and 2017 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 benefi
t cost in future years. These amounts, net of deferred income taxes, are recognized in our accumulated other comprehensive income (loss) at December 31, 2016 and 2017. We expect that $1.5 million of the unrecognized actuarial losses will be recognized as
a component of our periodic defined benefit pension cost in 2018.
The table below details the changes in other comprehensive income during 2015, 2016 and 2017.
|
|
Years ended December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Changes in plan assets and benefit obligations
recognized in other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial gain (loss) arising during the year
|
|
$
|
(2,373
|
)
|
|
$
|
122
|
|
|
$
|
498
|
|
Amortization of unrecognized net actuarial loss
|
|
|
1,340
|
|
|
|
1,474
|
|
|
|
1,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1,033
|
)
|
|
$
|
1,596
|
|
|
$
|
2,202
|
|
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 2015, 2016 and 2017, net of deferred income taxes, was recognized as a component of our accumulated other comprehensive income (loss) at December 31, 2014, 2015 and 2016, respectively.
|
|
Years ended December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost on PBO
|
|
$
|
2,376
|
|
|
$
|
2,302
|
|
|
$
|
2,072
|
|
Expected return on plan assets
|
|
|
(3,353
|
)
|
|
|
(2,911
|
)
|
|
|
(2,770
|
)
|
Recognized actuarial losses
|
|
|
1,340
|
|
|
|
1,474
|
|
|
|
1,704
|
|
Settlement cost
|
|
|
-
|
|
|
|
-
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
363
|
|
|
$
|
865
|
|
|
$
|
1,093
|
|
F-19
Certain information concerning our defined benefit pension plans (including information concerning certain plans for which ABO exceeds the fair value of plan assets as of the indicated date) is presented in the table below.
|
|
December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
(In thousands)
|
|
PBO at end of the year
|
|
|
|
|
|
|
|
|
U.S. plan
|
|
$
|
44,967
|
|
|
$
|
44,709
|
|
U.K. plan
|
|
|
9,294
|
|
|
|
9,269
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
54,261
|
|
|
$
|
53,978
|
|
Fair value of plan assets at end of the year
|
|
|
|
|
|
|
|
|
U.S. plan
|
|
$
|
31,937
|
|
|
$
|
32,360
|
|
U.K. plan
|
|
|
10,331
|
|
|
|
11,862
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
42,268
|
|
|
$
|
44,222
|
|
Plans for which the ABO exceeds plan assets:
|
|
|
|
|
|
|
|
|
PBO
|
|
$
|
44,967
|
|
|
$
|
44,709
|
|
ABO
|
|
|
44,967
|
|
|
|
44,709
|
|
Fair value of plan assets
|
|
|
31,937
|
|
|
|
32,360
|
|
The weighted-average discount rate assumptions used in determining the actuarial present value of our benefit obligations as of December 31, 2016 and 2017 are 3.7% and 3.4%, 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, 2016 and 2017.
The weighted-average rate assumptions used in determining the net periodic pension cost for 2015, 2016 and 2017 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
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
Discount rate
|
|
|
3.8
|
%
|
|
|
4.0
|
%
|
|
|
3.7
|
%
|
Long-term rate of return on plan assets
|
|
|
7.2
|
%
|
|
|
7.0
|
%
|
|
|
6.9
|
%
|
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, 2016 and 2017, all of the assets attributable to our U.S. plan 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.
For 2015, 2016 and 2017, the long-term rate of return assumption for plan assets invested in the CMRT was 7.5%, based on the long-term asset mix of the assets of the CMRT and the expected long-term rates of return for such asset components as well as advice from Contran’s actuaries.
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
F-20
to meet any redemption request. For purposes of our plan asset disclosure, we consider the investment in the CMRT as a Level 2 inpu
t 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 whole, at any time based on the most recent value and (ii) observable inputs from Level 1 or Level 2 (or assets not
subject to classification in the fair value hierarchy) were used to value approximately 92% and 93% of the assets of the CMRT at December 31, 2016 and 2017, respectively, as noted below. CMRT assets not subject to classification in the fair value hierarch
y consist principally of certain investments measured at net asset value per share in accordance with ASC 820-10.
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,
|
|
|
|
2016
|
|
|
2017
|
|
CMRT asset value (in millions)
|
|
$
|
637.8
|
|
|
$
|
672.4
|
|
CMRT assets comprised of:
|
|
|
|
|
|
|
|
|
Assets not subject to fair value hierarchy
|
|
|
30
|
%
|
|
|
31
|
%
|
Assets subject to fair value hierarchy:
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
54
|
|
|
|
54
|
|
Level 2
|
|
|
8
|
|
|
|
8
|
|
Level 3
|
|
|
8
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
CMRT asset mix:
|
|
|
|
|
|
|
|
|
Domestic equities, principally publicly traded
|
|
|
31
|
%
|
|
|
33
|
%
|
International equities, principally publicly traded
|
|
|
22
|
|
|
|
25
|
|
Fixed income securities, principally publicly traded
|
|
|
36
|
|
|
|
31
|
|
Privately managed limited partnerships
|
|
|
5
|
|
|
|
4
|
|
Hedge funds
|
|
|
5
|
|
|
|
5
|
|
Other, primarily cash
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
F-21
The composition of our December 31, 2016 and 2017 pension plan assets by fair value level is shown in the table below.
|
|
Fair Value Measurements
|
|
|
|
Total
|
|
|
Quoted Prices
in Active
Markets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
|
(In thousands)
|
|
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
CMRT
|
|
$
|
31,937
|
|
|
$
|
-
|
|
|
$
|
31,937
|
|
Other
|
|
|
10,331
|
|
|
|
10,331
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
42,268
|
|
|
$
|
10,331
|
|
|
$
|
31,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
CMRT
|
|
$
|
32,360
|
|
|
$
|
-
|
|
|
$
|
32,360
|
|
Other
|
|
|
11,862
|
|
|
|
11,862
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
44,222
|
|
|
$
|
11,862
|
|
|
$
|
32,360
|
|
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, 2017, we currently expect to contribute approximately $.4 million to all OPEB plans during 2018. Contribution to our OPEB plans to cover benefit payments expected to be paid to OPEB plan participants are summarized in the table below:
Years ending December 31,
|
|
Amount
|
|
|
|
(In thousands)
|
|
2018
|
|
$
|
367
|
|
2019
|
|
|
325
|
|
2020
|
|
|
284
|
|
2021
|
|
|
247
|
|
2022
|
|
|
213
|
|
Next 5 years
|
|
|
671
|
|
F-22
The funded status of our OPEB plans is presented in the table below.
|
|
December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Change in accumulated OPEB obligations:
|
|
|
|
|
|
|
|
|
Obligations at beginning of the year
|
|
$
|
3,238
|
|
|
$
|
2,744
|
|
Interest cost
|
|
|
96
|
|
|
|
78
|
|
Actuarial gain
|
|
|
(263
|
)
|
|
|
(279
|
)
|
Net benefits paid
|
|
|
(327
|
)
|
|
|
(330
|
)
|
Obligations at end of the year
|
|
|
2,744
|
|
|
|
2,213
|
|
Fair value of plan assets
|
|
|
-
|
|
|
|
-
|
|
Funded status
|
|
$
|
(2,744
|
)
|
|
$
|
(2,213
|
)
|
|
|
|
|
|
|
|
|
|
Accrued OPEB costs recognized in the balance sheet:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(434
|
)
|
|
$
|
(367
|
)
|
Noncurrent
|
|
|
(2,310
|
)
|
|
|
(1,846
|
)
|
Total
|
|
$
|
(2,744
|
)
|
|
$
|
(2,213
|
)
|
Accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
Net actuarial losses
|
|
$
|
679
|
|
|
$
|
616
|
|
Total
|
|
$
|
679
|
|
|
$
|
616
|
|
The amounts shown in the table above for unrecognized actuarial losses at December 31, 2016 and 2017 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 loss at December 31, 2016 and 2017. We expect to recognize approximately $.3 million of actuarial gains as a component of our net periodic OPEB benefit in 2018.
The table below details the changes in other comprehensive income during 2015, 2016 and 2017.
|
|
Years ended December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Changes in benefit obligations recognized in other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial gain (loss) arising during the year
|
|
$
|
336
|
|
|
$
|
263
|
|
|
$
|
279
|
|
Amortization of unrecognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial gain
|
|
|
(101
|
)
|
|
|
(152
|
)
|
|
|
(216
|
)
|
Prior service credit
|
|
|
(621
|
)
|
|
|
(541
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(386
|
)
|
|
$
|
(430
|
)
|
|
$
|
63
|
|
F-23
The components of our periodic OPEB cost are presented in the table below. The amounts shown below for the amortization of unrecognized actuarial gains and prior service credit in 2015, 2016 and 2017, net
of deferred income taxes, were recognized as components of our accumulated other comprehensive income at December 31, 2014, 2015 and 2016, respectively.
|
|
Years ended December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Net periodic OPEB cost (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
108
|
|
|
$
|
96
|
|
|
$
|
78
|
|
Amortization of actuarial gain
|
|
|
(101
|
)
|
|
|
(152
|
)
|
|
|
(216
|
)
|
Amortization of prior service credit
|
|
|
(621
|
)
|
|
|
(541
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(614
|
)
|
|
$
|
(597
|
)
|
|
$
|
(138
|
)
|
A summary of our key actuarial assumptions used to determine the net benefit obligation as of December 31, 2016 and 2017 follows:
|
|
2016
|
|
|
2017
|
|
Health care inflation:
|
|
|
|
|
|
|
|
|
Initial rate
|
|
|
6.5
|
%
|
|
|
6.3
|
%
|
Ultimate rate
|
|
|
4.5
|
%
|
|
|
5.0
|
%
|
Year of ultimate rate achievement
|
|
|
2021
|
|
|
|
2021
|
|
Discount rate
|
|
|
3.1
|
%
|
|
|
3.0
|
%
|
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 2017 or on the accumulated OPEB obligation at December 31, 2017.
The weighted-average discount rate used in determining the net periodic OPEB cost for 2017 was 3.1% (the rate was 3.2% in 2016 and 3.0% in 2015). The weighted-average rate was determined using the projected benefit obligation as of the beginning of each year.
Variances from actuarially-assumed rates will result in additional increases or decreases in accumulated OPEB obligations, net periodic OPEB cost and funding requirements in future periods.
Note 12 - Other noncurrent liabilities:
|
December 31,
|
|
|
2016
|
|
|
2017
|
|
|
(in thousands)
|
|
Reserve for uncertain tax positions
|
$
|
12,186
|
|
|
$
|
7,312
|
|
Insurance claims and expenses
|
|
589
|
|
|
|
620
|
|
Other
|
|
767
|
|
|
|
560
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
13,542
|
|
|
$
|
8,492
|
|
Our reserve for uncertain tax positions is discussed in Note 14.
F-24
Note 13
-
Other 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 from these insurance carriers. The majority of the $3.7 million of insurance recoveries we recognized in 2015 relate to a settlement we reached with one of our insurance carriers in the first quarter of 2015 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. See Note 17.
Note 14 - Income taxes:
The provision for income taxes and 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.
|
Years ended December 31,
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
(in millions)
|
|
Expected tax expense (benefit), at U.S. federal statutory
income tax rate of 35%
|
$
|
(18.0
|
)
|
|
$
|
4.9
|
|
|
$
|
39.3
|
|
Rate differences on equity in earnings (losses) of Kronos
|
|
(7.4
|
)
|
|
|
(7.4
|
)
|
|
|
(7.4
|
)
|
Adjustment to the reserve for uncertain tax positions, net
|
|
(3.0
|
)
|
|
|
-
|
|
|
|
-
|
|
Change in federal tax rate, net
|
|
-
|
|
|
|
-
|
|
|
|
(37.5
|
)
|
U.S. state income taxes and other, net
|
|
(.2
|
)
|
|
|
(.3
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
$
|
(28.6
|
)
|
|
$
|
(2.8
|
)
|
|
$
|
(5.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of income tax benefit:
|
|
|
|
|
|
|
|
|
|
|
|
Currently payable (receivable):
|
$
|
.1
|
|
|
$
|
1.5
|
|
|
$
|
(.1
|
)
|
Deferred income tax benefit
|
|
(28.7
|
)
|
|
|
(4.3
|
)
|
|
|
(5.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
$
|
(28.6
|
)
|
|
$
|
(2.8
|
)
|
|
$
|
(5.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive provision for income taxes (benefit) allocable to:
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
(28.6
|
)
|
|
$
|
(2.8
|
)
|
|
$
|
(5.6
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
(25.3
|
)
|
|
|
10.9
|
|
|
|
14.3
|
|
Currency translation
|
|
(9.8
|
)
|
|
|
(1.8
|
)
|
|
|
6.1
|
|
Interest rate swap
|
|
(.2
|
)
|
|
|
-
|
|
|
|
.2
|
|
Pension plans
|
|
1.4
|
|
|
|
(2.1
|
)
|
|
|
1.9
|
|
OPEB plans
|
|
(.2
|
)
|
|
|
(.2
|
)
|
|
|
(.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
(62.7
|
)
|
|
$
|
4.0
|
|
|
$
|
16.8
|
|
F-25
The components of the net deferred tax liability at December 31, 2016 and 2017 are summarized in the following table.
|
December 31,
|
|
|
2016
|
|
|
2017
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
(In millions)
|
|
Tax effect of temporary differences related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
$
|
.5
|
|
|
$
|
-
|
|
|
$
|
.3
|
|
|
$
|
-
|
|
Marketable securities
|
|
-
|
|
|
|
(17.0
|
)
|
|
|
-
|
|
|
|
(18.4
|
)
|
Property and equipment
|
|
-
|
|
|
|
(4.4
|
)
|
|
|
-
|
|
|
|
(2.7
|
)
|
Accrued OPEB costs
|
|
1.0
|
|
|
|
-
|
|
|
|
.5
|
|
|
|
-
|
|
Accrued pension costs
|
|
4.2
|
|
|
|
-
|
|
|
|
1.8
|
|
|
|
-
|
|
Accrued employee benefits
|
|
1.9
|
|
|
|
-
|
|
|
|
1.2
|
|
|
|
-
|
|
Accrued environmental liabilities
|
|
41.1
|
|
|
|
-
|
|
|
|
24.6
|
|
|
|
-
|
|
Goodwill
|
|
-
|
|
|
|
(2.6
|
)
|
|
|
-
|
|
|
|
(1.7
|
)
|
Other accrued liabilities
and deductible differences
|
|
.2
|
|
|
|
-
|
|
|
|
.4
|
|
|
|
-
|
|
Other taxable differences
|
|
-
|
|
|
|
(3.3
|
)
|
|
|
-
|
|
|
|
(3.0
|
)
|
Investment in Kronos Worldwide, Inc.
|
|
-
|
|
|
|
(49.0
|
)
|
|
|
-
|
|
|
|
(52.3
|
)
|
Adjusted gross deferred tax assets (liabilities)
|
|
48.9
|
|
|
|
(76.3
|
)
|
|
|
28.8
|
|
|
|
(78.1
|
)
|
Netting of items by tax jurisdiction
|
|
(48.9
|
)
|
|
|
48.9
|
|
|
|
(28.8
|
)
|
|
|
28.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net noncurrent deferred tax asset (liability)
|
$
|
-
|
|
|
$
|
(27.4
|
)
|
|
$
|
-
|
|
|
$
|
(49.3
|
)
|
In accordance with GAAP, we recognize deferred income taxes on our undistributed equity in earnings (losses) of Kronos. Because we and Kronos are part of the same U.S. federal income tax group, any dividends we receive from Kronos are nontaxable to us. Accordingly, we do not recognize and we are not required to pay income taxes on dividends from Kronos. We received aggregate dividends from Kronos of $21.1 million in each of 2015, 2016 and 2017. See Note 6. The amounts shown in the table above of our income tax rate reconciliation for rate differences on equity in earnings (losses) of Kronos represents the benefit associated with such non-taxability of the dividends we receive from Kronos, as it relates to the amount of deferred income taxes we recognize on our undistributed equity in earnings (losses) of Kronos.
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.
The following table shows the changes in the amount of our uncertain tax positions (exclusive of the effect of interest and penalties) during 2015, 2016 and 2017:
|
December 31,
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
(in millions)
|
|
Unrecognized liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of the period
|
$
|
16.8
|
|
|
$
|
12.2
|
|
|
$
|
12.2
|
|
Change in federal tax rate
|
|
-
|
|
|
|
-
|
|
|
|
(4.9
|
)
|
Lapse of applicable statute of limitations
|
|
(4.6
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
$
|
12.2
|
|
|
$
|
12.2
|
|
|
$
|
7.3
|
|
F-26
In th
e first quarter of 2015, we recognized a non-cash income tax benefit of $3.0 million related to the release of a portion of our reserve for uncertain tax positions due to the expiration of the applicable statute of limitations. We currently estimate that o
ur unrecognized tax benefits will not change materially during the next twelve months.
If our uncertain tax positions were recognized, a benefit of $7.3 million would affect our rate in 2017
.
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 2015, 2016 and 2017 was not material.
We and Contran file income tax returns in U.S. federal and various state and local jurisdictions. Our U.S. income tax returns prior to 2014 are generally considered closed to examination by applicable tax authorities. On December 22, 2017, H.R.1, formally known as the “Tax Cuts and Jobs Act” (2017 Tax Act) was enacted into law. This new tax legislation, among other changes, reduces the Federal corporate income tax rate from 35% to 21% effective January 1, 2018, eliminates the domestic production activities deduction and allows for the expensing of certain capital expenditures. Following the enactment of the 2017 Tax Act, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) 118 to provide guidance on the accounting and reporting impacts of the 2017 Tax Act. SAB 118 states that companies should account for changes related to the 2017 Tax Act in the period of enactment if all information is available and the accounting can be completed. In situations where companies do not have enough information to complete the accounting in the period of enactment, a company must either 1) record an estimated provisional amount if the impact of the change can be reasonably estimated; or 2) continue to apply the accounting guidance that was in effect immediately prior to the 2017 Tax Act if the impact of the change cannot be reasonably estimated. If estimated provisional amounts are recorded, SAB 118 provides a measurement period of no longer than one year during which companies should adjust those amounts as additional information becomes available.
Under GAAP, we are required to revalue our net deferred tax liability associated with our net taxable temporary differences in the period in which the new tax legislation is enacted based on deferred tax balances as of the enactment date, to reflect the effect of such reduction in the corporate income tax rate. Other than with respect to temporary differences related to our marketable securities, and certain year-end actuarial valuations associated with our defined benefit pension and OPEB plans, our temporary differences as of December 31, 2017 are not materially different from our temporary differences as of the enactment date. Accordingly, revaluation of our temporary differences is based on our net deferred tax liabilities as of December 31, 2017 (except for our temporary differences related to our marketable securities, and certain year-end actuarial valuations associated with our defined benefit pension and OPEB plans, for which such revaluation is based on the deferred income tax asset/liability as of the enactment date). Such revaluation resulted in a non-cash deferred income tax benefit of $37.5 million recognized in continuing operations, reducing our net deferred tax liability. The amounts recorded as of December 31, 2017 as a result of the 2017 Tax Act represent estimates based on information currently available and, in accordance with the guidance in SAB 118, these amounts are provisional and subject to adjustment as we obtain additional information and complete our analysis in 2018. If the underlying guidance or tax laws change and such change impacts the income tax effects of the new legislation recognized at December 31, 2017, or we determine we have additional tax liabilities under other provisions of the 2017 Tax Act, we will recognize an adjustment in the first reporting period within the measurement period, which period ends December 22, 2018, in which such adjustment is determined.
Income tax matters related to Kronos
Kronos has substantial net operating loss (NOL) carryforwards in Germany (the equivalent of $652 million for German corporate purposes and $.5 million for German trade tax purposes at December 31, 2017) and in Belgium (the equivalent of $50 million for Belgian corporate tax purposes at December 31, 2017), all of which have an indefinite carryforward period. As a result, Kronos has net deferred income tax assets with respect to these two jurisdictions, primarily related to these NOL carryforwards. The German corporate tax is similar to the U.S. federal income tax, and the German trade tax is similar to the U.S. state income tax. Prior to June 30, 2015, and using all available evidence, Kronos had concluded no deferred income tax asset valuation allowance was required to be recognized with respect to these net deferred income tax assets under the more-likely-than-not recognition criteria, primarily because (i) the carryforwards have an indefinite carryforward period, (ii) Kronos utilized a portion of such carryforwards during the most recent three-year period, and (iii) Kronos expected to utilize the remainder of the carryforwards over the long term. Kronos had also previously indicated that facts and circumstances could change, which might in the future result in the recognition of a valuation allowance against some or all of such deferred income tax assets. However, as of June 30, 2015, and given Kronos’ operating results during the second quarter of 2015 and
F-27
Kronos’ expectations at that time for its operating results for the remainder of 2015, Kronos did not have
sufficient positive evidence to overcome the significant negative evidence of having cumulative losses in the most recent twelve consecutive quarters in both its German and Belgian jurisdictions at June 30, 2015 (even considering that the carryforward peri
od of Kronos’ German and Belgian NOL carryforwards is indefinite, one piece of positive evidence). Accordingly, at June 30, 2015, Kronos concluded that it was required to recognize a non-cash deferred income tax asset valuation allowance under the more-li
kely-than-not recognition criteria with respect to its German and Belgian net deferred income tax assets at such date. Such valuation allowance aggregated $150.3 million at June 30, 2015. Kronos recognized an additional $8.7 million non-cash deferred inc
ome tax asset valuation allowance under the more-likely-than-not recognition criteria during the third and fourth quarters of 2015. During 2016, Kronos recognized an aggregate $2.2 million non-cash tax benefit as the result of a net decrease in such defer
red income tax asset valuation allowance, as the impact of utilizing a portion of Kronos’ German NOLs during such period more than offset the impact of additional losses recognized by its Belgian operations during such period. Such valuation allowance agg
regated approximately $173 million at December 31, 2016 ($153 million with respect to Germany and $20 million with respect to Belgium). During the first six months of 2017, Kronos recognized an aggregate non-cash income tax benefit of $12.7 million as a r
esult of a net decrease in such deferred income tax asset valuation allowance, due to the utilization of a portion of both the German and Belgian NOLs during such period. A
t June 30, 2017, Kronos concluded it had sufficient positive evidence under the mor
e-likely-than-not recognition criteria to support reversal of the entire valuation allowance related to its German and Belgian operations. Such sufficient positive evidence at June 30, 2017 included, among other things,
the existence of cumulative profits
in the most recent twelve consecutive quarters (Germany) or profitability in recent quarters during which such profitability was trending upward throughout such period (Belgium), the ability to demonstrate future profitability in Germany and Belgium for a
sustainable period, and the indefinite carryforward period for the German and Belgian NOLs.
As discussed below regarding accounting for income taxes at interim dates, a large portion ($149.9 million) of the remaining valuation allowance as of June 30, 20
17 was reversed in the second quarter with the remainder reversed during the second half of 2017.
In accordance with the ASC 740-270 guidance regarding accounting for income taxes at interim dates, the amount of the valuation allowance reversed at June 30, 2017 ($149.9 million, of which $141.9 million related to Germany and $8.0 million related to Belgium) relates to Kronos’ change in judgment at that date regarding the realizability of the related deferred income tax asset as it relates to future years (i.e. 2018 and after). A change in judgment regarding the realizability of deferred tax assets as it relates to the current year is considered in determining the estimated annual effective tax rate for the year and is recognized throughout the year, including interim periods subsequent to the date of the change in judgment. Accordingly, Kronos’ income tax benefit in 2017 includes an aggregate non-cash income tax benefit of $186.7 million related to the reversal of the German and Belgian valuation allowance, comprised of $12.7 million recognized in the first half of 2017 related to the utilization of a portion of both the German and Belgian NOLs during such period, $149.9 million related to the portion of the valuation allowance reversed as of June 30, 2017 and $24.1 million recognized in the second half of 2017 related to the utilization of a portion of both the German and Belgian NOLs during such period. In addition, Kronos’ deferred income tax asset valuation allowance increased $13.7 million in 2017 as a result of changes in currency exchange rates, which increase was recognized as part of other comprehensive income (loss).
In addition to the reduction in the federal corporate income tax rate discussed above, the 2017 Tax Act (i) implements a territorial tax system and imposes a one-time repatriation tax (Transition Tax) on the deemed repatriation of the post-1986 undistributed earnings of non-U.S. subsidiaries accumulated up through December 31, 2017, regardless of whether such earnings are repatriated; (ii) eliminates U.S. tax on future foreign earnings (subject to certain exceptions); (iii) eliminates the net operating loss carryback and provides for an indefinite carryforward period subject to an 80% annual usage limitation; (iv) eliminates the domestic production activities deduction beginning in 2018; (v) allows for the expensing of certain capital expenditures; and (vi)
imposes a tax on global intangible low-tax income; and (vii) imposes a base erosion anti-abuse tax
.
Kronos’ temporary differences as of December 31, 2017 are not materially different from its temporary differences as of the enactment date, accordingly revaluation of its net deductible temporary differences is based on its net deferred tax assets as of December 31, 2017. Such revaluation is recognized in continuing operations and is not material to Kronos.
Prior to the enactment of the 2017 Tax Act, the undistributed earnings of Kronos’ European subsidiaries were deemed to be permanently reinvested (Kronos had not made a similar determination with respect to the undistributed
F-28
earnings of its Canadian subsidiary). Pursuant to the Transition Tax provisions imposing a one-time repatriation tax on post-1986 undistributed earnings, Kronos recognized a provisional current income tax expense of
$76.2 million in the fourth quarter of 2017.
Kronos will elect to pay such tax over an eight year period beginning in 2018, including approximately $6.1 million which will be paid in 2018 and the remaining $70.1 million will be paid in increments over th
e remainder of the eight year period.
The amounts recorded as of December 31, 2017 as a result of the 2017 Tax Act represent estimates based on information currently available and, in accordance with the guidance in SAB 118, these amounts are provisional
and subject to adjustment as Kronos obtains additional information and completes its analysis in 2018. If the underlying guidance or tax laws change and such change impacts the income tax effects of the new legislation recognized at December 31, 2017 or K
ronos determines it has additional tax liabilities under other provisions of the 2017 Tax Act, including the tax on global intangible low-taxed income and the base erosion anti-abuse tax, Kronos will recognize an adjustment in the reporting period within t
he measurement period in which such adjustment is determined. Such measurement period ends December 22, 2018 pursuant to the guidance of SAB 118.
Prior to the enactment of the 2017 Tax Act the undistributed earnings of our European subsidiaries were deemed to be permanently reinvested (we had not made a similar determination with respect to the undistributed earnings of its Canadian subsidiary). As a result of the implementation of a territorial tax system under the 2017 Tax Act, effective January 1, 2018, and the Transition Tax which in effect taxes the post-1986 undistributed earnings of our non-U.S. subsidiaries accumulated up through December 31, 2017, Kronos has now determined that all of the post-1986 undistributed earnings of its European subsidiaries are not permanently reinvested
(Kronos had previously concluded that all of the undistributed earnings of its Canadian subsidiary are not permanently reinvested)
. Accordingly, in the fourth quarter of 2017 Kronos recognized an aggregate provisional non-cash deferred income tax expense of $4.5 million for the estimated U.S. state and foreign income tax and withholding tax liability attributable to all of such previously-considered permanently reinvested undistributed earnings. Kronos is currently reviewing certain other provisions under the 2017 Tax Act that would impact its determination of the aggregate temporary differences attributable to its investment in its non-U.S. subsidiaries. Kronos continues to assert indefinite reinvestment as it relates to its outside basis differences attributable to its investments in its non-U.S. subsidiaries, other than post-1986 undistributed earnings of its European subsidiaries and all undistributed earnings of its Canadian subsidiary. It is possible that a change in facts and circumstances, such as a change in the expectation regarding future dispositions or acquisitions or a change in tax law, could result in a conclusion that some or all of such investments are no longer permanently reinvested.
Certain U.S. deferred tax attributes of one of Kronos’ non-U.S. subsidiaries, which subsidiary is treated as a dual resident for U.S. income tax purposes, were subject to various limitations. As a result, Kronos had previously concluded that a deferred income tax asset valuation allowance was required to be recognized with respect to such subsidiary’s U.S. net deferred income tax asset because such assets did not meet the more-likely-than-not recognition criteria primarily due to (i) the various limitations regarding use of such attributes due to the dual residency; (ii) the dual resident subsidiary had a history of losses and absent distributions from Kronos’ non-U.S. subsidiaries, which were previously not determinable, such subsidiary was expected to continue to generate losses; and (iii) a limited NOL carryforward period for U.S. tax purposes. Because Kronos had concluded the likelihood of realization of such subsidiary’s net deferred income tax asset was remote, Kronos had not previously disclosed such valuation allowance or the associated amount of the subsidiary’s net deferred income tax assets (exclusive of such valuation allowance). Primarily due to changes enacted under the 2017 Tax Act, Kronos has concluded it now has sufficient positive evidence under the more-likely-than-not recognition criteria to support reversal of the entire valuation allowance related to such subsidiary’s net deferred income tax asset, which evidence included, among other things, (i) the inclusion under the Transition Tax provisions of significant earnings for U.S. income tax purposes which significantly and positively impacts the ability of such deferred tax attributes to be utilized by Kronos; (ii) the indefinite carryforward period for U.S. net operating losses incurred after December 31, 2017; (iii) an expectation of continued future profitability for U.S. operations; and (iv) a positive taxable income basket for U.S. tax purposes in excess of the U.S. deferred tax asset related to the U.S. attributes of such subsidiary. Accordingly, in the fourth quarter Kronos recognized an $18.7 million non-cash deferred income tax benefit as a result of the reversal of such valuation allowance.
F-29
None of our or Kronos’ U.S. and non-U.S. tax returns are currently under examination. As a result of prior a
udits in certain jurisdictions which are now settled, in 2008 Kronos filed Advance Pricing Agreement Requests with the tax authorities in the U.S., Canada and Germany. These requests have been under review with the respective tax authorities since 2008 an
d prior to 2016, it was uncertain whether an agreement would be reached between the tax authorities and whether Kronos would agree to execute and finalize such agreements.
|
•
|
During 2016, Contran, as the ultimate parent of our U.S. Consolidated income tax group, executed and finalized an Advance Pricing Agreement with the U.S. Internal Revenue Service and Kronos’ Canadian subsidiary executed and finalized an Advance Pricing Agreement with the Competent Authority for Canada (collectively, the “U.S.-Canada APA”) effective for tax years 2005 - 2015. Pursuant to the terms of the U.S.-Canada APA, the U.S. and Canadian tax authorities agreed to certain prior year changes to taxable income of our U.S. and Canadian subsidiaries. As a result of such agreed-upon changes, Kronos recognized a $3.4 million current U.S. income tax benefit in 2016. In addition, Kronos’ Canadian subsidiary incurred a cash income tax payment of approximately CAD $3 million (USD $2.3 million) related to the U.S.-Canada APA, but such payment was fully offset by previously provided accruals, and such income tax was paid in the third quarter of 2017.
|
|
•
|
During the third quarter of 2017, Kronos’ Canadian subsidiary executed and finalized an Advance Pricing Agreement with the Competent Authority for Canada (the “Canada-Germany APA”) effective for tax years 2005 - 2017. Pursuant to the terms of the Canada-Germany APA, the Canadian and German tax authorities agreed to certain prior year changes to taxable income of our Canadian and German subsidiaries. As a result of such agreed-upon changes, Kronos reversed a significant portion of its reserve for uncertain tax positions and recognized a non-cash income tax benefit of $8.6 million related to such reversal ($8.1 million recognized in the third quarter of 2017). In addition, Kronos recognized a $2.6 million non-cash income tax benefit related to an increase in its German NOLs and a $.6 million German cash tax refund related to the Canada-Germany APA in the third quarter of 2017.
|
Note 15 - Stockholders’ equity:
Long-term incentive compensation plan
– We have a long-term incentive plan that provides for the award of stock to our board of directors, and up to a maximum of 200,000 shares can be awarded. We awarded 9,000 shares under this plan in each of 2015 and 2017 and 14,000 shares in 2016. At December 31, 2017, 154,000 shares were available for future grants under this plan.
Long-term incentive compensation 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, 2017, Kronos had 155,500 shares available for award and CompX had 166,000 shares available for award.
Dividends
– Prior to 2015,
after considering our results of operations, financial conditions and cash requirements for our businesses, our Board of Directors suspended our regular quarterly dividend. The declaration and payment of future dividends, and the amount thereof, is discretionary and is dependent upon these and other factors deemed relevant by our Board of Directors.
F-30
Accumulated other comprehensive income (loss)
-
Changes in accumulated other comprehensive income (loss) attributable to NL stockholders, including amounts resulting from our investment in Kronos Worldwide (see Note 6), are presented in the table below.
|
Years ended December 31,
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
(in thousands)
|
|
Accumulated other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
47,112
|
|
|
$
|
195
|
|
|
$
|
20,473
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) arising during the year
|
|
(48,647
|
)
|
|
|
20,278
|
|
|
|
25,596
|
|
Less reclassification adjustment for amounts included
|
|
|
|
|
|
|
|
|
|
|
|
in realized loss
|
|
1,730
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
$
|
195
|
|
|
$
|
20,473
|
|
|
$
|
46,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
(154,173
|
)
|
|
$
|
(172,384
|
)
|
|
$
|
(175,859
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Arising during the year
|
|
(18,211
|
)
|
|
|
(3,475
|
)
|
|
|
11,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
$
|
(172,384
|
)
|
|
$
|
(175,859
|
)
|
|
$
|
(164,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
-
|
|
|
$
|
(445
|
)
|
|
$
|
(390
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses arising during the year
|
|
(560
|
)
|
|
|
(393
|
)
|
|
|
(296
|
)
|
Reclassification adjustments for amounts included in equity
in earnings of Kronos
|
|
115
|
|
|
|
448
|
|
|
|
686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
$
|
(445
|
)
|
|
$
|
(390
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
(75,260
|
)
|
|
$
|
(72,712
|
)
|
|
$
|
(76,710
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost and net losses
|
|
|
|
|
|
|
|
|
|
|
|
included in net periodic pension cost
|
|
2,884
|
|
|
|
2,655
|
|
|
|
2,956
|
|
Net actuarial gain (loss) arising during the year
|
|
(336
|
)
|
|
|
(6,653
|
)
|
|
|
803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
$
|
(72,712
|
)
|
|
$
|
(76,710
|
)
|
|
$
|
(72,951
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
OPEB plans:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
282
|
|
|
$
|
(12
|
)
|
|
$
|
(360
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service credit and net losses
|
|
|
|
|
|
|
|
|
|
|
|
included in net periodic OPEB cost
|
|
(547
|
)
|
|
|
(529
|
)
|
|
|
(193
|
)
|
Net actuarial gain arising during year
|
|
253
|
|
|
|
181
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
$
|
(12
|
)
|
|
$
|
(360
|
)
|
|
$
|
(388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
$
|
(182,039
|
)
|
|
$
|
(245,358
|
)
|
|
$
|
(232,846
|
)
|
Other comprehensive income (loss)
|
|
(63,319
|
)
|
|
|
12,512
|
|
|
|
41,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
$
|
(245,358
|
)
|
|
$
|
(232,846
|
)
|
|
$
|
(191,737
|
)
|
See Note 11 for amounts related to our defined benefit pension plans and OPEB plans.
F-31
Note 16 - Related party transactions:
We may be deemed to be controlled by Ms. Simmons and Ms. Connelly. See Note 1. Corporations that may be deemed to be controlled by or affiliated with such individuals 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 interest in another related party. While no transactions of the type described above are planned or proposed with respect to us other than as set forth in these financial statements, we continuously 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 and payables to affiliates are summarized in the table below:
|
December 31,
|
|
|
2016
|
|
|
2017
|
|
|
(In thousands)
|
|
Current receivables from affiliates:
|
|
|
|
|
|
|
|
Refundable income taxes from Valhi
|
$
|
-
|
|
|
$
|
1,767
|
|
Other - trade items
|
|
14
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
14
|
|
|
$
|
1,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current payables to affiliates:
|
|
|
|
|
|
|
|
Income taxes payable to Valhi
|
$
|
1,506
|
|
|
$
|
-
|
|
Other - trade items
|
|
211
|
|
|
|
429
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
1,717
|
|
|
$
|
429
|
|
From time to time, we may 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 and 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. While certain of such loans may be of a lesser credit quality 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. On November 14, 2016, NLKW entered into the Valhi Credit Facility whereby, we could borrow up to $50 million. NLKW had borrowings outstanding of $0.5 million as of December 31, 2017 under the Valhi Credit Facility, and we incurred a nominal amount of interest expense under such credit facility for the year ended December 31, 2016 and 2017. See Note 10. In addition, in August 2016 CompX entered into an unsecured revolving demand promissory note with Valhi whereby CompX has agreed to loan Valhi up to $40 million. CompX’s loan to Valhi bears interest at prime plus 1.00%, payable quarterly, with all principal due on demand, but in any event no earlier than December 31, 2019. The amount of CompX’s outstanding loans to Valhi at any time is at its discretion. At December 31, 2017, the outstanding principal balance receivable from Valhi under the promissory note was $38.2 million. Interest income (including unused commitment fees) on CompX’s loan to Valhi was $.2 million in 2016 and $1.8 million in 2017.
F-32
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 company on a fee basis. Such charges are base
d 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 a
nd 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) aggregated approximately $23.3 million in 2015, $24.5 million in 2016 and $24.5 million in 2017. This agreement is renewed annually.
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. 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 us. 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. Tall Pines is a subsidiary of Valhi and EWI is a subsidiary of Valhi and us. 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. The aggregate premiums paid to Tall Pines and EWI by us (including amounts attributable to Kronos for all periods, including its Louisiana Pigment Company joint venture), were $12.2 million in 2015, $11.3 million in 2016 and $11.8 million in 2017. These amounts principally represent payments for insurance premiums, which include premiums or fees paid to Tall Pines or fees paid to EWI. These amounts also include payments to insurers or reinsurers through EWI for the reimbursement of claims within our applicable deductible or retention ranges that such insurers or reinsurers paid to third parties on our behalf, as well as amounts for claims and risk management services and various other third-party fees and expenses incurred by the program. We expect these relationships with Tall Pines and EWI will continue in 2018.
With respect to certain of such jointly-owned 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, and in the event that the available coverage under a particular policy would become exhausted by one or more claims, Contran and certain of its subsidiaries and affiliates, including us, have entered into a loss sharing agreement under which any uninsured loss arising because the available coverage had been exhausted by one or more claims will be shared ratably amongst those entities that had 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.
Contran and certain of its subsidiaries, including us, participate in a combined information technology data recovery program that Contran provides from a data recovery center that it established. Pursuant to the program, Contran and certain of its subsidiaries, including us, as a group share information technology data recovery services. The program apportions its costs among the participating companies. The aggregate amount we paid to Contran for such services (including amounts attributable to Kronos for all periods) was $180,000 in 2015, $158,000 in 2016 and $161,000 in 2017. We expect that this relationship with Contran will continue in 2018.
F-33
Note 17 - Commitments 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 or a trial verdict in favor of either the defendants or the plaintiffs.
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. Other than with respect to the Santa Clara case discussed below, 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 with respect to all such lead pigment litigation cases to which we are a party, including the Santa Clara case, we believe 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, 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 (subject to the final outcome of the Santa Clara case discussed below), 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 (subject to the final outcome of the Santa Clara case discussed below).
|
Accordingly, we have not accrued any amounts for any of the pending lead pigment and lead-based paint litigation cases filed by or on behalf of states, counties, cities or their public housing authorities and school districts, or those asserted as class actions. In addition, we have determined that liability to us which may result, if any, cannot be reasonably estimated at this time because there is no prior history of a loss of this nature on which an estimate could be made and there is no substantive information available upon which an estimate could be based.
In one of these lead pigment cases, in April 2000 we were served with a complaint in
County of Santa Clara v. Atlantic Richfield Company, et al
. (Superior Court of the State of California, County of Santa Clara, Case No. 1-00-CV-788657) brought by a number of California government entities against the former pigment manufacturers, the LIA and certain paint manufacturers. The County of Santa Clara sought to recover compensatory damages for funds the plaintiffs have expended or would in the future expend for medical treatment, educational expenses, abatement or other costs due to exposure to, or potential exposure to, lead paint, disgorgement of profit, and punitive damages. In July 2003, the trial judge granted defendants’ motion to dismiss all remaining claims. Plaintiffs appealed and the
F-34
intermediate appellate court reinstated public nuisance, negligence, strict liability, and fraud c
laims in March 2006. A fourth amended complaint was filed in March 2011 on behalf of The People of California by the County Attorneys of Alameda, Ventura, Solano, San Mateo, Los Angeles and Santa Clara, and the City Attorneys of San Francisco, San Diego a
nd Oakland. That complaint alleged that the presence of lead paint created a public nuisance in each of the prosecuting attorney jurisdictions and sought its abatement. In July and August 2013, the case was tried. In January 2014, the trial court judge
issued a judgment finding us, The Sherwin Williams Company and ConAgra Grocery Products Company jointly and severally liable for the abatement of lead paint in pre-1980 homes, and ordered the defendants to pay an aggregate $1.15 billion to the people of th
e State of California to fund such abatement. The trial court’s judgment also found that to the extent any abatement funds remained unspent after four years, such funds were to be returned to the defendants.
In February 2014, we filed a motion for a new
trial, and in March 2014 the trial court denied the motion. Subsequently in March 2014, we filed a notice of appeal with the Sixth District Court of Appeal for the State of California.
On November 14, 2017, t
he Sixth District Court of Appeal issued its o
pinion, upholding the trial court’s judgment, except that it reversed the portion of the judgment requiring abatement of homes built between 1951 and 1980, which significantly reduced the number of homes subject to the abatement order. In addition, the ap
pellate court ordered the case be remanded to the trial court to recalculate the amount of the abatement fund, to limit it to the amount necessary to cover the cost of investigating and remediating pre-1951 homes, and to hold an evidentiary hearing to appo
int a suitable receiver. In addition, the appellate court found that NL and the other defendants had the right to
seek recovery from liable parties that contributed to a hazardous condition at a particular property
. Subsequently, NL and the other defenda
nts filed a Petition with the California Supreme Court seeking its review of a number of issues. On February 14, 2018, the California Supreme Court denied such petition. NL and the other defendants have indicated they intend to file an appeal with the U.
S. Supreme Court, seeking its review of two federal issues in the trial court’s original judgment. Review by the U.S. Supreme Court is discretionary, and there can be no assurance that the U.S. Supreme Court would agree to hear any such appeal that NL and
the other defendants would file, or if they would agree to hear any such appeal, that the U.S. Supreme Court would rule in favor of NL and the other defendants. NL and the other defendants intend to seek a stay of the case to the trial court, pending its
appeal to the U.S. Supreme Court. Granting of such a stay by the appellate court is discretionary. If no such stay is issued, the remand to the trial court would proceed, and under such remand the trial court would, among other things, (i) assign a new
judge to the case (the original judge has retired), (ii) recalculate the amount of the abatement fund, excluding remediation of homes built between 1951 and 1980, (iii) hold an evidentiary hearing to appoint a suitable receiver for the abatement fund, and
(iv) enter an order setting forth its rulings on these issues. NL believes any party will have a right to appeal any of these new decisions made by the trial court from the remand of the case.
The Santa Clara case is unusual in that this is the second time that an adverse verdict in the lead pigment litigation has been entered against NL (the first adverse verdict against NL was ultimately overturned on appeal). Given the appellate court’s November 2017 ruling, and the denial of an appeal by the California Supreme Court, we have concluded that the likelihood of a loss in this case has reached a standard of “probable” as contemplated by ASC 450. However, we have also concluded that the amount of such loss cannot be reasonably at this time estimated (nor can a range of loss be reasonably estimated) because, among other things:
|
•
|
The appellate court has remanded the case back to the trial court to recalculate the total amount of the abatement, limiting the abatement to pre-1951 homes. Until the trial court has completed such recalculation, NL and the other defendants have no basis to estimate a liability;
|
|
•
|
The appellate court upheld NL’s and the other defendants’ right to seek contribution from other liable parties (e.g. property owners who have violated the applicable housing code) on a house-by-house basis. The method by which the trial court would undertake to determine such house-by-house responsibility, and the outcome of such a house-by-house determination, is not presently known;
|
|
•
|
Participation in any abatement program by each homeowner is voluntary, and each homeowner would need to consent to allowing someone to come into the home to undertake any inspection and abatement, as well as consent to the nature, timing and extent of any abatement. The original trial court’s judgment unrealistically assumed 100% participation by the affected homeowners. Actual participation rates are likely to be less than 100% (the ultimate extent of participation is not presently known);
|
|
•
|
The remedy ordered by the trial court is an abatement fund. The trial court ordered that any funds unspent after four years are to be returned to the defendants (this provision of the trial court’s original judgment was not overturned by the appellate court). As noted above, the actual number of homes which would participate in any abatement, and the nature, timing and extent of any such abatement, is not presently known; and
|
F-35
|
•
|
NL and the other two defendants are jointly and severally liable for the abatement, and NL doe
s not believe any individual defendant would be 100% responsible for the cost of any abatement.
|
Accordingly, the total ultimate amount of any abatement fund, and NL’s share of any abatement is not presently known. For all of the reasons noted above, NL has concluded that the amount of loss for this matter cannot be reasonably estimated at this time (nor can any reasonable range of loss be estimated). However, as with any legal proceeding, there is no assurance that any appeal would be successful, and it is reasonably possible, based on the outcome of the appeals process and the remand proceedings in the trial court, that NL may in the future incur some liability resulting in the recognition of a loss contingency accrual that could have a material adverse impact on our results of operations, financial position and liquidity.
New cases may continue to be filed against 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 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 Agency’s (EPA) Superfund National Priorities List or similar state lists. These proceedings seek cleanup costs, damages for personal injury or property damage and/or damages for injury to natural resources. Certain of these proceedings involve claims for substantial amounts. Although we may be jointly and severally liable for these costs, in most cases we are only one of a number of PRPs who may also be jointly and severally liable, and among whom costs may be shared or allocated. In addition, we are occasionally named as a party in a number of personal injury lawsuits filed in various jurisdictions alleging claims related to environmental conditions alleged to have resulted from our operations.
Obligations associated with environmental remediation and related matters are difficult to assess and estimate for numerous reasons including the:
|
•
|
complexity and differing interpretations of governmental regulations,
|
F-36
|
•
|
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 that actual costs will not exceed accrued amounts or the upper end of the range for sites for which estimates have been made, and we cannot assure you that costs will not be incurred for sites where no estimates presently can be made. Further, additional environmental and related matters may arise in the future. If we were to incur any future liability, this could have a material adverse effect on our consolidated financial statements, results of operations and liquidity.
We record liabilities related to environmental remediation and related matters (including costs associated with damages for personal injury or property damage and/or damages for injury to natural resources) when estimated future expenditures are probable and reasonably estimable. We adjust such accruals as further information becomes available to us or as circumstances change. Unless the amounts and timing of such estimated future expenditures are fixed and reasonably determinable, we generally do not discount estimated future expenditures to their present value due to the uncertainty of the timing of the payout. We recognize recoveries of costs from other parties, if any, as assets when their receipt is deemed probable. At December 31, 2016 and 2017, 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 Operations.
|
Years ended December 31,
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
(In thousands)
|
|
Balance at the beginning of the year
|
$
|
110,015
|
|
|
$
|
113,133
|
|
|
$
|
116,658
|
|
Additions charged to expense, net
|
|
4,370
|
|
|
|
5,152
|
|
|
|
3,376
|
|
Payments, net
|
|
(1,252
|
)
|
|
|
(1,627
|
)
|
|
|
(8,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the year
|
$
|
113,133
|
|
|
$
|
116,658
|
|
|
$
|
111,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
Current liability
|
$
|
8,668
|
|
|
$
|
13,350
|
|
|
$
|
5,302
|
|
Noncurrent liability
|
|
104,465
|
|
|
|
103,308
|
|
|
|
106,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the year
|
$
|
113,133
|
|
|
$
|
116,658
|
|
|
$
|
111,909
|
|
F-37
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 En
vironmental Management Services, Inc., (EMS), has contractually assumed our obligations. At December 31, 2017, we had accrued approximately $112 million related to approximately 39 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 $154 million,
including the amount currently accrued. 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, 2017, 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, for the contamination at the site, if any, 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.
Insurance coverage claims
We are involved in certain legal proceedings with a number of our former insurance carriers regarding the nature and extent of the carriers’ obligations to us under insurance policies with respect to certain lead pigment and asbestos lawsuits. The issue of whether insurance coverage for defense costs or indemnity or both will be found to exist for our lead pigment and asbestos litigation depends upon a variety of factors and we cannot assure you that such insurance coverage will be available.
We have agreements with 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 January 2014, we were served with a complaint in
Certain Underwriters at Lloyds, London, et al v. NL Industries, Inc.
(Supreme Court of the State of New York, County of New York, Index No. 14/650103). The plaintiff, a former insurance carrier of ours, is seeking a declaratory judgment of its obligations to us under insurance policies issued to us by the plaintiff with respect to certain lead pigment lawsuits. The case is now proceeding in the trial court. We believe the action is without merit and intend to defend NL’s rights in this action vigorously.
In February 2014, we were served with a complaint in
Zurich American Insurance Company, as successor-in-interest to Zurich Insurance Company, U.S. Branch vs. NL Industries, Inc., and The People of the State of California, acting by and through county Counsels of Santa Clara, Alameda, Los Angeles, Monterey, San Mateo, Solano and Ventura Counties and the city Attorneys of Oakland, San Diego, and San Francisco, et al
(Superior Court of California, County of Santa Clara, Case No.: 1-14-CV-259924). In January 2015, an Order of Deposit Under CCP § 572 was entered by the trial court.
F-38
Other litigation
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 101 of these types of cases pending, involving a total of approximately 574 plaintiffs. In addition, the claims of approximately 8,676 plaintiffs have been administratively dismissed or placed on the inactive docket in Ohio 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:
|
•
|
facts concerning historical operations,
|
|
•
|
the rate of new claims,
|
|
•
|
the number of claims from which we have been dismissed, and
|
|
•
|
our prior experience in the defense of these matters,
|
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 affiliates 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 (including asbestos-related claims), 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 operations accounted for approximately 48% in 2015, 46% in 2016 and 44% in 2017. One customer of CompX’s Security Products business accounted for 13% of total sales in 2015, 14% in 2016 and 16% in 2017. Another customer of CompX’s Security Products business accounted for approximately 12% of total sales in 2015, and 11% in 2016.
Other
Rent expense principally for CompX operating facilities and equipment was not significant in 2015, 2016 and 2017 and at December 31, 2017, future minimum rentals under noncancellable operating leases are also not significant.
Income taxes
We and Valhi are a party to a tax sharing agreement 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 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
F-39
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 sharing agreement.
Note 18
-
Financial instruments:
The following table summarizes the valuation of our marketable securities on a fair value basis as of December 31, 2016 and 2017:
|
Fair value measurements
|
|
|
Total
|
|
|
Quoted
prices
in active
markets
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
|
(In thousands)
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
$
|
49,731
|
|
|
$
|
49,731
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
$
|
88,681
|
|
|
$
|
88,681
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The following table presents the financial instruments that are not carried at fair value but which require fair value disclosure as December 31, 2016 and 2017:
|
December 31, 2016
|
|
|
December 31, 2017
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
(In thousands)
|
|
Cash, cash equivalents and restricted cash
|
$
|
98,242
|
|
|
$
|
98,242
|
|
|
$
|
102,941
|
|
|
$
|
102,941
|
|
Noncontrolling interest in CompX common stock
|
|
16,350
|
|
|
|
26,790
|
|
|
|
17,756
|
|
|
|
22,224
|
|
The fair value of our noncontrolling interest in CompX stockholders’ equity is based upon its quoted market price at each balance sheet date, which represents Level 1 inputs. Due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value.
Note 19 – Recent accounting pronouncements:
Adopted
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04,
Intangibles
—
Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment
, which aims to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Previously, Step 2 measured a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the new ASU, an entity performs its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and a goodwill impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. In no circumstances will the loss recognized exceed the total amount of goodwill allocated to that reporting unit. We have elected to adopt this ASU beginning with our goodwill impairment test performed in the third quarter of 2017. The application of ASU 2017-04 did not have a material effect on our Consolidated Financial Statements.
F-40
In February 2018, the FASB issued ASU 2018-02,
Income Statemen
t – Reporting Comprehensive Income (Topic 220)
, which permits a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 Tax Act. The reclassification permitted by ASU 2018-02 is op
tional and is not required to be adopted, but if adopted it must be adopted by us no later than the first quarter of 2019 (with early adoption permitted). Consistent with Note 1, we have considered the optional nature of ASU 2018-02, and we have elected t
o not adopt the reclassification.
Pending Adoption
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
. This standard replaces existing revenue recognition guidance, which in many cases was tailored for specific industries, with a uniform accounting standard applicable to all industries and transactions. The new standard, as amended, is currently effective for us beginning with the first quarter of 2018. Entities may elect to adopt ASU No. 2014-09 retrospectively for all periods for all contracts and transactions which occurred during the period (with a few exceptions for practical expediency) or modified retrospectively with a cumulative effect recognized as of the date of adoption. We will adopt the standard in the first quarter of 2018 including the expanded disclosure requirements using the modified retrospective approach to adoption. Our sales generally involve single performance obligations to ship goods pursuant to customer purchase orders without further underlying contracts. Prices for our products are based on published price lists, customer agreements and individual customer orders which do not involve variable consideration, financing components, noncash consideration or consideration paid to our customers. We currently record sales when products are shipped and title and other risks and rewards of ownership have passed to the customer, which is generally upon delivery of our products to transport carriers. Under ASU 2014-09, we will record sales when our customers obtain control of our products, which we have determined is also upon delivery of our products to transport carriers, consistent with our current practice. Accordingly, we expect adoption of this standard will have minimal effect on our revenues and disclosures.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
, which addresses certain aspects related to the recognition, measurement, presentation and disclosure of financial instruments. The ASU requires equity investments (except for those accounted for under the equity method of accounting or those that result in the consolidation of the investee) to generally be measured at fair value with changes in fair value recognized in net income. The amendment also requires a number of other changes, including among others: simplifying the impairment assessment for equity instruments without readily determinable fair values; eliminating the requirement for public business entities to disclose methods and assumptions used to determine fair value for financial instruments measured at amortized cost; requiring an exit price notion when measuring the fair value of financial instruments for disclosure purposes; and requiring separate presentation of financial assets and liabilities by measurement category and form of asset. The changes indicated above will be effective for us beginning in the first quarter of 2018, with prospective application required, and early adoption is not permitted. The most significant aspect of adopting this ASU will be the requirement to recognize changes in fair value of our available-for-sale marketable equity securities in net income (currently changes in fair value of such securities are recognized in other comprehensive income).
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which is a comprehensive rewriting of the lease accounting guidance which aims to increase comparability and transparency with regard to lease transactions. The primary change will be the recognition of lease assets for the right-of-use of the underlying asset and lease liabilities for the obligation to make payments by lessees on the balance sheet for leases currently classified as operating leases. The ASU also requires increased qualitative disclosure about leases in addition to quantitative disclosures currently required. Companies are required to use a modified retrospective approach to adoption with a practical expedient which will allow companies to continue to account for existing leases under the prior guidance unless a lease is modified, other than the requirement to recognize the right-of-use asset and lease liability for all operating leases. The changes indicated above will be effective for us beginning in the first quarter of 2019, with early adoption permitted. We are in the process of assessing all of our current leases. We have not yet evaluated the effect this ASU will have on our Consolidated Financial Statements, but given the insignificant amount of our future minimum payments under non-cancellable operating leases at December 31, 2017 discussed in Note 17, we do not expect the adoption of this standard to have a material effect on our Consolidated Balance Sheets.
In March 2017, the FASB issued ASU 2017-07,
Compensation— Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, which requires that the
F-41
service cost
component of net periodic defined benefit pension and OPEB cost be reported in the same line item as other compensation costs for applicable employees incurred during the period. Other components of such net benefit cost are required to be presented in t
he income statement separately from the service cost component, and below income from operations (if such a subtotal is presented). These other net benefit cost components must be disclosed either on the face of the financial statements or in the notes to
the financial statements. In addition only the service cost component is eligible for capitalization in assets where applicable (inventory or internally constructed fixed assets for example).
The amendments in ASU 2017-06 are effective for us beginning
in the first quarter of 2018, early adoption as of the beginning of an annual period is permitted, retrospective presentation is required for the income statement presentation of the service cost component and other components of net benefit cost, and pros
pective application is required for the capitalization in assets of the service cost component of net benefit cost. We will adopt this ASU in the first quarter of 2018. Our net benefit cost for both defined benefit pension plans and OPEB plans does not i
nclude any service cost component, none of such net benefit costs are capitalized in assets, we present a subtotal for income from operations and our net benefit cost is currently included in the determination of income from operations. Accordingly, adopt
ion of this standard will change the determination of the amount we report as income from operations. As disclosed in Note 11, our total net periodic defined benefit pension costs were $.4 million in 2015, $.9 million in 2016 and $1.1 million in 2017, and
our net periodic OPEB cost was a credit of $.6 million in 2015, $.6 million in 2016 and $.1 million in 2017.
Note 20
-
Quarterly results of operations (unaudited):
|
|
Quarter ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
|
(In millions, except per share data)
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
27.1
|
|
|
$
|
27.1
|
|
|
$
|
28.4
|
|
|
$
|
26.3
|
|
Gross margin
|
|
|
8.2
|
|
|
|
8.5
|
|
|
|
9.4
|
|
|
|
9.1
|
|
Net income (loss)
|
|
|
(2.2
|
)
|
|
|
1.2
|
|
|
|
7.8
|
|
|
|
10.0
|
|
Amounts attributable to NL stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(2.5
|
)
|
|
|
0.8
|
|
|
|
7.4
|
|
|
|
9.6
|
|
Income (loss) per common share
|
|
$
|
(.05
|
)
|
|
$
|
.02
|
|
|
$
|
.15
|
|
|
$
|
.20
|
|
|
|
|
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Year ended December 31, 2017
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Net sales
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$
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29.9
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$
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30.0
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$
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27.0
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$
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25.1
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Gross margin
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9.7
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9.5
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8.2
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7.4
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Net income
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8.8
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41.6
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17.8
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49.6
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Amounts attributable to NL stockholders:
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Net income
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8.3
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41.2
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17.5
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49.1
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Income per common share
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$
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.17
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$
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.85
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$
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.36
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$
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1.00
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We recognized the following amounts during 2016:
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income of $.3 million, net of income taxes, included in our equity in earnings of Kronos related to insurance settlement gains in the first quarter,
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income of $1.1 million in the third quarter and loss of $.4 million in the fourth quarter, each net of income taxes, included in our equity in earnings of Kronos related to the execution and finalization of the U.S.-Canada APA (see Note 14),
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loss of $.6 million in the second quarter and income of $.9 million in the fourth quarter, each net of income taxes, included in our equity in earnings of Kronos related to a net decrease in our deferred income tax asset valuation allowance related to Kronos’ German and Belgian operations (see Note 14), and
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loss of $.5 million, net of income taxes, included in our equity in earnings of Kronos related to a net increase in Kronos’ reserve for uncertain tax positions, mostly in the fourth quarter.
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F-42
We recognized the following amounts during 2017:
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income
of $37.5 million
in the fourth quarter related to a non-cash deferred income tax benefit related to the revaluation of our net deferred income tax liability resulting from the reduction in the U.S. federal corporate income tax rate enacted into law on December 22, 2017 (see Note 14),
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income of $1.0 million in the first quarter, $31.1 million in the second quarter, $1.5 million in the third quarter, and $3.2 million in the fourth quarter, each net of income taxes, included in our equity in earnings of Kronos related to a non-cash deferred income tax benefit recognized as the result of the reversal of Kronos’ deferred income tax asset valuation allowance associated with its German and Belgian operations (see Note 14),
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loss of $15.1 million in the fourth quarter, net of income taxes, included in our equity in earnings of Kronos related to Kronos’ current income tax expense recognized as the result of
change in the 2017 Tax Act enacted on December 22, 2017 for the one-time repatriation tax imposed on the post-1986 undistributed earnings of Kronos’ non-U.S. subsidiaries
(see Note 14),
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income of $3.7 million in the fourth quarter, net of income taxes, included in our equity in earnings of Kronos related to Kronos’ non-cash deferred income tax benefit recognized as the result of the reversal of Kronos’ deferred income tax asset valuation allowance
related to certain U.S. deferred income tax assets of one of Kronos’ non-U.S. subsidiaries (which subsidiary is treated as a dual resident for U.S. income tax purposes)
(see Note 14),
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income of $2.2 million in the third quarter, net of income taxes, included in our equity in earnings of Kronos related to the execution and finalization of an Advanced Pricing Agreement between Canada and Germany, mostly in the third quarter (see Note 14),
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loss of $.9 million in the fourth quarter, net of income taxes, included in our equity in earnings of Kronos
related to Kronos’
non-cash deferred income tax expense as a result of a change in its conclusions regarding Kronos’ permanent reinvestment assertion with respect to the post-1986 undistributed earnings of its European subsidiaries (see Note 14),
and
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loss of $.9 million
in the third quarter, net of income taxes, included in our equity in earnings of Kronos related to Kronos’ loss on prepayment of debt.
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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.
F-43