UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of the Securities
Exchange Act of 1934
Date of Report (Date of the earliest event reported)
November 14, 2005
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Valhi, Inc.
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(Exact name of Registrant as specified in its charter)
Delaware 1-5467 87-0110150
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(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification
incorporation) No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(972) 233-1700
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(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2):
[ ] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Item 4.02 Non-Reliance on Previously Issued Financial Statements or a Related
Audit Report or Completed Interim Review.
(a) On November 14, 2005, the Company and its audit committee concluded that the
Company will file an Annual Report on Form 10-K/A for its year ended December
31, 2004 ("Form 10-K/A") to reflect the following:
o an increase to its total stockholders' equity of $48.8 million as of
each of December 31, 2004, December 31, 2003, December 31, 2002 and
December 31, 2001. Such $48.8 million net increase, which is comprised
of a $131.7 million increase in retained earnings and a $82.9 million
decrease in accumulated other comprehensive income related to
marketable securities, relates to a prior period adjustment to correct
the Company's accounting for its investment in The Amalgamated Sugar
Company LLC, as more fully described below. In addition to such
adjustments to stockholders' equity, the effect of such prior period
adjustment results in a $80.0 million increase in noncurrent
marketable securities, and a $31.2 million increase in noncurrent
deferred income tax liabilities at each of such dates.
o A decrease in the Company's net income of $19.1 million, or $.16 per
diluted share, for the year ended December 31, 2003, and a decrease in
the Company's net income of $6.8 million, or $.05 per diluted share,
for the year ended December 31, 2004, in each case to correct the
Company's accounting for its pro-rata share of the income tax
liability recognized by NL Industries, Inc., the Company's
majority-owned subsidiary, upon NL's distribution of certain shares of
common stock of Kronos Worldwide, Inc. to NL's stockholders other than
the Company. The Company previously accounted for its pro-rata share
of such income taxes as a direct reduction of equity (additional
paid-in capital). There is no net effect to the Company's
previously-reported total stockholders' equity as a result of this
correction.
As a result of these restatements for the recognition of the items referred to
above, the Company's previously issued consolidated financial statements
contained in its Annual Report on Form 10-K for the year ended December 31, 2004
filed on March 30, 2005 (the "Original Form 10-K") should no longer be relied
upon.
With respect to the restatement related to the Company's accounting for its
investment in The Amalgamated Sugar Company LLC, as disclosed in the Original
Form 10-K, in January 1997 the Company transferred control of the refined sugar
operations previously conducted by the Company's wholly-owned subsidiary, The
Amalgamated Sugar Company, to Snake River Sugar Company, an Oregon agricultural
cooperative formed by certain sugarbeet growers in Amalgamated's areas of
operations. Pursuant to the transaction, Amalgamated contributed substantially
all of its net assets to the Amalgamated Sugar Company LLC, a limited liability
company controlled by Snake River, on a tax-deferred basis in exchange for a
non-voting ownership interest in the LLC. The cost basis of the net assets
transferred by Amalgamated to the LLC was approximately $34 million. As part of
such transaction, Snake River made certain loans to Valhi aggregating $250
million. Such loans from Snake River are collateralized by the Company's
interest in the LLC. Snake River's sources of funds for its loans to Valhi, as
well as for the $14 million it contributed to the LLC for its voting interest in
the LLC, included cash capital contributions by the grower members of Snake
River and $180 million in debt financing provided by Valhi, of which $100
million was subsequently repaid in 1997 when Snake River obtained an equal
amount of third-party term loan financing. After such repayments, $80 million
principal amount of Valhi's loans to Snake River have remained outstanding since
June 30, 1997 through December 31, 2004.
The Company and Snake River share in distributions from the LLC up to an
aggregate of $26.7 million per year (the "base" level), with a preferential 95%
share going to the Company. To the extent the LLC's distributions are below this
base level in any given year, the Company is entitled to an additional 95%
preferential share of any future annual LLC distributions in excess of the base
level until such shortfall is recovered. Under certain conditions, the Company
is entitled to receive additional cash distributions from the LLC. The Company
may, at its option, require the LLC to redeem the Company's interest in the LLC
beginning in 2012, and the LLC has the right to redeem the Company's interest in
the LLC beginning in 2027. The redemption price is generally $250 million plus
the amount of certain undistributed income allocable to the Company. In the
event the Company requires the LLC to redeem the Company's interest in the LLC,
Snake River has the right to accelerate the maturity of and call Valhi's $250
million loans from Snake River.
The Company reports the cash distributions received from the LLC as dividend
income. The amount of such future distributions is dependent upon, among other
things, the future performance of the LLC's operations. Because the Company
receives preferential distributions from the LLC and has the right to require
the LLC to redeem its interest in the LLC for a fixed and determinable amount
beginning at a fixed and determinable date, the Company accounts for its
investment in the LLC as a debt security at its estimated fair value.
In 1997 when the Company obtained its interest in the LLC, the Company concluded
that the earnings process with respect to the refined sugar operations
contributed by the Company to the LLC was not complete. Accordingly, the Company
did not recognize any gain in earnings. The Company did treat its investment in
the LLC as equivalent to a SFAS No. 115 debt security. Thus, the excess of the
fair value of the Company's investment in the LLC over the $34 million cost
basis of such investment was recognized as a component of other comprehensive
income, net of applicable deferred income taxes. In estimating the fair value of
the Company's interest in the LLC, the Company considered, among other things,
the outstanding balance of the Company's loans to Snake River and the
outstanding balance of the Company's loans from Snake River, with the result
that the estimated fair value of the Company's LLC investment was deemed to be
$170 million ever since June 30, 1997. Under this accounting, the Company would
have reported a gain in earnings for financial reporting purposes at the time
its LLC interest was redeemed, with a corresponding reduction in accumulated
other income.
In connection with finalizing the preparation of the Company's consolidated
financial statements for the quarter ended September 30, 2005, the Company
re-evaluated its original conclusions regarding how it accounts for its
investment in the LLC. As a result, the Company and its audit committee have now
concluded that a proper application of accounting principles generally accepted
in the United States of America ("GAAP") would have been to recognize a gain in
earnings in 1997 equal to the difference between $250 million (the fair value of
the Company's interest in the LLC) and the $34 million cost basis of the net
assets contributed to the LLC, net of applicable deferred income taxes. The
Company has concluded that this correction, which under GAAP is accounted for as
a prior period adjustment, results in a requirement to amend the Company's
consolidated financial statements contained in the Original Form 10-K. The
effect of this correction on the Company's December 31, 2004 consolidated
balance sheet, as contained in the Original Form 10-K, is to (i) increase the
carrying value of the Company's investment in the LLC (included as part of
noncurrent marketable securities) by $80 million, (ii) increase noncurrent
deferred income tax liabilities by $31.2 million and (iii) increase total
stockholders' equity by $48.8 million (with retained earnings increasing by
$131.7 million and accumulated other comprehensive income related to marketable
securities decreasing by $82.9 million). A similar balance sheet adjustment
would be applicable to Valhi's consolidated balance sheet at December 31, 2003
included in the Original Form 10-K, and a similar adjustment would be applicable
to Valhi's total stockholders' equity at December 31, 2002 and December 31,
2001, in each case as they were reflected in Valhi's consolidated statement of
stockholders' equity contained in the Original Form 10-K. Under this revised
accounting, the Company would not be expected to report a gain in earnings for
financial reporting purposes at the time its LLC interest was redeemed, as the
redemption price of $250 million is expected to equal the carrying value of its
investment in the LLC at the time of redemption.
With respect to the second item discussed above, the Company has concluded that
its net income was misstated by $19.1 million, or $.16 per diluted share, for
the year ended December 31, 2003 and by $6.8 million, or $.05 per diluted share,
for the year ended December 31, 2004, in each case as they relate to the
Company's accounting for its pro-rata share of NL's provision for income taxes
related to shares of common stock of Kronos that NL distributed to it
shareholders other than the Company, as required by GAAP as provided by the
guidance contained in SFAS No. 109, Accounting for Income Taxes. The Company and
its audit committee have concluded that the Company had failed to properly apply
the guidance contained in SFAS No. 109 in so far as it related to the income tax
effect of such shares of Kronos distributed by NL to its shareholders other than
the Company. The Company previously accounted for its pro-rata share of such
income taxes as a direct reduction of equity (additional paid-in capital). The
Company has now concluded that such income taxes should have been accounted for
in the determination of net income, as required by the guidance of SFAS No. 109,
Accounting for Income Taxes. The Company has concluded that this correction,
which under GAAP is also accounted for as a prior period adjustment, results in
a requirement to further amend the Company's consolidated financial statements
contained in the Original Form 10-K.
These adjustments became known to the Company in connection with the preparation
of its consolidated financial statements for the quarter ended September 30,
2005.
Attached hereto as Exhibit 99.1 are the Company's unaudited condensed
consolidated balance sheet as of December 31, 2004 and December 31, 2003, and
selected unaudited consolidated statements of income, comprehensive income,
stockholders' equity and cash flow data for the years ended December 31, 2003
and December 31, 2004, reflecting (i) balances as reflected in the Original Form
10-K, (ii) adjustments to reflect the aggregate effect of the restatements
discussed above and (ii) balances, as restated to reflect the aggregate effect
of the restatements.
The guidance set forth in Auditing Standard No. 2 of the Public Company
Accounting Oversight Board states that a restatement of previously-issued
financial statements to reflect the correction of a misstatement should be
regarded as at least a significant control deficiency and as a strong indicator
that a material weakness in internal control over financial reporting exists. A
material weakness is a control deficiency, or a combination of control
deficiencies that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.
In the Original Form 10-K, management of the Company previously concluded that
the Company maintained effective internal control over financial reporting as of
December 31, 2004. In connection with the restatement related to the accounting
for income taxes related to the Company's pro-rata share of the income tax
liability recognized by NL upon NL's distribution of certain shares of common
stock of Kronos to NL's stockholders other than the Company, management of the
Company has now concluded that a material weakness existed at December 31, 2004
that precludes the Company from concluding that its internal control over
financial reporting was effective as of such date. Therefore, management's
previous conclusion that it maintained effective internal control over financial
reporting as of such date, as reported in Item 9A of the Original Form 10-K, can
no longer be relied upon and will be restated when the Company files the Form
10-K/A. In such Form 10-K/A, the Company will conclude that it did not maintain
effective controls surrounding the proper application of GAAP as they relate to
the accounting for the income tax effect related to NL's distribution of shares
of common stock of Kronos in the preparation of the Company's consolidated
financial statements. Specifically, the Company did not maintain effective
controls to accurately classify within its consolidated financial statements the
Company's pro-rata share of the income tax incurred by NL with respect to NL's
distribution of shares of common stock of Kronos. This deficiency resulted in
the requirement to restate the Company's annual consolidated financial
statements for 2004 and 2003 as well as affected interim periods. This control
deficiency could result in the misstatement of the provision for income taxes,
minority interest and additional paid-in capital that would result in a material
misstatement to the annual or interim financial statements that would not be
prevented or detected. Accordingly, management determined that this control
deficiency represents a material weakness.
In order to remediate the material weakness, the Company will institute enhanced
procedures in the fourth quarter of 2005, designed to be performed each quarter
in connection with the Company's preparation and review of its quarterly
provision for income taxes. The procedure will help ensure that GAAP has been
appropriately applied with respect to the accurate classification within the
consolidated financial statements of income taxes arising from the distribution
of shares of common stock of a subsidiary and/or equity method investee or other
non-cash assets by the Company. Such enhanced procedures will include
preparation of a written accounting and income tax quarter-end close procedure
related to the proper classification of such income taxes, and the addition of
an item on the applicable quarterly close checklist to ensure that the
appropriate level of personnel have reviewed such quarter-end procedures and
concluded that any applicable provision for income taxes has been properly
classified within the consolidated financial statements.
However, in connection with the expected filing of the Form 10-K/A, and with
respect to the restatement related to the Company's investment in the LLC, the
Company has determined that its previous conclusion, as reported in the
Company's Management Report on Internal Control Over Financial Reporting
contained in Item 9A of the Original Form 10-K, that it maintained effective
internal control over financial reporting as of December 31, 2004, is still
applicable. In coming to this conclusion, management considered, among other
things, the restatement discussed above and the guidance contained in the SEC's
Staff Accounting Bulletin ("SAB") No. 99, Materiality, paragraphs 36 and 37 of
Accounting Principles Board Opinion ("APBO") No. 20 and paragraph 29 of APBO No.
28. The Company also considered, by analogy, the guidance contained in the SEC's
SAB Topic 5-F, Accounting Changes Not Retroactively Applied Due to
Immateriality. Because (i) the restatement adjustments did not have a material
impact to the financial statements of prior annual periods presented in the
Original Form 10-K or to the financial statements of any interim period
presented in the Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 2005 and June 30, 2005 (the "Interim Form 10-Q's"), taken as a whole,
(ii) the impact of the restatement adjustments did not have a material impact on
the Company's consolidated stockholders' equity as of any annual period
presented in the Original Form 10-K or as of any interim period presented in the
Interim Form 10-Q's and (iii) the Company decided to restate its
previously-issued consolidated financial statements in part because the impact
of the adjustment which the Company concuded should have been reported as part
of 1997's consolidated net income, if recorded in the consolidated net income
during the 2005 interim period in which the adjustment became known, would have
been material to such 2005 interim period's reported net income, management of
the Company concluded that this control deficiency, individually or in the
aggregate when considereed with other control deficiencies, does not constitute
a material weakness in internal control over financial reporting.
As management of the Company completes the Forms 10-K/A for matters described
herein, additional control deficiencies may be identified that could require
disclosures.
The Company's management and audit committee have discussed the matters
disclosed in this Form 8-K with the Company's independent registered public
accounting firm, PricewaterhouseCoopers LLP.
Item 9.01 Financial Statements and Exhibits.
(c) Exhibits.
Item No. Exhibit Index
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99.1* Unaudited Condensed Consolidated Balance Sheets as
of December 31, 2004 and December 31, 2003, and
selected unaudited consolidated statements of
income, comprehensive income, stockholders' equity
and cash flow data for the years ended December
31, 2003 and December 31, 2004.
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* Filed herewith.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Valhi, Inc.
(Registrant)
By: /s/ Gregory M. Swalwell
----------------------------
Gregory M. Swalwell
Vice President and Controller
Date: November 14, 2005
INDEX TO EXHIBITS
Exhibit No. Description
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99.1 Unaudited Condensed Consolidated Balance Sheets as
of 31, 2004 and December 31, 2003, and selected
unaudited consolidated statements of income,
comprehensive income, stockholders' equity and
cash flow data for the years ended December 31,
2003 and December 31, 2004. .
Exhibit 99.1
Valhi, Inc. and Subsidiaries
Selected Consolidated Statement of Income Data
Years ended December 31, 2003 and 2004
(In thousands, except per share data)
(Unaudited)
2003 2004
---- ----
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As originally Adjustment As restated As originally Adjustment As restated
reported reported
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Income from continuing operations
before income tax and minority
interest $ 45,358 $ - $ 45,358 $ 78,098 $ - $ 78,098
Provision for income taxes (benefit) (8,496) 22,479 13,983 (288,055) 8,169 (279,886)
Minority interest in after tax earnings 12,080 (3,460) 8,620 57,493 (1,353) 56,140
------------ ------------ ------------ ----------- -------- ----------
Income from continuing operations 41,774 (19,019) 22,755 308,660 (6,816) 301,844
Discontinued operations (2,874) - (2,874) 3,732 - 3,732
------------- --------- ------------- ---------- --------- ---------
Cumulative effect of change in
accounting principle 586 - 586 - - -
--- --------- --- --------- --------- ------
Net income $ 39,486 $ (19,019) $ 20,467 $ 312,392 $ (6,816) $ 305,576
========== ============ ======== ========== =========== ==========
Earnings per share:
Basic net income per share $ .33 $ (.16) $ .17 $ 2.60 $ (.06) $ 2.54
========= =========== ========= ========== =========== ==========
Diluted net income per share $ .33 $ (.16) $ .17 $ 2.59 $ (.05) $ 2.54
========= =========== ========= ========== =========== ==========
Valhi, Inc. and Subsidiaries
Selected Consolidated Statements of Comprehensive Income
Years ended December 31, 2003 and 2004
(In thousands, except per share data)
(Unaudited)
2003 2004
---- ----
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As originally Adjustment As restated As originally Adjustment As restated
reported reported
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Net income $ 39,486 $ (19,019) $ 20,467 $ 312,392 $ (6,816) $ 305,576
--------- ---------- -------- ---------- --------- ----------
Other comprehensive income:
Marketable securities 860 - 860 3,243 - 3,243
Currency translationa 32,017 - 32,017 49,134 - 49,134
Pension liabilities (22,193) - (22,193) 1,375 - 1,375
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Other comprehensive income 10,684 - 10,684 53,752 - 53,752
--------- ---------- ----------- --------- ----------- --------
Comprehensive income $ 50,170 $ (19,019) $31,151 $ 366,144 $ (6,816) $359,328
========== ============ ======= ========== =========== ========
Valhi, Inc. and Subsidiaries
Selected Consolidated Statement of Stockholders' Equity Data
Year ended December 31, 2003
(In thousands)
(Unaudited)
Total stockholders' equity
Originally
Reported Adjustment As restated
--------- ---------- --------
Balance at December 31, 2002 $ 614,756 $ 48,800 $663,556
Net income 39,486 (19,019) 20,467
Income tax related to Kronos distribution (19,019) 19,019 -
Other, net 24,511 - 24,511
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Balance at December 31, 2003 $ 659,734 $ 48,800 $ 708,534
========= ========== =========
Valhi, Inc. and Subsidiaries
Selected Consolidated Statement of Stockholders' Equity Data
Year ended December 31, 2004
(In thousands)
(Unaudited)
Total stockholders' equity
Originally
Reported Adjustment As restated
--------- --------- ----------
Balance at December 31, 2003 $ 659,734 $ 48,800 $708,534
Net income 312,392 (6,816) 305,576
Income tax related to Kronos distribution (6,816) 6,816 -
Other, net 24,173 - 24,173
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Balance at December 31, 2004 $ 989,483 $48,800 $ 1,038,283
========= ========= ===========
Valhi, Inc. and Subsidiaries
Selected Consolidated Statement of Cash Flow Data
Year ended December 31, 2003
(In thousands)
(Unaudited)
Originally
reported Adjustment As restated
--------- ------------ -----------
Items comprising cash flow from operating activities:
Net income $ 39,486 $ (19,019) $ 20,467
========= ============ =========
Minority interest- continuing
operations $ 12,080 $ (3,460) $ 8,620
========= =========== ========
Accounts with affiliates $ 2,293 $ 22,479 $24,772
======= ========= =======
Valhi, Inc. and Subsidiaries
Selected Consolidated Statement of Cash Flow Data
Year ended December 31, 2004
(In thousands)
(Unaudited)
Originally
reported Adjustment As restated
---------- ---------- --------
Items comprising cash flow from operating activities:
Net income $ 312,392 $ (6,816) $305,576
========== =========== ========
Minority interest - continuing
operations $ 57,493 $ (1,353) $56,140
========= =========== =======
Accounts with affiliates $ (19,892) $ 8,169 $(11,723)
========== ======= =========
Valhi, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
December 31, 2004
(In thousands)
(Unaudited)
Originally
reported Adjustment As restated
---------- ------------- ---------------
Current assets $799,090 $ - $799,090
Marketable securities 176,770 80,000 256,770
Property and equipment, net 652,795 - 652,795
Other noncurrent assets 970,872 - 970,872
-------------------- -------------------- ---------------
$2,599,527 $80,000 $2,679,527
==================== ==================== ===============
Current liabilities $311,662 $ - $311,662
Deferred income taxes 161,758 31,200 192,958
Other noncurrent liabilities 978,384 - 978,384
Minority interest 158,240 - 158,240
Stockholders' equity 989,483 48,800 1,038,283
-------------------- -------------------- ---------------
$2,599,527 $80,000 $2,679,527
==================== ==================== ===============
Components of stockholders' equity:
Common stock at par $1,242 $ - $1,242
Paid in capital 85,213 25,835 111,048
Retained earnings 864,821 105,883 970,704
Accumulated other
comprehensive income :
Marketable securities 88,367 (82,918) 5,449
Foreign currency 45,561 - 45,561
Pension liabilities (57,779) - (57,779)
Treasury stock (37,942) - (37,942)
-------------------- -------------------- ---------------
$989,483 $48,800 $1,038,283
==================== ==================== ===============
Valhi, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet
December 31, 2003
(In thousands)
(Unaudited)
Originally
Reported Adjustment As restated
---------------- -------------------- ---------------
Current assets $670,846 $ - $670,846
Marketable securities 176,941 80,000 256,941
Property and equipment, net 637,486 - 637,486
Other noncurrent assets 734,181 - 734,181
-------------------- -------------------- ---------------
$2,219,454 $80,000 $2,299,454
==================== ==================== ===============
Current liabilities $292,764 $ - $292,764
Deferred income taxes 301,648 31,200 332,848
Other noncurrent liabilities 865,519 - 865,519
Minority interest 99,789 - 99,789
Stockholders' equity 659,734 48,800 708,534
-------------------- -------------------- ---------------
$2,219,454 $80,000 $2,299,454
==================== ==================== ===============
Components of stockholders' equity:
Common stock at par $1,340 $ - $1,340
Paid in capital 99,048 19,019 118,067
Retained earnings 639,463 112,699 752,162
Accumulated other
comprehensive income:
Marketable securities 85,124 (82,918) 2,206
Foreign currency (3,573) - (3,573)
Pension liabilities (59,154) - (59,154)
Treasury stock (102,514) - (102,514)
-------------------- -------------------- ---------------
$659,734 $48,800 $708,534
==================== ==================== ===============
