SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1995 COMMISSION FILE NUMBER 1-5467
VALHI, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 87-0110150
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ FREEWAY, SUITE 1700, DALLAS, TEXAS 75240-2697
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 233-1700
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS.
YES X NO
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ON JULY 31, 1995: 113,838,414.
VALHI, INC. AND SUBSIDIARIES
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1994
and June 30, 1995 3-4
Consolidated Statements of Operations - Three
months ended June 30, 1994 and 1995 5
Consolidated Statements of Operations - Six
months ended June 30, 1994 and 1995 6
Consolidated Statements of Cash Flows - Six
months ended June 30, 1994 and 1995 7-8
Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 1995 9
Notes to Consolidated Financial Statements 10-17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 18-25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 26
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 6. Exhibits and Reports on Form 8-K. 27
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS December 31, June 30,
1994 1995
Current assets:
Cash and cash equivalents $ 170,747 $ 165,953
Marketable securities 49,233 2,387
Accounts and notes receivable 200,985 267,058
Refundable income taxes 1,187 11,393
Receivable from affiliates 5,411 9,576
Inventories 498,097 384,647
Prepaid expenses 8,198 13,131
Deferred income taxes 2,276 3,223
Total current assets 936,134 857,368
Other assets:
Marketable securities 115,527 136,319
Investment in joint ventures 187,480 185,989
Natural resource properties 93,400 94,029
Prepaid pension cost 24,496 26,943
Goodwill 248,097 256,996
Deferred income taxes 2,827 773
Other 65,011 62,868
Total other assets 736,838 763,917
Property and equipment:
Land 38,393 41,868
Buildings 184,009 205,826
Equipment 809,758 871,356
Construction in progress 18,267 32,211
1,050,427 1,151,261
Less accumulated depreciation 242,696 278,953
Net property and equipment 807,731 872,308
$2,480,703 $2,493,593
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, June 30,
1994 1995
Current liabilities:
Notes payable $ 124,893 $ 164,854
Current long-term debt 62,625 69,134
Accounts payable 267,047 132,236
Accrued liabilities 157,646 156,531
Payable to affiliates 11,358 10,704
Income taxes 24,192 13,294
Deferred income taxes 8,461 1,666
Total current liabilities 656,222 548,419
Noncurrent liabilities:
Long-term debt 1,086,654 1,102,119
Accrued pension cost 76,344 79,054
Accrued OPEB cost 83,300 81,223
Accrued environmental costs 93,655 104,466
Deferred income taxes 226,789 281,707
Other 56,890 54,759
Total noncurrent liabilities 1,623,632 1,703,328
Minority interest 2,425 2,826
Stockholders' equity:
Common stock 1,245 1,245
Additional paid-in capital 33,341 33,829
Retained earnings 209,071 231,942
Adjustments:
Currency translation (12,128) (7,285)
Marketable securities 37,669 50,449
Pension liabilities (506) (506)
Treasury stock (70,268) (70,654)
Total stockholders' equity 198,424 239,020
$2,480,703 $2,493,593
[FN]
Commitments and contingencies (Note 13)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1994 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro forma*
1994 1994 1995
Revenues and other income:
Net sales $210,781 $447,894 $513,531
Other, net 3,107 8,294 9,020
213,888 456,188 522,551
Costs and expenses:
Cost of sales 157,072 338,624 370,193
Selling, general and administrative 30,761 87,207 85,772
Interest 8,845 29,916 32,365
196,678 455,747 488,330
Income of consolidated companies
before income taxes 17,210 441 34,221
Equity in losses of NL prior to
consolidation (11,741) - -
Income before income taxes 5,469 441 34,221
Provision for income taxes 1,475 1,092 16,723
Minority interest - 247 141
Income from continuing operations 3,994 $ (898) 17,357
Discontinued operations (1,043) -
Net income $ 2,951 $ 17,357
Earnings per common share:
Continuing operations $ .04 $(.01) $ .15
Discontinued operations (.01) -
Net income $ .03 $ .15
Cash dividends per share $ .02 $ .02 $ .03
Average common shares outstanding 114,306 114,306 114,391
[FN]
* Assuming the Company had consolidated NL Industries effective at the
beginning of 1994. See Note 1.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1994 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro forma*
1994 1994 1995
Revenues and other income:
Net sales $399,746 $838,708 $981,160
Other, net 4,693 32,923 14,678
404,439 871,631 995,838
Costs and expenses:
Cost of sales 303,375 634,345 710,321
Selling, general and administrative 58,733 173,377 162,124
Interest 17,842 59,978 65,207
379,950 867,700 937,652
Income of consolidated companies
before income taxes 24,489 3,931 58,186
Equity in losses of NL prior to
consolidation (17,958) - -
Income before income taxes 6,531 3,931 58,186
Provision for income taxes 2,357 6,532 27,928
Minority interest - 496 486
Income from continuing operations 4,174 $ (3,097) 29,772
Discontinued operations (1,923) -
Net income $ 2,251 $ 29,772
Earnings per common share:
Continuing operations $ .04 $(.03) $ .26
Discontinued operations (.02) -
Net income $ .02 $ .26
Cash dividends per share $ .04 $ .04 $ .06
Average common shares outstanding 114,289 114,289 114,392
[FN]
* Assuming the Company had consolidated NL Industries effective at the
beginning of 1994. See Note 1.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1994 AND 1995
(IN THOUSANDS)
Pro forma*
1994 1994 1995
Cash flows from operating activities:
Net income $ 2,251 $ (3,097) $ 29,772
Depreciation, depletion and
amortization 13,142 40,095 45,073
Noncash interest expense 5,363 14,284 15,410
Deferred income taxes (8,535) 16,567 21,399
Equity in NL prior to consolidation 17,958 - -
Other, net 3,868 - (7,965)
34,047 67,849 103,689
Change in assets and liabilities:
Accounts and notes receivable (12,606) (59,397) (54,300)
Inventories 120,656 143,371 126,938
Accounts payable/accrued liabilities:
Sugarbeet purchases (102,451) (102,451) (124,262)
Other, net (9,533) (10,381) (21,417)
Income taxes (1,311) 74,179 (22,837)
Other, net 3,855 16,811 (2,906)
Trading securities:
Sale proceeds 29,375 44,499 48,889
Purchases (25,000) (25,870) (762)
Net cash provided by operating
activities 37,032 148,610 53,032
Cash flows from investing activities:
Capital expenditures (36,914) (53,478) (54,213)
Purchase of NL common stock (599) (599) (13,168)
Loans to affiliates:
Loans (7,800) (7,800) (39,070)
Collections 800 800 30,070
Other, net 3,967 6,934 642
Net cash used by investing
activities (40,546) (54,143) (75,739)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1994 AND 1995
(IN THOUSANDS)
Pro forma*
1994 1994 1995
Cash flows from financing activities:
Indebtedness:
Borrowings $ 206,779 $ 238,716 $ 452,556
Principal payments (196,374) (301,846) (435,148)
Dividends paid (4,572) (4,572) (6,901)
Other, net 166 (36) 3,118
Net cash provided (used) by
financing activities 5,999 (67,738) 13,625
Net increase (decrease) 2,485 26,729 (9,082)
Currency translation (294) 4,648 4,288
Cash and equivalents, beginning of period 22,189 128,782 170,747
Cash and equivalents, end of period $ 24,380 $ 160,159 $ 165,953
Supplemental disclosures - cash paid for:
Interest, net of amounts capitalized $ 11,379 $ 46,509 $ 44,443
Income taxes (refund) 8,269 (86,865) 30,551
[FN]
* Assuming the Company had consolidated NL Industries effective at the
beginning of 1994. See Note 1.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1995
(IN THOUSANDS)
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
Balance at December 31, 1994 $1,245 $33,341 $209,071
Net income - - 29,772
Dividends - - (6,901)
Adjustments, net - - -
Other, net - 488 -
Balance at June 30, 1995 $1,245 $33,829 $231,942
ADJUSTMENTS TOTAL
CURRENCY MARKETABLE PENSION TREASURY STOCKHOLDERS'
TRANSLATION SECURITIES LIABILITIES STOCK EQUITY
Balance at December 31, 1994 $(12,128) $37,669 $(506) $(70,268) $198,424
Net income - - - - 29,772
Dividends - - - - (6,901)
Adjustments, net 4,843 12,780 - - 17,623
Other, net - - - (386) 102
Balance at June 30, 1995 $ (7,285) $50,449 $(506) $(70,654) $239,020
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION:
The consolidated balance sheet of Valhi, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 1994 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 1995 and the consolidated statements of
operations, cash flows and stockholders' equity for the interim periods ended
June 30, 1994 and 1995 have been prepared by the Company, without audit. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial position,
results of operations and cash flows have been made. The results of operations
for the interim periods are not necessarily indicative of the operating results
for a full year or of future operations.
Valhi increased its ownership of NL Industries, Inc. (Commission File
No. 1-640) from approximately 49% to more than 50% in December 1994 and,
accordingly, consolidated NL's financial position effective December 31, 1994
and commenced consolidating NL's results of operations and cash flows effective
January 1, 1995. The accompanying consolidated financial statements include,
for comparative purposes, certain 1994 pro forma financial information as if the
Company had consolidated NL as of the beginning of that year.
Certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted and certain prior year amounts have been reclassified to conform to the
1995 presentation. The accompanying consolidated financial statements should be
read in conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 1994 (the "1994 Annual Report").
Contran Corporation holds, directly or through subsidiaries, approximately
90% of Valhi's outstanding common stock.
NOTE 2 - EARNINGS PER COMMON SHARE:
Earnings per share is based on the weighted average number of common shares
outstanding. Common stock equivalents are excluded from the computation because
they are either antidilutive or the dilutive effect is not material.
NOTE 3 - BUSINESS SEGMENT INFORMATION:
% OWNED
BUSINESS SEGMENT PRINCIPAL ENTITIES AT JUNE 30, 1995
Chemicals NL Industries, Inc. 53%
Refined sugar The Amalgamated Sugar Company 100%
Building products Medite Corporation 100%
Hardware products National Cabinet Lock, Inc. 100%
Fast food Sybra, Inc. 100%
Six months ended June 30,
Pro forma
1994 1994 1995
(In millions)
Net sales:
Chemicals $ - $439.0 $534.3
Refined sugar 216.5 216.5 243.8
Building products 93.4 93.4 108.0
Hardware products 35.5 35.5 39.4
Fast food 54.3 54.3 55.6
$399.7 $838.7 $981.1
Operating income:
Chemicals $ - $ 39.1 $ 89.0
Refined sugar 16.5 16.5 12.7
Building products 16.7 16.7 18.6
Hardware products 10.1 10.1 10.6
Fast food 3.9 3.9 2.9
47.2 86.3 133.8
General corporate items:
Securities earnings 1.1 1.9 7.1
General expenses, net (6.0) (24.4) (17.5)
Interest expense (17.8) (59.9) (65.2)
Income of consolidated companies
before income taxes 24.5 3.9 58.2
Equity in NL prior to consolidation (18.0) - -
Income before income taxes $ 6.5 $ 3.9 $ 58.2
NL's chemicals operations are conducted through Kronos, Inc. (titanium
dioxide pigments or "TiO2") and Rheox, Inc. (specialty chemicals). The
Company's building products (Medite), hardware products (National Cabinet Lock)
and fast food (Sybra) subsidiaries are owned by Valcor, Inc., a wholly-owned
subsidiary of Valhi.
Six months ended June 30,
Depreciation,
depletion and Capital
amortization expenditures
Pro forma Pro forma
1994 1995 1994 1995
(In millions)
Chemicals $26.8 $29.7 $16.5 $26.2
Refined sugar 4.8 5.2 10.9 14.7
Building products 4.4 6.0 18.5 5.1
Fast food and other 4.1 4.2 7.6 8.2
$40.1 $45.1 $53.5 $54.2
NOTE 4 - MARKETABLE SECURITIES:
DECEMBER 31, JUNE 30,
1994 1995
(IN THOUSANDS)
Current assets (trading securities):
U.S. Treasury securities $ 25,165 $ 2,387
Global bond investments 24,068 -
$ 49,233 $ 2,387
Noncurrent assets (available-for-sale):
Dresser Industries common stock $103,243 $121,704
Other common stocks 12,284 14,615
$115,527 $136,319
Valhi holds 5.5 million shares of Dresser common stock with a quoted market
price of $22.25 at June 30, 1995, or an aggregate market value of approximately
$122 million (cost $44 million). Such Dresser stock is exchangeable for Valhi's
LYONs, at the option of the LYONs holder, and the carrying value of the Dresser
stock is limited to the accreted LYONs obligation. At June 30, 1995, the
aggregate cost of other available-for-sale securities was approximately $16
million and the aggregate amortized cost of trading securities was approximately
$2 million.
NOTE 5 - INVENTORIES:
DECEMBER 31, JUNE 30,
1994 1995
(IN THOUSANDS)
Raw materials:
Chemicals $ 30,118 $ 27,791
Sugarbeets 86,868 -
Other 15,789 12,609
132,775 40,400
In process products:
Chemicals 7,654 9,085
Refined sugar and by-products 54,700 28,338
Other 5,918 6,600
68,272 44,023
Finished products:
Chemicals 113,276 121,174
Refined sugar and by-products 107,236 91,181
Other 5,221 10,601
225,733 222,956
Supplies 71,317 77,268
$498,097 $384,647
NOTE 6 - OTHER NONCURRENT ASSETS:
DECEMBER 31, JUNE 30,
1994 1995
(IN THOUSANDS)
Natural resource properties:
Timber and timberlands $53,114 $53,523
Mining properties 40,286 40,506
$93,400 $94,029
Franchise fees and other intangible assets $27,831 $27,259
Deferred financing costs 23,102 22,035
Other 14,078 13,574
$65,011 $62,868
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
DECEMBER 31, JUNE 30,
1994 1995
(IN THOUSANDS)
Accounts payable:
Sugarbeet purchases $146,638 $ 22,376
Other 120,409 109,860
$267,047 $132,236
Accrued liabilities:
Employee benefits $ 50,929 $ 50,527
Sugar processing costs 20,132 11,794
Environmental costs 13,276 11,159
Interest 11,363 16,625
Miscellaneous taxes 9,080 5,784
Other 52,866 60,642
$157,646 $156,531
NOTE 8 - OTHER NONCURRENT LIABILITIES:
DECEMBER 31, JUNE 30,
1994 1995
(IN THOUSANDS)
Insurance claims and expenses $18,155 $18,116
Employee benefits 15,440 17,485
Deferred technology fee income 18,305 14,064
Other 4,990 5,094
$56,890 $54,759
NOTE 9 - NOTES PAYABLE AND LONG-TERM DEBT:
DECEMBER 31, JUNE 30,
1994 1995
(IN THOUSANDS)
Notes payable:
Amalgamated:
United States Government loans $ 79,893 $ 88,072
Bank credit agreements 45,000 55,000
124,893 143,072
Kronos - non-U.S. bank credit agreements - 21,782
$ 124,893 $ 164,854
Long-term debt:
Valhi LYONS $ 119,096 $ 124,604
Valcor Senior Notes 100,000 99,000
Amalgamated bank term loan 26,000 31,000
NL Industries:
Senior Secured Notes 250,000 250,000
Senior Secured Discount Notes 116,409 123,976
Deutsche mark bank credit facility
(DM 397,610 and DM 397,610) 255,703 286,756
Joint venture term loan 88,715 81,000
Rheox bank term loan 67,500 50,263
Other 11,322 14,404
789,649 806,399
Medite:
Bank term loans 89,411 78,411
Bank working capital facilities 8,802 6,824
Other 4,360 4,256
102,573 89,491
Other:
Sybra bank credit agreements 5,500 14,728
Sybra capital leases 6,321 5,912
National Cabinet Lock 140 119
11,961 20,759
1,149,279 1,171,253
Less current maturities 62,625 69,134
$1,086,654 $1,102,119
Valcor Senior Notes at June 30, 1995 are stated net of $1 million principal
amount held by Valhi.
NOTE 10 - OTHER INCOME:
Six months ended June 30,
Pro forma
1994 1994 1995
(In thousands)
Securities earnings:
Interest and dividends $ 2,940 $ 5,012 $ 5,900
Securities transactions (1,844) (3,057) 1,215
1,096 1,955 7,115
Technology fee income - 4,862 5,305
Currency transactions, net 545 911 (1,555)
Litigation settlement gain - 20,040 -
Other, net 3,052 5,155 3,813
$ 4,693 $32,923 $14,678
NOTE 11 - PROVISION FOR INCOME TAXES - CONTINUING OPERATIONS:
Six months ended June 30,
Pro forma
1994 1994 1995
(In millions)
Expected tax expense $ 2.3 $ 1.4 $20.4
Non-U.S. tax rates (.8) (3.7) (5.1)
Incremental tax and rate differences on
equity in earnings of non-tax group
companies 1.4 (7.7) 14.4
Change in NL's deferred income tax
valuation allowance - 15.1 (2.5)
Other, net (.5) 1.4 .7
$ 2.4 $ 6.5 $27.9
NOTE 12 - OTHER:
Investment in joint ventures consists principally of Kronos' 50% interest
in a TiO2 manufacturing joint venture.
Receivable from affiliates at June 30, 1995 includes demand loans to
Contran of $9 million. Such loans, made principally for overall cash management
purposes, are supported by Contran's unused revolving credit availability.
NOTE 13 - COMMITMENTS AND CONTINGENCIES:
At June 30, 1995, the estimated cost to complete capital projects in
process approximated $85 million, most of which relates to NL's environmental
protection and improvement programs and productivity-enhancing programs at both
NL and Amalgamated.
Medite has entered into interest rate swaps to mitigate the impact of
changes in interest rates for $26 million of its U.S. bank term loan due in
1998-2000 that results in a weighted average interest rate of 7.6% for such
borrowings. At June 30, 1995, the fair value of the interest rate swaps, based
upon quotes obtained from the counter party financial institution, is a $.7
million receivable, representing the estimated amount Medite would receive if it
were to terminate the swap agreements at that date.
Medite has entered into the equivalent of approximately $6 million of
forward currency contracts to mitigate certain exchange rate fluctuation risk
for a portion of its future sales denominated in European Currency Units. These
contracts expire throughout 1995 and the counter parties are major international
financial institutions. At June 30, 1995, the aggregate fair value of these
contracts, based upon quotes obtained from the counter party institutions,
approximated the aggregate contract amount.
For information concerning certain legal proceedings, income tax and other
commitments and contingencies see (i) Item 2 -- "Management's Discussion and
Analysis of Financial Condition and Results of Operations," (ii) Part II, Item 1
-- "Legal Proceedings", (iii) Valhi's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995 and (iv) the 1994 Annual Report.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
Net income was $17.4 million, or $.15 per share, for the second quarter of
1995, up from net income of $3 million, or $.03 per share, in the second quarter
of 1994. For the first half of 1995, net income was $29.8 million, or $.26 per
share, compared to net income of $2.3 million, or $.02 per share, in 1994.
Operating income for the first half of 1995 increased 55% to $134 million
on a 17% sales increase to $981 million (% comparisons to 1994 pro forma
results). Overall operating income margins were 14% in the first six months of
1995 compared to 10% in 1994. The improvement in sales, earnings and margins
were driven by higher prices for TiO2.
CHEMICALS
Three months ended Six months ended
June 30, June 30,
1994 1995 % Change 1994 1995 % Change
(In millions) (In millions)
Net sales:
Kronos $206.5 $249.3 + 21% $380.7 $466.7 + 23%
Rheox 30.7 34.1 + 11% 58.3 67.6 + 16%
$237.2 $283.4 + 20% $439.0 $534.3 + 22%
Operating income:
Kronos $ 13.2 $ 42.1 +219% $ 24.3 $ 69.9 +188%
Rheox 8.2 10.0 + 22% 14.8 19.1 + 29%
$ 21.4 $ 52.1 +143% $ 39.1 $ 89.0 +128%
Operating income margins:
Kronos 6% 17% 6% 15%
Rheox 27% 29% 25% 28%
Aggregate margin 9% 18% 9% 17%
The improvement in Kronos' 1995 TiO2 results was primarily due to higher
average selling prices in all of NL's major markets. In billing currency terms,
average TiO2 selling prices in the first six months of 1995 were approximately
15% higher than in the same period of 1994 and 1995 second quarter prices were
6% higher than in the first quarter. Kronos' year-to-date sales volumes for
1995 approximated sales volume for the same period in 1994; however, second
quarter 1995 volume was 6% lower than in the second quarter of 1994. Rheox's
operating results improved primarily as a result of higher sales volume and
higher average selling prices. A significant amount of NL's sales are
denominated in currencies other than the U.S. dollar, and fluctuations in the
value of the U.S. dollar relative to other currencies increased the dollar value
of sales in the first six months of 1995 by $32 million compared to the 1994
period.
The Company's chemicals operating income differs from that separately
reported by NL due to amortization of basis differences (principally
depreciation, depletion and amortization expense) arising from purchase
accounting adjustments made in conjunction with the Company's acquisition of its
interest in NL. Such additional non-cash expense reduces operating income by
approximately $20 million per year compared to amounts separately reported by
NL.
REFINED SUGAR
Three months ended Six months ended
June 30, June 30,
1994 1995 % Change 1994 1995 % Change
(In millions) (In millions)
Net sales:
Refined sugar $103.3 $123.5 +20% $195.9 $219.2 +12%
By-products and other 9.0 9.1 + 1% 20.6 24.6 +19%
$112.3 $132.6 +18% $216.5 $243.8 +13%
Operating income:
FIFO basis $ 7.2 $ 5.3 -27% $ 13.1 $ 10.3 -21%
LIFO adjustment 2.5 1.0 3.4 2.4
LIFO (reporting) basis $ 9.7 $ 6.3 -37% $ 16.5 $ 12.7 -23%
Operating income margin:
FIFO accounting method 6% 4% 6% 4%
LIFO accounting method 9% 5% 8% 5%
Refined sugar sales increased in 1995 primarily due to higher volume. U.S.
Government-imposed marketing allotments on domestic processors are in effect for
the crop year ending September 30, 1995. Based on Amalgamated's allotment of
approximately 16 million hundredweight ("cwt") for the crop year and domestic
sales to date, aggregate domestic sugar sales volume during the third quarter is
expected to be slightly lower than in the comparable 1994 period. To help
reduce the relatively high level of sugar inventories resulting from the
combined effects of a record crop and marketing allotments, Amalgamated has been
making limited sales into foreign markets, which are excluded from allotments.
Foreign sales are typically at lower prices than domestic sales. The imposition
of marketing allotments for the next crop year beginning October 1, 1995, if
any, would probably be announced by the U.S. Government in late September.
Due primarily to an abnormally high yield per acre, Amalgamated's sugar
production from the crop harvested in the fall of 1994 is approximately 10%
higher than its previous record crop. The large sugarbeet crop and adverse
weather conditions resulted in the longest and most difficult processing
campaign in recent years. These factors, along with a lower sugar content of
the beets, contributed to a 9% increase in per cwt processing costs. By-product
sales increased due primarily to higher pulp volume, reflecting the larger crop.
Amalgamated's contracted acreage for the crop planted in the spring of 1995
approximated the acreage harvested in 1994, although adverse weather conditions
have resulted in slower than normal beet growth and the abnormally high yield
per acre experienced in the prior crop is unlikely to recur. Based on
preliminary estimates, production from the crop to be harvested this fall is
expected to be more in line with historical levels of the past few years, or
about 6% to 8% lower than the last crop.
BUILDING PRODUCTS
Three months ended Six months ended
June 30, % June 30, %
1994 1995 Change 1994 1995 Change
(In millions) (In millions)
Net sales:
Medium density fiberboard $32.3 $37.5 +16% $63.5 $ 83.0 +31%
Traditional timber products 21.3 12.2 -43% 30.5 25.8 -16%
Eliminations (.2) (.3) (.6) (.8)
$53.4 $49.4 - 7% $93.4 $108.0 +16%
Operating income:
Medium density fiberboard $ 7.3 $ 7.2 - 1% $13.0 $ 16.8 +30%
Traditional timber products 4.3 1.1 -75% 3.7 1.8 -53%
$11.6 $ 8.2 -28% $16.7 $ 18.6 +11%
Operating income margins:
Medium density fiberboard 23% 19% 20% 20%
Traditional timber products 20% 9% 12% 7%
Aggregate margin 22% 17% 18% 17%
Average MDF selling prices (in billing currency terms) for the first half
of 1995 were 20% above year-ago levels. MDF volume increased 4% (specialty
products +2% and standard products +5%) in the first six months of 1995.
However, during the second quarter of 1995 the Company experienced softening in
customer orders and selling prices which resulted in increased MDF sales into
non-core, lower-margin markets and to price discounts in certain areas.
Consequently, compared to the first quarter of 1995, second quarter 1995
aggregate MDF sales volume was down 18% with the overall average selling price
essentially flat.
MDF margins declined in 1995 as a 21% increase in per-unit costs offset the
higher average selling prices. Increased wood costs continue to be influenced
in part by competing demand from paper and pulp producers. Standard resin
costs, while still high, are moderating and have recovered about one-half of
last year's increases. Fluctuations in the value of the U.S. dollar relative to
other currencies accounted for about five percentage points of the increase in
both average MDF selling prices and per-unit MDF costs.
Traditional timber products results declined as the significantly lower
sales volume of logs and lower lumber selling prices more than offset higher
veneer volume and prices. The decline in log sales is in part due to relative
timing of logging. In 1995, the majority of logging is scheduled for the last
half of the year whereas in 1994 about 60% of the year's log sales were in the
second quarter.
The Company believes general economic conditions and expectations in North
America and in key European markets contributed to the recent decline in MDF
customer orders. Further industry capacity additions are expected in Europe
during 1995 and Medite's MDF operating rates for the last half of 1995 may be
lower than in the comparable 1994 period.
HARDWARE PRODUCTS
Three months ended Six months ended
June 30, June 30,
1994 1995 % Change 1994 1995 % Change
(In millions) (In millions)
Net sales $17.5 $19.3 +10% $35.5 $39.4 +11%
Operating income 5.0 5.1 + 1% 10.1 10.6 + 5%
Operating income margin 29% 26% 28% 27%
Volumes have continued to increase in the computer keyboard/workstation
products and drawer slides product lines. Lock sales declined slightly in the
second quarter as volume from a government agency contract completed in March
1995 has not as yet been fully replaced. Operating margins declined as higher
raw material costs (zinc, copper and steel) were only partially recovered by
responsive selling price increases. Fluctuations in the value of the U.S.
dollar relative to the Canadian dollar have continued to favorably impact
operating results. National Cabinet Lock continues to add new products to its
STOCK LOCKS product line as well as to its Waterloo Furniture Components
workstation and drawer slide lines.
FAST FOOD
Three months ended Six months ended
June 30, June 30,
1994 1995 % Change 1994 1995 % Change
(In millions) (In millions)
Net sales $27.6 $28.8 + 4% $54.3 $55.6 + 2%
Operating income 2.3 1.8 -19% 3.9 2.9 -25%
Operating income margin 8% 7% 7% 5%
The higher sales level resulted from new restaurants as same store sales
declined 1.4% in the first six months of 1995. Despite stable to lower food
costs, competitive promotions and discounts along with higher labor costs
continued to hamper operating results. During the first six months of 1995,
Sybra opened five new stores and closed seven stores and at June 30, 1995
operated a total of 160 Arby's restaurants. Sybra expects to open three to five
new stores during the last half of 1995 and may close three or four more under
performing restaurants later in the year.
OTHER
General corporate items. Securities earnings increased primarily because
the first quarter of 1994 included a market value decline of fixed-income
investments. Year-to-date net general expenses decreased compared to the 1994
pro forma amount as lower environmental remediation and other expenses more than
offset NL's $20 million first quarter 1994 litigation settlement gain related to
settlement of its lawsuit against Lockheed Corporation.
Interest expense. Interest expense increased compared to 1994 pro forma
expense as lower borrowing levels associated with NL's DM bank term loan were
more than offset by changes in currency exchange rates, higher average U.S.
variable interest rates and higher borrowing levels associated with facilities
expansion. At June 30, 1995, approximately $656 million of consolidated
indebtedness, principally publicly-traded debt, bears interest at fixed rates
averaging 10.9%. The weighted average interest rate on outstanding variable
rate borrowings at June 30, 1995 was 7.2%, down slightly from December 31, 1994
but up from 4.4% at year-end 1993.
Minority interest. Minority interest relates to certain partially-owned
foreign subsidiaries of NL. At June 30, 1995, NL separately reported a
shareholders' deficit of approximately $263 million and, as a result, no
minority interest related to the Company's interest in NL Industries is recorded
in the Company's consolidated financial statements. Until such time as NL
reports positive shareholders' equity in its separate financial statements,
future changes in NL's equity, including all undistributed earnings, will accrue
to the Company for financial reporting purposes.
Provision for income taxes. Income tax rates vary by jurisdiction (country
and/or state), and relative changes in the geographic mix of the Company's pre-
tax earnings can result in fluctuations in the effective income tax rate. In
1994, such geographic mix included losses in certain of NL's tax jurisdictions
for which no current refund was available and for which recognition of a
deferred tax asset was not considered appropriate. In addition, because certain
subsidiaries, including NL, are not members of the consolidated U.S. tax group,
Valhi's incremental income taxes on its after-tax earnings or losses
attributable to such subsidiaries can also increase the Company's overall
effective tax rate. See Note 11 to the Consolidated Financial Statements.
Equity in earnings of NL prior to consolidation. The Company's interest in
NL was reported by the equity method during 1994.
Discontinued operations. Discontinued operations represents the Company's
former interest in Tremont Corporation's titanium metals operations.
LIQUIDITY AND CAPITAL RESOURCES:
Cash flow from operating activities. Cash flow from operating activities
before changes in assets and liabilities of $104 million in 1995 was $36 million
higher than the comparable 1994 pro forma amount reflecting improved chemicals
operating results. Changes in assets and liabilities include the impact of
significant seasonal fluctuations related to Amalgamated's seasonal purchase and
processing of sugarbeets. Reflecting the higher inventory levels from the
record crop and imposition of marketing allotments, changes in Amalgamated's
assets and liabilities used $26 million in cash in the first half of 1995
compared to $2 million in the comparable 1994 period. Cash flow from operating
activities in the 1994 year-to-date pro forma period includes NL's receipt of DM
185 million ($112 million) of tentative German income tax refunds, including
interest. Relative changes in the size of the Company's portfolio of trading
securities also impacted cash flow from operating activities comparisons.
Cash flow from investing and financing activities. Capital spending for
all of 1995 is estimated at approximately $122 million, up about 10% from 1994
pro forma of $110 million, and includes facility expansion, productivity
programs and environmental programs. Net borrowings in 1995 include $22 million
of short-term borrowings in the second quarter under NL non-U.S. bank credit
facilities. Net repayments of indebtedness in the 1994 year-to-date pro forma
period include payments aggregating DM 143 ($87 million) on NL's DM credit
facility.
Credit facilities. At June 30, 1995, unused revolving credit facilities
aggregated $299 million, including $228 million attributable to NL. Of such
amount, $90 million is available only for (i) permanently reducing NL's DM term
loan or (ii) paying future NL German income tax assessments, as discussed below.
Valhi has not guaranteed any subsidiary indebtedness.
NL Industries. The TiO2 industry is cyclical, with the previous peak in
selling prices in early 1990 and the latest trough in the third quarter of 1993.
Reflecting the improvement in Kronos' operating results, NL generated $74
million in cash from operating activities before changes in assets and
liabilities in the first six months 1995 compared to $34 million in the 1994
period. NL's $25 million ($7 million in 1995) debottlenecking project at its
Leverkusen, Germany chloride process TiO2 facility is expected to increase NL's
attainable TiO2 production capacity by 20,000 metric tons in 1997.
Certain of NL's U.S. and non-U.S. income tax returns, including Germany,
are being examined and tax authorities have proposed tax deficiencies.
Additional substantial German proposed tax deficiency assessments are expected.
Although NL believes it will ultimately prevail, NL has granted a DM 100 million
($72 million at June 30, 1995) lien on its Nordenham, Germany TiO2 plant and may
be required to provide additional security in favor of the German tax
authorities until the assessments proposing tax deficiencies are resolved. NL
believes that it has adequately provided accruals for additional income taxes
and related interest expense which may ultimately result from all such
examinations and believes that the ultimate disposition of such examinations
should not have a material adverse effect on its consolidated financial
position, results of operations or liquidity.
NL has been named as a defendant, potentially responsible party, or both,
in a number of legal proceedings associated with environmental matters,
including waste disposal sites currently or formerly owned, operated or used by
NL, many of which disposal sites or facilities are on the U.S. Environmental
Protection Agency's Superfund National Priorities List or similar state lists.
NL believes it has provided adequate accruals ($94 million at June 30, 1995) for
reasonably estimable costs of such matters, and has estimated that the upper end
of the range of reasonably possible costs to NL for sites for which it is
possible to estimate costs is approximately $162 million. NL is also a
defendant in a number of legal proceedings seeking damages for personal injury
and property damage arising out of the sale of lead pigments and lead-based
paints. Based on, among other things, the results of such litigation to date,
NL believes that the pending lead pigment litigation is without merit and has
not accrued any amounts for the pending lead pigment litigation. NL currently
believes the disposition of all claims and disputes, individually and in the
aggregate, should not have a material adverse effect on NL's consolidated
financial position, results of operations or liquidity. There can be no
assurance that additional matters of these types will not arise in the future or
that actual costs will not exceed accrued amounts or the upper end of the range
for sites for which estimates have been made. In addition, various legislation
and administrative regulations have, from time to time, been enacted or proposed
at the state, local and federal levels that seek to impose various obligations
on present and former manufacturers of lead pigment and lead-based paint with
respect to asserted health concerns associated with the use of such products and
effectively overturn court decisions in which NL and other pigment manufacturers
have been successful.
NL periodically evaluates its liquidity requirements, alternative uses of
capital, capital needs and availability of resources in view of, among other
things, its debt service and capital expenditure requirements and estimated
future operating cash flows. As a result of this process, NL has in the past
and may in the future seek to reduce, refinance or restructure indebtedness,
raise additional capital, restructure ownership interests, sell interests in
subsidiaries or other assets, or take a combination of such steps or other steps
to manage its liquidity and capital resources.
Amalgamated. Seasonal cash requirements are financed with short-term
borrowings under the government sugar price support loan program and bank credit
agreements. In view of higher inventory levels resulting from the combined
effect of the record crop and the imposition of marketing allotments,
Amalgamated increased its $75 million revolving working capital facility to $85
million. In addition, such facility was extended one-year to September 1997.
Other subsidiaries. In addition to the 1994 completion of the second MDF
production line in Ireland, Medite intends to continue the upgrade and
debottlenecking of its existing facilities. Medite may also seek to add other
new MDF production capacity. Although there are no plans or arrangements in
place with respect to such capacity additions, Medite continues to explore
expansion opportunities through acquisitions, strategic joint ventures and new
construction. The Company also continues to explore additional expansion and/or
acquisition opportunities for its hardware products business. Sybra's
Consolidated Development Agreement with Arby's, Inc. requires it to open another
16 new stores through 1997 in order to retain its exclusive development rights
in the Dallas/Ft. Worth, Texas areas.
Valhi general corporate. Valhi's operations are conducted principally
through subsidiaries (NL, Amalgamated and Valcor). Valcor is an intermediate
parent company with operations conducted through its subsidiaries (Medite,
National Cabinet Lock and Sybra). Accordingly, the Company's long-term ability
to meet its corporate level obligations is dependent in large measure on the
receipt of dividends or other distributions from subsidiaries, the realization
of their investments through the sale of interests in such entities and
investment income. Various credit agreements to which subsidiaries are parties
contain customary limitations on the payment of dividends, typically a
percentage of net income or cash flow; however, such restrictions have not
significantly impacted the Company's ability to service parent company
obligations.
During the first half of 1995, Valhi purchased an additional 1.1 million
shares (2%) of NL common stock at an average price of $12 per share. Valhi
expects to increase its $20 million revolving credit facility to $50 million
during the third quarter of 1995.
The Company continues to negotiate with an agricultural cooperative of
sugarbeet growers in Amalgamated's area of operation regarding the co-op's
possible acquisition of the Company's controlling interest in Amalgamated's
sugar business. The transaction would be subject to significant conditions,
including financing and grower commitments. No assurance can be given that any
transaction will be consummated. The net proceeds from the transaction, if
completed, would be available for general corporate purposes, including
expansion of Valhi's other businesses.
The Company routinely compares its liquidity requirements and alternative
uses of capital against the estimated future cash flows to be received from its
subsidiaries, and the estimated sales value of those units. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, refinance or restructure indebtedness, modify its dividend
policy, consider the sale of interests in subsidiaries, business units,
marketable securities or other assets, or take a combination of such steps or
other steps, to increase liquidity, reduce indebtedness and fund future
activities. Such activities have in the past and may in the future involve
related companies. The Company routinely evaluates acquisitions of interests
in, or combinations with, companies, including related companies, perceived by
management to be undervalued in the marketplace. These companies may or may not
be engaged in businesses related to the Company's current businesses. The
Company intends to consider such acquisition activities in the future and, in
connection with this activity, may consider issuing additional equity securities
and increasing the indebtedness of the Company, its subsidiaries and related
companies. From time to time, the Company and related entities also evaluate
the restructuring of ownership interests among their respective subsidiaries and
related companies.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Reference is made to the 1994 Annual Report and the March 31, 1995 Form 10-
Q for descriptions of certain legal proceedings.
Alan Russell Kahn v. Tremont Corporation, et al. Trial was held in June
1995 and post-trial briefing is underway.
Medite's Irish subsidiary has been named as a defendant in a complaint
filed in the High Court for the Republic of Ireland (Woodfab Limited v. Coillte
Teoranta and Medite of Europe Limited, 1995 No. 1154P). Plaintiff alleges that
timber supply contracts between Medite/Europe and Coillte violate certain
provisions of the Competition Act of 1991 and the European Community Treaty.
The complaint seeks to, among other things, declare that the timber supply
contracts are invalid and therefore should be rescinded. Medite believes, and
understands the other defendants believe, that the allegations are without merit
and intends to defend this action vigorously.
Wright (Alvin) and Wright (Allen) v. Lead Industries, et al. In an April
1995 amended complaint, plaintiffs voluntarily dismissed their breach of
warranty claim and added an unfair and deceptive trade practices claim. In July
1995, the trial court granted in part the defendants' motion to dismiss, and
dismissed the plaintiffs' fraud and unfair and deceptive trade practices claims.
A trial date has been set in these consolidated cases for October 1996.
HANO Third-Party Complaints. In June 1995, the District Court granted
motions for summary judgment in several of the remaining cases, and after such
grant, two cases remained pending. The time in which plaintiffs may file an
appeal has not yet expired. NL understands that the plaintiffs' counsel in the
HANO cases has indicated an intention to file a class action against the lead
pigment defendants on behalf of allegedly injured plaintiffs.
Wagner, et al. v. Anzon, Inc. and NL Industries, Inc. In May 1995,
plaintiffs filed a notice of appeal.
In re Asbestos III. The trial date has been delayed until August 1995.
Rhodes, et al. v. ACF Industries, Inc., et al. (Circuit Court of Putnam
County, West Virginia, No. 95-C-261). Twelve plaintiffs brought this action
against NL and various other defendants in July 1995. Plaintiffs allege that
they were employed by demolition and disposal contractors, and claim that as a
result of the defendants' negligence they were exposed to asbestos during such
activities on the defendants' premises in West Virginia. Plaintiffs allege
personal injuries and seek compensatory damages totaling $18.5 million and
punitive damages totaling $55.5 million. NL intends to file an answer denying
plaintiffs' allegations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Valhi's 1995 Annual Meeting of Stockholders was held on May 9, 1995.
Norman S. Edelcup, Kenneth R. Ferris, Glenn R. Simmons, Harold C. Simmons and J.
Walter Tucker, Jr. were elected as directors, each receiving votes "For" their
election of approximately 97% of the 113.8 million common shares eligible to
vote at the Annual Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 - Financial Data Schedule for the six-month period ended June 30,
1995.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended June 30, 1995 and the month
of July 1995:
April 18, 1995 - Reported Items 5 and 7.
April 26, 1995 - Reported Items 5 and 7.
May 9, 1995 - Reported Items 5 and 7.
July 24, 1995 - Reported Items 5 and 7.
SIGNATURES
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 thereunto duly authorized.
VALHI, INC.
(Registrant)
Date July 31, 1995 By /s/ William C. Timm
William C. Timm
Vice President - Finance and
Treasurer
(Principal Financial Officer)
Date July 31, 1995 By /s/ J. Thomas Montgomery, Jr.
J. Thomas Montgomery, Jr.
Vice President and Controller
(Principal Accounting Officer)
SIGNATURES
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 thereunto duly authorized.
VALHI, INC.
(Registrant)
Date July 31, 1995 By
William C. Timm
Vice President - Finance and
Treasurer
(Principal Financial Officer)
Date July 31, 1995 By
J. Thomas Montgomery, Jr.
Vice President and Controller
(Principal Accounting Officer)