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Valhi, Inc.
5430 LBJ Freeway, Suite 1700
Dallas, Texas 75240
July 13, 2005
Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Valhi, Inc.
File No. 1-5467
Annual Report on Form 10-K for the year ended December 31, 2004
Quarterly Report on Form 10-Q for the quarter ended March
31, 2005
Ladies and Gentlemen:
The following are the responses of Valhi, Inc. ("Valhi") to the comments
contained in the Staff's comment letter dated June 20, 2005 (the "Comment
Letter") concerning the above-referenced periodic reports. The responses are
numbered to correspond to the numbers of the Comment Letter.
1. We note the materiality of receivables and inventories to your total
assets. We also note the material impact that changes in these accounts had
on your operating cash flows, both at 12/31/04 and at 3/31/05. It does not
appear that the changes in these accounts are attributable solely to the
corresponding increase in net sales. In this regard we note that the ratio
of accounts receivable to quarterly net sales has materially increased
since 12/31/03 whereas the corresponding inventory ratio has materially
decreased. In future filings please expand the liquidity section of your
MD&A to quantify the receivable and inventory turnover ratios for each
period presented. Material variances should be explained in the filing
pursuant to the guidance in Instructions 4. and 5. to Item 303(a) of
Regulation S-K.
In Valhi's future filings with the Commission, we will disclose in MD&A the
requested receivable and inventory turnover ratios for each of our
chemicals and component products segments, and discuss any material changes
in such ratios for each period presented.
2. Both the critical accounting policies section of MD&A, and the accounting
policies footnote to your financial statements, disclose the existence of
an allowance for obsolete and slow-moving inventories. However, this
account balance is not disclosed in the inventory footnote (Note 6) or in
Section II. In future filings, please disclose the activity in this account
pursuant to Article 12-09 of Regulation S-X.
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July 13, 2005
Page 2
While Valhi had not previously disclosed the activity in its allowance for
obsolete and slow-moving inventories in Schedule II because Valhi did not
believe it was material, Valhi will disclose the activity in its allowance
for obsolete and slow-moving inventories in its future filings with the
Commission in Schedule II pursuant to Article 12-09 of Regulation S-X.
3. We note the inclusion of a subtotal on your Income Statements that readers
may interpret as being analogous to operating income. Such amount is
$56,420 at 12/31/04. This balance includes interest and dividend income as
well as interest expense and therefore is not consistent with the guidance
in Article 5-03 of Regulation S-X. To facilitate comparability with other
similar public companies, in future filings, please either reclassify such
accounts as non-operating or delete the subtotal.
In Valhi's future filings with the Commission, we will delete the indicated
subtotal.
4. We note that the cash dividends paid to minority shareholders are
classified as financing activities in your Statements of Cash Flows. This
presentation had a 14% impact on the financing cash flows balance in your
3/31/05 Statement of Cash Flows. Given that the minority interests in the
earnings of a subsidiary reduce consolidated net income, and that dividends
to minority owners are the payout of amounts previously deducted from
consolidated net income and carried as a credit on the consolidated balance
sheet, it appears that, like interest paid on other sources of financing,
dividends paid to minority owners should be classified as operating cash
flows. The difference between the minority interest in the net income of a
subsidiary and the dividends paid to minority owners would be a reconciling
item between consolidated net income and net cash flows from operations.
Please tell us your basis for your presentation.
Paragraph 20(a) of SFAS No. 95 states that dividends paid to owners are
classified as a component of financing activities, and makes no distinction
between noncontrolling, or minority, owners and controlling owners. FASB
Concept Statement No. 6 uses the term owner to include both controlling and
noncontrolling owners. See, for example, paragraphs 60 through 63 (and the
footnotes thereto) and paragraph 254 of FASB Concept Statement No. 6.
Dividends paid to noncontrolling owners are classified as a component of
financing activities in the separate financial statements of the applicable
subsidiary, under the guidance in paragraph 20(a) of SFAS No. 95. It would
be inconsistent for those dividends to be classified as a component of
financing activities in the separate financial statements of the applicable
subsidiary, while at the same time have those dividends be classified as a
component of operating activities in the financial statements of the
applicable subsidiary's parent company.
We also do not believe it is appropriate to analogize interest paid on
indebtedness with distributions paid to noncontrolling owners. With respect
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July 13, 2005
Page 3
to indebtedness, there is generally a formal requirement to pay interest.
With respect to the noncontrolling ownership interests reflected in Valhi's
consolidated financial statements, payments of dividends is discretionary
at the option of the applicable board of directors and there is no
requirement that dividends be paid. Additionally, paragraph 254 of FASB
Concept Statement No. 6 notes that noncontrolling interests do not
represent liabilities, as they do not represent present obligations of the
enterprise to pay cash or distribute other assets to
noncontrolling/minority owners.
Therefore, for all of the reasons noted above, Valhi believes that cash
dividends paid to minority (or noncontrolling) shareholders are properly
classified as a component of financing activities in accordance with SFAS
No. 95.
5. Note 5 to the 12/31/04 financial statements describes a $170 million equity
investment in Amalgamated Sugar Company LLC. Notes 8 and 10 describe a $118
million loan/interest receivable and a $250 million loan payable from/to
Snake River Sugar Company. We understand that Snake River Sugar Company is
the other equity member in the LLC. In a letter of supplemental
information, please clarify certain issues regarding these arrangements.
Under separate letter, we have supplementally provided the Staff with our
responses to Comments Nos. 5.1, 5.2, 5.3, 5.4, 5.5, 5.6 and 6.
5.1 In 1997 the carrying value of the asset was increased from $34 million to
$170 million. The gain was recorded in the other comprehensive income
account in the equity section. Please explain to us how you determined that
the fair value of the LLC equity investment was readily determinable and
therefore subject to the "available for sale" accounting model. It appears
that the equity interest does not meet the criteria in paragraph 3.a of
SFAS 115. Instead, it appears that the LLC equity investment should have
been accounted for under the equity method pursuant to APB 18 and the
analogous guidance in SOP 78-9. It is not clear how you determined that you
did not have significant influence over the operating and financial
policies of the LLC given your ability to take control of the LLC if member
distributions (and presumably operating performance) decreased to certain
levels. We also note your substantial veto rights concerning material
investing and financial activities of the LLC. The guidance in EITF 3-16
also appears relevant to this issue. Please provide an analysis of these
issues at they pertain to both your original accounting for the LLC equity
interest and to your current accounting for this asset.
Under separate letter, we have supplementally provided the Staff with our
response to this Comment.
5.2 If this investment were accounted for under the equity method, separate
financial statements of the LLC may be required pursuant to Article 3-09 of
Regulation S-X. In this regard we note the materiality of your member
distributions relative to your pre-tax income. Please tell us your
consideration of this issue.
Securities and Exchange Commission
July 13, 2005
Page 4
Under separate letter, we have supplementally provided the Staff with our
response to this Comment.
5.3 Please clarify for us why the LLC equity interest is characterized as
"non-voting" given that Article 6.2 of the 1/3/97 Company Agreement appears
to indicate the existence of voting rights.
Under separate letter, we have supplementally provided the Staff with our
response to this Comment.
5.4 Please clarify for us the ownership percentage you have in the net assets
of the LLC.
Under separate letter, we have supplementally provided the Staff with our
response to this Comment.
5.5 Please explain to us the percentage of LLC losses that would be allocated
to your equity interest i.e. 50%; 95%; etc.
Under separate letter, we have supplementally provided the Staff with our
response to this Comment.
5.6 Please tell us whether you are obligated to fund LLC losses. Please address
any circumstances that would require you to remit cash or other
consideration to the LLC.
Under separate letter, we have supplementally provided the Staff with our
response to this Comment.
6. Note 19 to the 12/31/04 financial statements discloses that FIN46R
implementation did not materially impact that financial statements. In a
letter of supplemental information, please clarify for us how you
determined that consolidation of the LLC is not required. We may have
further comment.
Under separate letter, we have supplementally provided the Staff with our
response to this Comment.
7. Please note that your file number is 333-48391, not 1-5467.
File No. 333-48391 relates to Valhi's Registration Statement on Form S-8,
filed with the Commission on March 20, 1998, related to the Valhi, Inc.
1997 Long-Term Incentive Plan. We became aware in March 2003, concurrent
with the filing of Valhi's Annual Report on Form 10-K for the year ended
December 31, 2002, that the Commission's EDGAR system began to improperly
associate the 333-48391 file number, and not the correct 1-5467 file
number, with Valhi's periodic Form 10-K and 10-Q filings. Valhi contacted
the EDGAR help desk to inquire about this, but the individual to whom we
spoke indicated this was not a problem and nothing we should be concerned
about. Please note that Commission's EDGAR system reflects the correct
1-5767 file number for Valhi's Quarterly Report on Form 10-Q for the
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July 13, 2005
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quarter ended September 30, 2002, filed with the Commission on November 14,
2002, and for each Form 10-K and 10-Q filed previously thereto. Therefore,
Valhi believes its correct periodic report file number is 1-5467.
Valhi acknowledges that:
o Valhi is responsible for the adequacy and accuracy of the disclosure
in our filings with the Commission;
o Staff comments or changes to disclosure in response to Staff comments
do not foreclose the Commission from taking any action with respect to
our filings with the Commission; and
o Valhi may not assert Staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
If you have any questions regarding the foregoing, please feel free to
contact the undersigned at 972-450-4261.
Very truly yours,
Bobby D. O'Brien
Vice President and Chief Financial Officer
CC: Nilima N. Shah, Accounting Branch Chief, Division of Corporation Finance
Al Pavot, Division of Corporation Finance