NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(unaudited)
Note 1 – Organization and basis of presentation:
Organization
– At September 30, 2018, Valhi, Inc. (NYSE: VHI) held approximately 83% of our outstanding common stock and a wholly-owned subsidiary of
Contran Corporation held approximately 92% 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.
Basis of presentation
–
Consolidated in this Quarterly Report are the results of our majority-owned subsidiary, CompX International Inc. We also own 30% of Kronos Worldwide, Inc. (Kronos). CompX (NYSE American: CIX) and Kronos (NYSE: KRO); each file periodic reports with the Securities and Exchange Commission (SEC).
The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report have been prepared on the same basis as the audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2017 that we filed with the SEC on March 12, 2018 (the 2017 Annual Report). In our opinion, we have made all necessary adjustments (which include only normal recurring adjustments) in order to state fairly, in all material respects, our consolidated financial position, results of operations and cash flows as of the dates and for the periods presented. We have condensed the Consolidated Balance Sheet at December 31, 2017 contained in this Quarterly Report as compared to our audited Consolidated Financial Statements at that date, and we have omitted certain information and footnote disclosures (including those related to the Consolidated Balance Sheet at December 31, 2017) normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Our results of operations for the interim periods ended September 30, 2018 may not be indicative of our operating results for the full year. The Condensed Consolidated Financial Statements contained in this Quarterly Report should be read in conjunction with our 2017 Consolidated Financial Statements contained in our 2017 Annual Report.
Unless otherwise indicated, references in this report to “NL,” “we,” “us” or “our” refer to NL Industries, Inc. and its subsidiaries and affiliate, Kronos, taken as a whole.
Note 2
–
Accounts and other receivables, net:
|
December 31,
|
|
|
September 30,
|
|
|
2017
|
|
|
2018
|
|
|
(In thousands)
|
|
Trade receivables - CompX
|
$
|
10,516
|
|
|
$
|
13,416
|
|
Accrued insurance recoveries
|
|
145
|
|
|
|
15,427
|
|
Other receivables
|
|
79
|
|
|
|
96
|
|
Allowance for doubtful accounts
|
|
(70
|
)
|
|
|
(70
|
)
|
|
|
|
|
|
|
|
|
Total
|
$
|
10,670
|
|
|
$
|
28,869
|
|
Accrued insurance recoveries are discussed in Note 14.
9
Note 3 – Inventories, net:
|
December 31,
|
|
|
September 30,
|
|
|
2017
|
|
|
2018
|
|
|
(In thousands)
|
|
Raw materials
|
$
|
2,730
|
|
|
$
|
3,001
|
|
Work in process
|
|
9,836
|
|
|
|
10,864
|
|
Finished products
|
|
2,816
|
|
|
|
3,294
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
15,382
|
|
|
$
|
17,159
|
|
Note 4
–
Marketable securities:
Our marketable securities consist of investments in the publicly-traded shares of our immediate parent company Valhi, Inc. Prior to 2018, any unrealized gains or losses on the securities were recognized through other comprehensive income, net of deferred income taxes. Beginning on January 1, 2018 with the adoption of Accounting Standards Update (“ASU”) 2016-01, our marketable equity securities will continue to be carried at fair value as noted below, but any unrealized gains or losses on the securities are now recognized as a component of other income included in Marketable equity securities on our Condensed Consolidated Statements of Operations. See Note 16.
|
Fair value
measurement
level
|
|
Market
value
|
|
|
Cost basis
|
|
|
Unrealized
gain
|
|
|
|
|
(In thousands)
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valhi common stock
|
1
|
|
$
|
88,681
|
|
|
$
|
24,347
|
|
|
$
|
64,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valhi common stock
|
1
|
|
$
|
32,770
|
|
|
$
|
24,347
|
|
|
$
|
8,423
|
|
At December 31, 2017 and September 30, 2018, we held approximately 14.4 million shares of common stock of Valhi. See Note 1. 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, 2017 and September 30, 2018, the quoted per share market price of Valhi common stock was $6.17 and $2.28, respectively. During the first nine months of 2018 we recognized a pre-tax loss of $55.9 million related to the aggregate net change in market value of our marketable equity securities during such period.
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.
Note 5 – Investment in Kronos Worldwide, Inc.:
At December 31, 2017 and September 30, 2018, we owned approximately 35.2 million shares of Kronos common stock. At September 30, 2018, the quoted market price of Kronos’ common stock was $16.25 per share, or an aggregate market value of $572.3 million. At December 31, 2017, the quoted market price was $25.77 per share, or an aggregate market value of $907.6 million.
10
Th
e change in the carrying value of our investment in Kronos during the first
nine
months of 2018 is summarized below.
|
Amount
|
|
|
(In millions)
|
|
Balance at the beginning of the period
|
$
|
229.5
|
|
Equity in earnings of Kronos
|
|
55.0
|
|
Dividends received from Kronos
|
|
(17.9
|
)
|
Equity in Kronos' other comprehensive income:
|
|
|
|
Currency translation
|
|
(3.0
|
)
|
Defined benefit pension plans
|
|
2.2
|
|
|
|
|
|
Balance at the end of the period
|
$
|
265.8
|
|
Selected financial information of Kronos is summarized below:
|
December 31,
|
|
|
September 30,
|
|
|
2017
|
|
|
2018
|
|
|
(In millions)
|
|
Current assets
|
$
|
1,062.5
|
|
|
$
|
1,238.4
|
|
Property and equipment, net
|
|
506.4
|
|
|
|
491.9
|
|
Investment in TiO
2
joint venture
|
|
86.5
|
|
|
|
79.7
|
|
Other noncurrent assets
|
|
169.0
|
|
|
|
124.9
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
1,824.4
|
|
|
$
|
1,934.9
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
231.5
|
|
|
$
|
249.6
|
|
Long-term debt
|
|
473.8
|
|
|
|
465.2
|
|
Accrued pension and postretirement benefits
|
|
261.9
|
|
|
|
255.0
|
|
Other noncurrent liabilities
|
|
102.9
|
|
|
|
91.7
|
|
Stockholders' equity
|
|
754.3
|
|
|
|
873.4
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
$
|
1,824.4
|
|
|
$
|
1,934.9
|
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
|
(In millions)
|
|
Net sales
|
|
$
|
464.5
|
|
|
$
|
410.3
|
|
|
$
|
1,275.7
|
|
|
$
|
1,312.5
|
|
Cost of sales
|
|
|
309.5
|
|
|
|
291.2
|
|
|
|
882.3
|
|
|
|
846.8
|
|
Income from operations
|
|
|
96.1
|
|
|
|
58.1
|
|
|
|
226.8
|
|
|
|
285.5
|
|
Income tax expense (benefit)
|
|
|
6.1
|
|
|
|
14.1
|
|
|
|
(114.0
|
)
|
|
|
75.5
|
|
Net income
|
|
|
73.8
|
|
|
|
32.6
|
|
|
|
307.1
|
|
|
|
181.0
|
|
11
Note 6
–
Other noncurrent assets, net:
|
December 31,
|
|
|
September 30,
|
|
|
2017
|
|
|
2018
|
|
|
(In thousands)
|
|
Restricted cash
|
$
|
1,255
|
|
|
$
|
1,089
|
|
Pension asset
|
|
2,593
|
|
|
|
2,847
|
|
Other
|
|
995
|
|
|
|
1,201
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
4,843
|
|
|
$
|
5,137
|
|
Note 7
–
Accrued and other current liabilities:
|
December 31,
|
|
|
September 30,
|
|
|
2017
|
|
|
2018
|
|
|
(In thousands)
|
|
Employee benefits
|
$
|
8,269
|
|
|
$
|
7,955
|
|
Litigation settlement
|
|
-
|
|
|
|
60,000
|
|
Other
|
|
1,438
|
|
|
|
2,095
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
9,707
|
|
|
$
|
70,050
|
|
See Note 14 for a discussion of the accrued litigation settlement.
Note 8
–
Long-term debt:
During the first nine months of 2018, our wholly owned subsidiary, NLKW Holding, LLC had no borrowings or repayments under its $50 million secured revolving credit facility with Valhi. At September 30, 2018, we had outstanding borrowings of $0.5 million under such facility, and the remaining $49.5 million was available for future borrowing under this facility. Outstanding borrowings under such credit facility bear interest at the prime rate plus 1.875% per annum, and the average interest rate as of and for the nine months ended September 30, 2018 was 7.125% and 6.64%, respectively. We are in compliance with all of the covenants contained in such facility at September 30, 2018.
Note 9
–
Employee benefit plans:
The components of net periodic defined benefit pension cost are presented in the table below.
|
Three months ended
|
|
|
Nine months ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
(In thousands)
|
|
Interest cost
|
$
|
506
|
|
|
$
|
372
|
|
|
$
|
1,518
|
|
|
$
|
1,116
|
|
Expected return on plan assets
|
|
(689
|
)
|
|
|
(590
|
)
|
|
|
(2,067
|
)
|
|
|
(1,770
|
)
|
Recognized actuarial losses
|
|
394
|
|
|
|
365
|
|
|
|
1,182
|
|
|
|
1,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
211
|
|
|
$
|
147
|
|
|
$
|
633
|
|
|
$
|
441
|
|
12
The components of net periodic postretirement benefits other than pension (OPEB) income are presented in the table below.
|
Three months ended
|
|
|
Nine months ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
(In thousands)
|
|
Interest cost
|
$
|
20
|
|
|
$
|
15
|
|
|
$
|
60
|
|
|
$
|
45
|
|
Recognized actuarial gains
|
|
(54
|
)
|
|
|
(63
|
)
|
|
|
(162
|
)
|
|
|
(189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
(34
|
)
|
|
$
|
(48
|
)
|
|
$
|
(102
|
)
|
|
$
|
(144
|
)
|
Upon the adoption of ASU 2017-07,
Compensation - Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, our net periodic defined benefit pension cost and other postretirement benefit cost is presented as a separate line item (“Other components of net periodic pension and OPEB cost”) in our Condensed Consolidated Statements of Operations for all periods presented. See Note 16.
We currently expect our 2018 contributions to our defined benefit pension plans and other postretirement plans to be approximately $3.4 million.
Note 10
–
Other noncurrent liabilities:
|
December 31,
|
|
|
September 30,
|
|
|
2017
|
|
|
2018
|
|
|
(In thousands)
|
|
Reserve for uncertain tax positions
|
$
|
7,312
|
|
|
$
|
7,312
|
|
Insurance claims and expenses
|
|
620
|
|
|
|
674
|
|
Litigation settlement
|
|
-
|
|
|
|
17,000
|
|
Other
|
|
560
|
|
|
|
410
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
8,492
|
|
|
$
|
25,396
|
|
See Note 14 for a discussion of the accrued litigation settlement.
Note 11 – Revenue Recognition
Our sales are conducted through our majority-owned subsidiary CompX and involve single performance obligations to ship our products pursuant to customer purchase orders. In some cases, the purchase order is supported by an underlying master sales agreement, but the purchase order acceptance generally evidences the contract with our customer by specifying the key terms of product and quantity ordered, price and delivery and payment terms. Effective January 1, 2018 with the adoption of ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606),
see Note 16,
we record revenue when we satisfy our performance obligations to our customers by transferring control of our products to them, which generally occurs at point of shipment or upon delivery. Such transfer of control is also evidenced by transfer of legal title and other risks and rewards of ownership (giving the customer the ability to direct the use of, and obtain substantially all of the benefits of, the product), and our customers becoming obligated to pay us and such payment being probable of occurring. In certain arrangements we provide shipping and handling activities after the transfer of control to our customer (e.g. when control transfers prior to delivery). In such arrangements shipping and handling are considered fulfillment activities, and accordingly, such costs are accrued when the related revenue is recognized.
Revenue is recorded in an amount that reflects the net consideration we expect to receive in exchange for our products. Prices for our products are based on terms specified in published list prices and purchase orders,
13
which generally do not include financing components, noncash consideration or consideration paid to our customers.
As our standard payment terms are less than
one year, we have elected the practical expedient under ASC 606 and we have not assessed whether a contract has a significant financing component.
We state sales net of price, early payment and distributor discounts as well as volume rebates
(collectively, variable consideration). Variable consideration, to the extent present, is not material and is recognized as the amount to which we are most-likely to be entitled, using all information (historical, current and forecasted) that is reasonab
ly available to us, and only to the extent that a significant reversal in the amount of the cumulative revenue recognized is not probable of occurring in a future period. Differences, if any, between estimates of the amount of variable consideration to w
hich we will be entitled and the actual amount of such variable consideration have not been material in the past. We report any tax assessed by a governmental authority that we collect from our customers that is both imposed on and concurrent with our reve
nue-producing activities (such as sales, use, value added and excise taxes) on a net basis (meaning we do not recognize these taxes either in our revenues or in our costs and expenses).
Frequently, we receive orders for products to be delivered over dates that may extend across reporting periods. We invoice for each delivery upon shipment and recognize revenue for each distinct shipment when all sales recognition criteria for that shipment have been satisfied. As scheduled delivery dates for these orders are within a one year period, under the optional exemption provided by ASC 606, we do not disclose sales allocated to future shipments of partially completed contracts.
The following table disaggregates our net sales by reporting unit, which are the categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors (as required by ASC 606).
|
Three months ended
|
|
|
Nine months ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
(In thousands)
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security Products
|
$
|
22,854
|
|
|
$
|
24,541
|
|
|
$
|
74,903
|
|
|
$
|
75,845
|
|
Marine Components
|
|
4,139
|
|
|
|
5,488
|
|
|
|
12,040
|
|
|
|
14,982
|
|
Total
|
$
|
26,993
|
|
|
$
|
30,029
|
|
|
$
|
86,943
|
|
|
$
|
90,827
|
|
14
Note 12
–
Income taxes:
|
Three months ended
|
|
|
Nine months ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
(In millions)
|
|
Expected tax expense (benefit), at U.S. federal
statutory income tax rate of 35% in 2017 and
21% in 2018
|
$
|
8.5
|
|
|
$
|
(4.4
|
)
|
|
$
|
34.0
|
|
|
$
|
(12.1
|
)
|
Rate differences on equity in earnings of Kronos
|
|
(2.1
|
)
|
|
|
(1.9
|
)
|
|
|
(5.0
|
)
|
|
|
(4.3
|
)
|
Nontaxable income
|
|
(.1
|
)
|
|
|
-
|
|
|
|
(.3
|
)
|
|
|
(.2
|
)
|
U.S. state income taxes and other, net
|
|
.2
|
|
|
|
.2
|
|
|
|
.2
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
$
|
6.5
|
|
|
$
|
(6.1
|
)
|
|
$
|
28.9
|
|
|
$
|
(15.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive provision for income taxes
(benefit) allocable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
6.5
|
|
|
$
|
(6.1
|
)
|
|
$
|
28.9
|
|
|
$
|
(15.4
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
(2.8
|
)
|
|
|
-
|
|
|
|
(5.3
|
)
|
|
|
-
|
|
Currency translation
|
|
3.1
|
|
|
|
.3
|
|
|
|
5.7
|
|
|
|
(.6
|
)
|
Interest rate swap
|
|
.2
|
|
|
|
-
|
|
|
|
.2
|
|
|
|
-
|
|
Pension plans
|
|
.4
|
|
|
|
.3
|
|
|
|
1.1
|
|
|
|
.8
|
|
OPEB plans
|
|
(.1
|
)
|
|
|
(.1
|
)
|
|
|
(.1
|
)
|
|
|
(.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
7.3
|
|
|
$
|
(5.6
|
)
|
|
$
|
30.5
|
|
|
$
|
(15.3
|
)
|
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 $15.8 million in the first nine months of 2017 and $18.0 million in the first nine months of 2018. The amounts shown in the above table of our income tax rate reconciliation for rate differences on equity in earnings of Kronos represents the net tax (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 and the result determined by multiplying the pre-tax earnings or losses of each of our non-U.S. subsidiaries by the difference between the applicable statutory income tax rate for each non-U.S. jurisdiction.
As discussed in the 2017 Annual Report, 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, (i) reduced the U.S. Federal corporate income tax rate from 35% to 21% effective January 1, 2018; (ii) eliminated the domestic production activities deduction beginning in 2018; and (iii) 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 in the reporting period within the measurement period in which such adjustment is determined.
15
Under GAAP, we are required to revalue our net deferred tax liability associated with our U.S. 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 marketab
le securities, and certain year-end actuarial valuations associated with our defined benefit pension and OPEB plans
,
our temporary differences as of December 31, 2017 were not materially different from our temporary differences as of the enactment date, ac
cordingly revaluation of our net taxable temporary differences was based on our net deferred tax liability as of December 31, 2017
(except for our temporary differences related to our marketa
b
le securities, and certain year-end actuarial valuations associa
t
e
d with ou
r
defined benefit pension and OPEB plans, for which such revaluation was based on the deferred income ta
x
asset/liability
as of
enactment date
)
. Such revaluation resulted in a non-cash deferred income tax benefit of $37.5 million recognized as o
f December 31, 2017 in continuing operations, reducing our net deferred income 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.
We did not make any a
dditional measurement-period adjustments to the provisional amounts recorded for this item during the first six months of 2018, as we were still waiting on additional guidance that might impact the income tax effects of the new legislation recognized at De
cember 31, 2017. During the third quarter of 2018, in conjunction with finalizing our federal income tax return, we were able to obtain, prepare and analyze the necessary information to complete the accounting under ASC 740 related to the revaluation of o
ur net deferred tax liability associated with our U.S. net taxable temporary differences as of December 31, 2017, which resulted in the recognition of an immaterial adjustment to the provisional amount recognized at December 31, 2017. Accordingly, we have
completed our analysis related to such revaluation as of September 30, 2018.
Income tax matters related to Kronos
Kronos has substantial net operating loss (NOL) carryforwards in Germany (the equivalent of $652 million for Kronos’ German corporate purposes and $.5 million for German trade tax purposes at December 31, 2017) and in Belgium (the equivalent of $50 million for Kronos’ 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. As discussed in the 2017 Annual Report, commencing June 30, 2015, Kronos concluded that it was required to recognize a non-cash deferred income tax asset valuation allowance under the more-likely-than-not recognition criteria with respect to its German and Belgian net deferred income tax assets at such date. During the first six months of 2017, Kronos recognized an aggregate non-cash deferred income tax benefit of $12.7 million as a result of a net decrease in such deferred income tax asset valuation allowance, due to utilizing a portion of both the German and Belgian NOL during the period, including $7.7 million in the second quarter of 2017. As also discussed in the 2017 Annual Report, at June 30, 2017, Kronos concluded it had sufficient positive evidence under the more-likely-than-not recognition criteria to support reversal of the entire valuation allowance related to its German and Belgian operations. 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 calendar 2017 includes an aggregate non-cash deferred 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 (noted above) 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 (including $7.8 million reversed in the third quarter) related to the utilization of a portion of both the German and Belgian NOLs during such period. 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).
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
16
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. The amounts recor
ded as of December 31, 2017 as a result of the 2017 Tax Act represent estimates based on information currently available. Kronos elected to pay such tax over an eight year period beginning in 2018, including approximately $6.1 million which was paid in Ap
ril 2018 (for the 2017 tax year)
and $
4
.
6
million which was paid in
the second and third quarters of
2018 (for the 2018 tax year)
.
Kronos did not make any measurement-period adjustments to the provisional amounts recorded for this item during the first six
months of 2018 because no new information became available during the period that required an adjustment. During the third quarter of 2018, in conjunction with finalizing Kronos’ federal income tax return and based on additional information that became a
vailable (including proposed regulations issued by the IRS in August 2018
with
respect to the Transition Tax), Kronos recognized a provisional income tax benefit of $1.7 million which amount is recorded as a measurement-period adjustment, reducing the prov
isional income tax expense of $76.2 million recognized in the fourth quarter of 2017. As a result, at September 30, 2018, taking into account the prior Transition Tax installments payments of $
10
.
7
million (noted above), the balance of Kronos’ unpaid Tran
sition Tax aggregates $6
3
.
8
million, which will be paid in quarterly installments over the remainder of the eight year period.
Of the $6
3
.
8
million, $
58.1
million is recorded as a noncurrent payable to affiliate (income taxes payable to Valhi) and $
5
.
7
mi
llion is included with Kronos’ current payable to affiliate (income taxes payable to Valhi) classified as a current liability.
The issuance of final regulations and/or additional guidance
with
respect
to
the Transition Tax may impact the amount of the Transition Tax recognized in the fourth quarter of 2017, as adjusted in the third quarter of 2018.
Kronos continues to gather information and is awaiting further guidance from the state jurisdictions in whi
ch Kronos operates
with
respect to the
Transition Tax. Kronos will complete its accounting for this item within the prescribed measurement period ending December 22, 2018, pursuant to the guidance under SAB 118, and if Kronos determines an adjustment to t
he provisional amount recognized at December 31, 2017 is required, Kronos will recognize such adjustment in the reporting period within the SAB 118 measurement period in which such adjustment is determined.
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 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 Kronos’ non-U.S. subsidiaries accumulated up through December 31, 2017, Kronos determined effective December 31, 2017 that all of the post-1986 undistributed earnings of its European subsidiaries 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 based on its reasonable estimates of the U.S. state and non-U.S. income tax and withholding tax liability attributable to all of such previously-considered permanently reinvested undistributed earnings through December 31, 2017. The amounts recorded as of December 31, 2017 as a result of the 2017 Tax Act represent estimates based on information currently available. Kronos has not made any measurement-period adjustments to the provisional amounts recorded at December 31, 2017 for this item during the first nine months of 2018. However, Kronos recorded a provisional non-cash deferred income tax expense of $2.5 million for the estimated U.S. state and non-U.S. income tax and withholding tax liability attributable to the 2018 undistributed earnings of its non-U.S. subsidiaries in the first nine months of 2018, including withholding taxes related to the undistributed earnings of Kronos’s Canadian subsidiary. Kronos is continuing its review of certain other provisions under the 2017 Tax Act and waiting on further guidance, primarily from the state jurisdictions in which it operates, that may impact its determination of the aggregate temporary differences attributable to its investments in its non-U.S. subsidiaries. Kronos will complete its accounting for this item within the prescribed measurement period ending December 22, 2018, pursuant to the guidance under SAB 118, and if Kronos determines an adjustment to the provisional amount recognized at December 31, 2017 and September 30, 2018 are required, Kronos will recognize such adjustment in the reporting period within the SAB 118 measurement period in which such adjustment is determined.
Under U.S. GAAP, as it relates to the new GILTI tax rules, Kronos is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into the measurement of our deferred taxes (the “deferred method”). Kronos’ selection of an accounting policy related to the GILTI tax provisions will depend, in part, on analyzing our global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. While Kronos’ future global operations depend on a number of different factors, Kronos does expect to have future U.S. inclusions in
17
taxable income related to GILTI. As such, Kronos has performed an analysis of GILTI’s impact on its provision and determined the impact is not material. Because the impact is not material to its tax provision, Kronos has not recorded any
adjustments related to potential GILTI tax in its financial statements in the first
nine months
of 2018. Further, Kronos has not made a policy decision regarding whether to record deferred taxes on GILTI or record GILTI tax as a current-period expense wh
en incurred. Kronos will complete its policy election for this item within the prescribed measurement period ending December 22, 2018, pursuant to the guidance under SAB 118 and if Kronos determines such policy election impacts its provision, it will reco
gnize an adjustment in the reporting period within the SAB 118 measurement period in which such adjustment is determined. Similarly, Kronos has evaluated the tax impact of BEAT on its tax provision in the first
nine
months
of 2018 and determined that the
tax law has no material impact on its tax provision as it has historically not entered into international payments between related parties that are unrelated to cost of goods sold.
None of Kronos U.S. and non-U.S. tax returns are currently under examination. As a result of prior audits 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 and 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 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 $8.1 million related to such reversal 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.
|
|
•
|
During the first quarter of 2018, Kronos’ German subsidiary executed and finalized the related Advance Pricing Agreement with the Competent Authority for Germany (the “Germany- Canada APA”) effective for tax years 2005 - 2017. In the first quarter of 2018, Kronos recognized a net $1.4 million non-cash income tax benefit related to an APA tax settlement payment between its German and Canadian subsidiaries.
|
Note 13
–
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 5), are presented in the table below.
18
|
Three months ended
|
|
|
Nine months ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
15,882
|
|
|
$
|
-
|
|
|
$
|
20,473
|
|
|
$
|
46,069
|
|
Change in accounting principle
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(46,069
|
)
|
Balance at beginning of period, as adjusted
|
$
|
15,882
|
|
|
$
|
-
|
|
|
$
|
20,473
|
|
|
$
|
-
|
|
Other comprehensive loss -
unrealized losses arising
during the year
|
|
(5,260
|
)
|
|
|
-
|
|
|
|
(9,851
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
$
|
10,622
|
|
|
$
|
-
|
|
|
$
|
10,622
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
(171,163
|
)
|
|
$
|
(167,984
|
)
|
|
$
|
(175,859
|
)
|
|
$
|
(164,467
|
)
|
Other comprehensive income (loss)
|
|
5,908
|
|
|
|
1,103
|
|
|
|
10,604
|
|
|
|
(2,414
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
$
|
(165,255
|
)
|
|
$
|
(166,881
|
)
|
|
$
|
(165,255
|
)
|
|
$
|
(166,881
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
(362
|
)
|
|
$
|
-
|
|
|
$
|
(390
|
)
|
|
$
|
-
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses arising
during the year
|
|
(119
|
)
|
|
|
-
|
|
|
|
(296
|
)
|
|
|
-
|
|
Less reclassification adjustment for
amounts included in interest expense
|
|
481
|
|
|
|
-
|
|
|
|
686
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
(75,450
|
)
|
|
$
|
(70,994
|
)
|
|
$
|
(76,710
|
)
|
|
$
|
(72,951
|
)
|
Other comprehensive income -
amortization of net losses included
in net periodic pension cost
|
|
738
|
|
|
|
959
|
|
|
|
1,998
|
|
|
|
2,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
$
|
(74,712
|
)
|
|
$
|
(70,035
|
)
|
|
$
|
(74,712
|
)
|
|
$
|
(70,035
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPEB plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
(456
|
)
|
|
$
|
(526
|
)
|
|
$
|
(360
|
)
|
|
$
|
(388
|
)
|
Other comprehensive loss -
amortization of net gains included in net periodic OPEB cost
|
|
(49
|
)
|
|
|
(65
|
)
|
|
|
(145
|
)
|
|
|
(203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
$
|
(505
|
)
|
|
$
|
(591
|
)
|
|
$
|
(505
|
)
|
|
$
|
(591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
(231,549
|
)
|
|
$
|
(239,504
|
)
|
|
$
|
(232,846
|
)
|
|
$
|
(191,737
|
)
|
Change in accounting principle
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(46,069
|
)
|
Balance at beginning of period, as adjusted
|
$
|
(231,549
|
)
|
|
$
|
(239,504
|
)
|
|
$
|
(232,846
|
)
|
|
$
|
(237,806
|
)
|
Other comprehensive income
|
|
1,699
|
|
|
|
1,997
|
|
|
|
2,996
|
|
|
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
$
|
(229,850
|
)
|
|
$
|
(237,507
|
)
|
|
$
|
(229,850
|
)
|
|
$
|
(237,507
|
)
|
See Note 9 for amounts related to our defined benefit pension plans and OPEB plans.
19
Note 14 – Commitments and contingencies:
General
We are involved in various environmental, contractual, product liability, patent (or intellectual property), employment and other claims and disputes incidental to our current and former businesses.
At least quarterly our management discusses and evaluates the status of any pending litigation or claim to which we are a party or which has been asserted against us. The factors considered in such evaluation include, among other things, the nature of such pending cases and claims, the status of such pending cases and claims, the advice of legal counsel and our experience in similar cases and claims (if any). Based on such evaluation, we make a determination as to whether we believe (i) it is probable a loss has been incurred, and if so if the amount of such loss (or a range of loss) is reasonably estimable, or (ii) it is reasonably possible but not probable a loss has been incurred, and if so if the amount of such loss (or a range of loss) is reasonably estimable, or (iii) the probability a loss has been incurred is remote.
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, other than with respect to the Santa Clara case discussed below, 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 (subject to the final outcome of the Santa Clara case discussed below),
|
|
•
|
no final, non-appealable adverse verdicts have ever been entered against NL (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).
|
20
Accordingly, other than with respect to the Santa Clara case discussed below, 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 other than the Santa Clara case noted below.
In addition, we h
ave 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 w
hich 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 intermediate appellate court reinstated public nuisance, negligence, strict liability, and fraud claims in March 2006. A fourth amended complaint was filed in March 2011 on behalf of The People of California by the County Attorneys of Alameda, Ventura, Solano, San Mateo, Los Angeles and Santa Clara, and the City Attorneys of San Francisco, San Diego and Oakland. That complaint alleged that the presence of lead paint created a public nuisance in each of the prosecuting jurisdictions and sought its abatement. In July and August 2013, the case was tried. In January 2014, the Judge issued a judgment finding 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 the 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, the Sixth District Court of Appeal issued its opinion, 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 appellate 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 appoint a suitable receiver. In addition, the appellate court found that we and the other defendants had the right to seek recovery from liable parties that contributed to a hazardous condition at a particular property. Subsequently, we and the other defendants 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. In July 2018, we and the other defendants filed appeals 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 in October 2018 the U.S. Supreme Court denied the petitions for the Court to hear such appeals.
Under such remand ordered by the appellate court, the trial court would, among other things, (i) recalculate the amount of the abatement fund, excluding remediation of homes built between 1951 and 1980, (ii) hold an evidentiary hearing to appoint a suitable receiver for the abatement fund and (iii) enter an order setting forth its rulings on these issues. We believe any party will have a right to appeal any of these new decisions to be made by the trial court from the remand of the case. Several uncertainties exist with respect to the new decisions to be made by the trial court from the remand of the case, including the following:
|
•
|
The appellate court remanded the case back to the trial court to recalculate the total amount of the abatement, limiting the abatement to pre-1951 homes. In this regard, NL and the other defendants filed a brief with the trial court proposing a recalculated maximum abatement fund amount of no more than $409 million and plaintiffs filed a brief proposing an abatement fund amount of $730 million. In September 2018, following a case-management hearing regarding the recalculated abatement fund amount held in August 2018, the trial court issued an order setting the recalculated amount of the abatement fund at $409 million;
|
|
•
|
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.
|
21
|
|
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
|
|
•
|
We and the other two defendants are jointly and severally liable for the abatement, we do not believe any individual defendant would be 100% responsible for the cost of any abatement, and the allocation of the recalculated amount of the abatement fund ($409 million) among the three defendants has not yet been determined.
|
In May 2018, we and the plaintiffs entered into a settlement agreement pursuant to which, as supplemented, the plaintiffs would be paid an aggregate of $80 million, in return for which we would be dismissed from the case with prejudice and all pending and future claims, causes of action, cross-complaints, actions or proceedings against us and our affiliates for indemnity, contribution, reimbursement or declaratory relief in respect to the case would be barred, discharged and enjoined as a matter of applicable law. Of such $80 million, $65 million would be paid by us and $15 million would be provided by one of our former insurance carriers that has previously placed such amount on deposit with the trial court in satisfaction of potential liability such former carrier might have with respect to the case under certain insurance policies we had with such former carrier. Of such $65 million which would be paid by us, $45 million would be paid upon approval of the terms of the settlement, and the remaining $20 million would be paid in five annual installments beginning four years from such approval ($6 million for the first installment, $5 million for the second installment and $3 million for each of the third, fourth and fifth installments). The settlement agreement is subject to a number of conditions including the trial court’s approval of the terms of the settlement (which trial court approval includes a determination that such settlement agreement meets the standards for a “good faith” settlement under applicable California law). The other defendants filed motions with the trial court objecting to the terms of the settlement. In September 2018, the trial court denied approval of the settlement agreement, finding among other things that the settlement agreement did not meet the standards for a “good faith” settlement under applicable California law. Subsequently in October 2018, we filed an appeal of the trial court’s denial of approval of the settlement agreement with the Sixth District Court of Appeal for the State of California, asserting among other things that in denying such approval the trial court made several legal errors in applying applicable California law to the terms of the settlement. The appellate court has discretion whether to hear such appeal, and the time for the appellate court to determine if it will hear such appeal has not yet run. There can be no assurance that the appellate court will agree to hear such appeal, or if it agrees to hear such appeal, that it would rule in favor of us and approve the settlement agreement. We continue to believe the settlement agreement satisfies the standards for a “good faith” settlement under applicable California law.
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 us (the first adverse verdict against us 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. With all of the uncertainties that exist with respect to the new decisions to be made by the trial court from the remand of the case, as noted above, we had previously concluded that the amount of such loss could not be reasonably estimated (nor could a range of loss be reasonably estimated). However, the terms of the settlement agreement entered into by us and the plaintiffs in May 2018, as supplemented, provides evidence that the amount of the loss to us could be reasonably estimated (and provides evidence of the low end of a range of loss to us). For financial reporting purposes, we discounted the five payments aggregating $20 million to be paid in installments to their estimated net present value, using a discount rate of 3.0% per annun. Such net present value is $17 million, and we would begin to accrete such present value amount upon approval of the settlement agreement. Accordingly, in the second quarter of 2018 we recognized a net $62 million pre-tax charge with respect to this matter ($45 million for the amount to be paid by us upon approval of the terms of the settlement and $17 million for the net present
22
value of the five payments aggregating $20
million to be paid by us in installments beginning four years from such approval), representing the net amount we would pay in full settlement of our liability under the terms of the proposed settlement agreement. For purposes of our condensed consolidate
d balance sheet, we have presented the aggregate $45 million that would be paid to the plaintiffs upon approval of the terms of the settlement and the $15 million that would be paid to the plaintiffs from the amount placed as deposit with the trial court b
y one of our former insurance carriers as a current liability, $17 million for the net present value of the five payments aggregating $20 million to be paid by us in installments beginning four years from such approval as a noncurrent liability and the $15
million portion of such aggregate $80 million undiscounted amount which would be funded from the amount placed on deposit
with the trial court by one of our former insurance carriers as a current insurance recovery receivable. See Notes 2, 7 and 10.
Although, we and the plaintiffs believed the settlement met all requirements of applicable California law, the trial court denied our motion for approval of a good faith settlement, and there can be no assurance that appellate court will reverse that decision and approve the terms of this or any other settlement agreement between us and the plaintiffs. If the appellate court does not reverse the trial court decision and approve the terms of this or any other settlement agreement between us and the plaintiffs, the proceedings in the trial court under the remand, as discussed above, would continue. In such event, NL’s share of the recalculated amount of the abatement fund is not presently known, and other uncertainties exist with respect to the new decisions to be made by the trial court from the remand of the case, as discussed above. 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 an additional 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
23
private actions associated with waste disposal sites, mining locations, and facilities that we or our pr
edecessors, 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 proceedi
ngs 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, i
n 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 juri
sdictions alleging claims related to environmental conditions alleged to have resulted from our operations.
Obligations associated with environmental remediation and related matters are difficult to assess and estimate for numerous reasons including the:
|
•
|
complexity and differing interpretations of governmental regulations,
|
|
•
|
number of PRPs and their ability or willingness to fund such allocation of costs,
|
|
•
|
financial capabilities of the PRPs and the allocation of costs among them,
|
|
•
|
solvency of other PRPs,
|
|
•
|
multiplicity of possible solutions,
|
|
•
|
number of years of investigatory, remedial and monitoring activity required,
|
|
•
|
uncertainty over the extent, if any, to which our former operations might have contributed to the conditions allegedly giving rise to such personal injury, property damage, natural resource and related claims and
|
|
•
|
number of years between former operations and notice of claims and lack of information and documents about the former operations.
|
In addition, the imposition of more stringent standards or requirements under environmental laws or regulations, new developments or changes regarding site cleanup costs or the allocation of costs among PRPs, solvency of other PRPs, the results of future testing and analysis undertaken with respect to certain sites or a determination that we are potentially responsible for the release of hazardous substances at other sites, could cause our expenditures to exceed our current estimates. We cannot assure you 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. We recognize recoveries of costs from other parties, if any, as assets when their receipt is deemed probable. At December 31, 2017 we had not recognized any receivables for recoveries and at September 30, 2018, we have recognized $15.0 million of receivables for recoveries related to the lead pigment litigation in California discussed above.
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.
24
Changes in the accrued environmental remediation and related costs during the first
nine
months of 2018 are as follows:
|
Amount
|
|
|
(In thousands)
|
|
Balance at the beginning of the period
|
$
|
111,909
|
|
Additions charged to expense, net
|
|
2,671
|
|
Payments, net
|
|
(3,098
|
)
|
|
|
|
|
Balance at the end of the period
|
$
|
111,482
|
|
|
|
|
|
Amounts recognized in the Condensed Consolidated
|
|
|
|
Balance Sheet at the end of the period:
|
|
|
|
Current liability
|
$
|
17,762
|
|
Noncurrent liability
|
|
93,720
|
|
|
|
|
|
Balance at the end of the period
|
$
|
111,482
|
|
On a quarterly basis, we evaluate the potential range of our liability for environmental remediation and related costs at sites where we have been named as a PRP or defendant, including sites for which our wholly-owned environmental management subsidiary, NL Environmental Management Services, Inc. (EMS), has contractually assumed our obligations. At September 30, 2018, we had accrued approximately $111 million related to approximately 37 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 $130 million, including the amount currently accrued. These accruals have not been discounted to present value.
We believe that it is not reasonably possible to estimate the range of costs for certain sites. At September 30, 2018, there were approximately 5 sites for which we are not currently able to reasonably 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.
25
We have agreements with certain of our former insurance carriers pursuant to which the carriers reimburse us for a portion of our future lead pigment litigation defense costs, and one such carrier reimburses us for a portion of our future asbestos litigati
on 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 a
ble to reasonably estimate the amount of the recovery.
For a complete discussion of certain litigation involving us and certain of our former insurance carriers, refer to our 2017 Annual Report.
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 109 of these types of cases pending, involving a total of approximately 582 plaintiffs. In addition, the claims of approximately 8,676 plaintiffs have been administratively dismissed or placed on the inactive docket in Ohio state court. 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. For a discussion of other legal proceedings to which we are a party, refer to our 2017 Annual Report.
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, 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.
Note 15 – Financial instruments and fair value measurements:
See Note 4 for information on how we determine fair value of our marketable securities.
26
The following table presents the financial instruments that are not carried at fair value but which requi
re fair value disclosure:
|
December 31, 2017
|
|
|
September 30, 2018
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
amount
|
|
|
value
|
|
|
amount
|
|
|
value
|
|
|
(In thousands)
|
|
Cash, cash equivalents and restricted cash
|
$
|
102,941
|
|
|
$
|
102,941
|
|
|
$
|
128,371
|
|
|
$
|
128,371
|
|
Noncontrolling interest in CompX common stock
|
|
17,756
|
|
|
|
22,224
|
|
|
|
19,177
|
|
|
|
22,854
|
|
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 a Level 1 input. Due to their near-term maturities, the carrying amounts of accounts receivable and accounts payable are considered equivalent to fair value.
Note 16
–
Recent accounting pronouncements:
Adopted
On January 1, 2018, we adopted ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
for all contracts which were not completed as of January 1, 2018 using the modified retrospective method. Prior to adoption of this standard, we recorded sales when our products were shipped and title and other risks and rewards of ownership had passed to our customer, which was generally at the time of shipment (although in some instances shipping terms were FOB destination point, for which we did not recognize revenue until the product was received by our customer). Following adoption of this standard, we record sales when we satisfy our performance obligations to our customers by transferring control of our products to them, which we have determined is at the same point in time that we recognized revenue prior to adoption of this new standard. Accordingly, the adoption of Topic 606 as of January 1, 2018 did not have a material impact on our consolidated financial statements, and we believe adoption of this standard will have a minimal effect on our revenues on an ongoing basis. See Note 11.
On January 1, 2018, we adopted 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 (previously, changes in fair value of such securities were recognized in other comprehensive 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. We adopted the new standard prospectively. The most significant aspect of adopting this ASU is the requirement to recognize changes in fair value of our available-for-sale marketable equity securities in net income. At December 31, 2017, our entire portfolio of marketable securities consisted of marketable equity securities. Upon adoption of the ASU on January 1, 2018, the entire balance of our accumulated other comprehensive income related to marketable securities of $46.1 million was reclassified to our beginning retained earnings pursuant to the transition requirements of the ASU.
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 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 the 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
27
constructed fixed assets for example). We adopted the amendments in ASU 2017-07 beginning i
n the first quarter of 2018, with retrospective presentation in our Condensed Consolidated Statements of
Operations
. We began applying ASU 2017-07 prospectively beginning on January 1, 2018 as it relates to the capitalization of the service cost component
of net benefit cost into assets (primarily inventory). We are availing ourselves of the practical expedient that permits us to use amounts we previously disclosed as components of our net periodic defined benefit pension and OPEB cost for periods prior t
o the adoption of this ASU as the estimation basis for applying the retrospective presentation requirements. As a result we have reclassified
$.2 million and
$.
5
million previously classified as part of corporate expense for the
third
quarter and first
ni
ne
months
of
September
30, 2017,
respectively,
to “Other components of net periodic pension and OPEB cost” in our Condensed Consolidated Statement of Income.
Pending adoption
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 currently 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 are in the process of completing our evaluation of the effect this ASU will have on our Consolidated Financial Statements, and we do not expect the adoption of this standard to have a material effect on our Consolidated Balance Sheet.
28