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, 1996 COMMISSION FILE NUMBER 1-5467
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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
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 233-1700
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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, 1996: 114,110,414.
-----------
VALHI, INC. AND SUBSIDIARIES
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1995
and June 30, 1996 3-4
Consolidated Statements of Income - Three months
and six months ended June 30, 1995 and 1996 5
Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 1996 6
Consolidated Statements of Cash Flows - Six
months ended June 30, 1995 and 1996 7-8
Notes to Consolidated Financial Statements 9-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 16-24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 24-25
Item 4. Submission of Matters to a Vote of Security Holders. 25
Item 6. Exhibits and Reports on Form 8-K. 25
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
Current assets:
Cash and cash equivalents $ 170,908 $ 144,669
Accounts and notes receivable 223,962 253,674
Refundable income taxes 4,978 2,056
Receivable from affiliates 3,529 1,260
Inventories 518,304 373,642
Prepaid expenses 7,249 9,387
Deferred income taxes 2,636 3,977
---------- ----------
Total current assets 931,566 788,665
---------- ----------
Other assets:
Marketable securities 144,256 151,919
Investment in joint ventures 190,518 196,589
Natural resource properties 95,774 91,730
Prepaid pension cost 24,767 25,650
Goodwill 252,773 260,008
Deferred income taxes 788 910
Other 57,084 51,943
---------- ----------
Total other assets 765,960 778,749
---------- ----------
Property and equipment:
Land 43,313 42,393
Buildings 212,729 210,666
Equipment 913,763 919,972
Construction in progress 20,709 36,972
---------- ----------
1,190,514 1,210,003
Less accumulated depreciation 315,827 359,429
---------- ----------
Net property and equipment 874,687 850,574
---------- ----------
$2,572,213 $2,417,988
========== ==========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
Current liabilities:
Notes payable $ 145,932 $ 135,329
Current long-term debt 63,752 103,242
Accounts payable 236,973 114,049
Accrued liabilities 156,146 152,421
Payable to affiliates 10,188 9,843
Income taxes 44,849 43,871
Deferred income taxes 4,496 2,902
---------- ----------
Total current liabilities 662,336 561,657
---------- ----------
Noncurrent liabilities:
Long-term debt 1,084,284 1,078,667
Accrued pension cost 70,040 61,348
Accrued OPEB cost 78,410 77,409
Accrued environmental costs 115,577 113,393
Deferred income taxes 239,444 218,219
Other 44,765 37,437
---------- ----------
Total noncurrent liabilities 1,632,520 1,586,473
---------- ----------
Minority interest 3,066 251
---------- ----------
Stockholders' equity:
Common stock 1,246 1,248
Additional paid-in capital 34,604 35,228
Retained earnings 263,777 255,311
Adjustments:
Currency translation (7,430) (8,851)
Marketable securities 55,629 60,539
Pension liabilities (2,881) (2,881)
Treasury stock (70,654) (70,987)
---------- ----------
Total stockholders' equity 274,291 269,607
---------- ----------
$2,572,213 $2,417,988
========== ==========
[FN]
Commitments and contingencies (Note 1)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1995 1996 1995 1996
---- ---- ---- ----
Revenues and other income:
Net sales $513,531 $470,783 $981,160 $933,578
Other, net 9,020 13,256 14,678 26,229
-------- -------- -------- --------
522,551 484,039 995,838 959,807
-------- -------- -------- --------
Costs and expenses:
Cost of sales 370,193 360,791 710,321 710,505
Plant closure charge - - - 24,000
Selling, general and
administrative 85,772 75,975 162,124 153,198
Interest 32,365 28,774 65,207 58,990
-------- -------- -------- --------
488,330 465,540 937,652 946,693
-------- -------- -------- --------
34,221 18,499 58,186 13,114
Equity in Waste Control Specialists - (1,267) - (2,418)
-------- -------- -------- --------
Income before income taxes 34,221 17,232 58,186 10,696
Provision for income taxes 16,723 6,183 27,928 3,014
Minority interest 141 2,299 486 4,620
-------- -------- -------- --------
Net income $ 17,357 $ 8,750 $ 29,772 $ 3,062
======== ======== ======== ========
Net income per common share $.15 $.08 $.26 $.03
==== ==== ==== ====
Cash dividends per share $.03 $.05 $.06 $.10
==== ==== ==== ====
Weighted average common shares
outstanding
114,391 114,639 114,392 114,604
======= ======= ======= =======
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS)
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
------- ----------- --------
Balance at December 31, 1995 $1,246 $34,604 $263,777
Net income - - 3,062
Dividends - - (11,528)
Adjustments, net - - -
Other, net 2 624 -
------ ------- --------
Balance at June 30, 1996 $1,248 $35,228 $255,311
====== ======= ========
ADJUSTMENTS TOTAL
-----------------------------------------
CURRENCY MARKETABLE PENSION TREASURY STOCKHOLDERS'
TRANSLATION SECURITIES LIABILITIES STOCK EQUITY
----------- ---------- ----------- --------- -------------
Balance at December 31, 1995 $(7,430) $55,629 $(2,881) $(70,654) $274,291
Net income - - - - 3,062
Dividends - - - - (11,528)
Adjustments, net (1,421) 4,910 - - 3,489
Other, net - - - (333) 293
------- ------- ------- -------- --------
Balance at June 30, 1996 $(8,851) $60,539 $(2,881) $(70,987) $269,607
======= ======= ======= ======== ========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(IN THOUSANDS)
1995 1996
---- ----
Cash flows from operating activities:
Net income $ 29,772 $ 3,062
Depreciation, depletion and
amortization 45,073 46,581
Plant closure charge - noncash portion - 15,200
Noncash interest expense 15,410 16,600
Deferred income taxes 21,399 (16,715)
Minority interest 486 4,620
Other, net (8,451) (3,989)
--------- --------
103,689 65,359
Change in assets and liabilities:
Accounts and notes receivable (54,300) (35,956)
Inventories 126,938 134,532
Accounts payable/accrued liabilities:
Sugarbeet purchases (124,262) (64,497)
Other, net (21,417) (57,081)
Income taxes (22,837) 3,369
Other, net (2,906) (10,656)
Trading securities:
Sale proceeds 48,889 -
Purchases (762) -
--------- --------
Net cash provided by operating activities 53,032 35,070
--------- --------
Cash flows from investing activities:
Capital expenditures (54,213) (50,998)
Purchases of minority interest (13,168) (16,971)
Investment in Waste Control Specialists - (10,000)
Loans to affiliates:
Loans (39,070) (7,400)
Collections 30,070 10,400
Other, net 642 2,062
--------- --------
Net cash used by investing activities (75,739) (72,907)
--------- --------
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(IN THOUSANDS)
1995 1996
---- ----
Cash flows from financing activities:
Indebtedness:
Borrowings $ 452,556 $ 392,618
Principal payments (435,148) (363,222)
Valhi dividends paid (6,901) (11,528)
Distributions to minority interest (14) (5,126)
Government grants and other, net 3,132 886
--------- ---------
Net cash provided by financing activities 13,625 13,628
--------- ---------
Net decrease (9,082) (24,209)
Currency translation 4,288 (2,030)
Cash and equivalents at beginning of period 170,747 170,908
--------- ---------
Cash and equivalents at end of period $ 165,953 $ 144,669
========= =========
Supplemental disclosures - cash paid for:
Interest, net of amounts capitalized $ 44,443 $ 42,583
Income taxes 30,551 17,066
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, 1995 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 1996 and the consolidated statements of
operations, cash flows and stockholders' equity for the interim periods ended
June 30, 1995 and 1996 have been prepared by the Company, without audit. In the
opinion of management, all 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.
Certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted. 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, 1995 (the "1995 Annual Report"). Commitments and contingencies are
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Legal Proceedings" and the 1995 Annual Report.
The Company's 55%-owned chemicals subsidiary, NL Industries, Inc.,
separately reported a stockholders' deficit of approximately $190 million at
June 30, 1996 and, accordingly, no minority interest in NL is reported in the
Company's consolidated balance sheet. Until such time as NL reports positive
stockholders' equity, all undistributed income or loss and other changes in NL's
reported stockholders' equity will accrue to the Company for financial reporting
purposes. Minority interest in earnings in 1996 consists principally of NL
dividends paid to stockholders other than Valhi.
Contran Corporation holds, directly or through subsidiaries, approximately
91% 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:
OPERATIONS PRINCIPAL ENTITIES % OWNED
- ------------------- --------------------------------- --------------
Chemicals NL Industries, Inc. 55%
Refined sugar The Amalgamated Sugar Company 100%
Building products Medite Corporation 100%
Hardware products National Cabinet Lock, Inc. 100%
Fast food Sybra, Inc. 100%
Waste management Waste Control Specialists LLC 50%
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. Each of NL (NYSE: NL) and Valcor are subject to the
periodic reporting requirements of the Securities Exchange Act of 1934, as
amended.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1995 1996 1995 1996
---- ---- ---- ----
(IN MILLIONS)
Net sales:
Chemicals $283.4 $263.2 $534.3 $503.6
Refined sugar 132.6 108.5 243.8 235.6
Building products 49.4 48.1 108.0 94.6
Hardware products 19.3 21.7 39.4 42.9
Fast food 28.8 29.3 55.6 56.9
------ ------ ------ ------
$513.5 $470.8 $981.1 $933.6
====== ====== ====== ======
Operating income:
Chemicals $52.1 $ 30.8 $ 89.0 $ 67.4
Refined sugar 6.3 3.9 12.7 12.6
Building products 8.3 5.6 18.6 (16.9)
Hardware products 5.1 5.0 10.6 9.4
Fast food 1.8 2.4 2.9 4.0
------ ------ ------ ------
73.6 47.7 133.8 76.5
Equity in losses of Waste Control - (1.3) - (2.4)
General corporate items:
Securities earnings 3.3 2.3 7.1 4.8
General expenses, net (10.2) (2.6) (17.5) (9.2)
Interest expense (32.4) (28.8) (65.2) (59.0)
------ ------ ------ ------
Income before income taxes $ 34.3 $ 17.3 $ 58.2 $ 10.7
====== ====== ====== ======
As previously reported, Medite recorded a pre-tax restructuring charge of
$24 million in the first quarter of 1996 based upon the estimated costs of
permanently closing its New Mexico medium density fiberboard (`MDF'') plant.
Approximately $15 million of such charge represents non-cash costs, most of
which relate to the net carrying value of property and equipment in excess of
estimated net realizable value. These non-cash costs were deemed utilized upon
adoption of the closure plan. Approximately $9 million of the charge represents
workforce, environmental and other estimated cash costs associated with closure
of this facility, of which $1.6 million had been paid at June 30, 1996. On
August 1, 1996, Medite completed the sale of substantially all of the building
and equipment of the New Mexico facility for $5.5 million cash, which
approximates the previously estimated net realizable value. Dismantlement and
removal could take up to a year for the buyer to complete. Medite retains
responsibility for any necessary site cleanup and remediation.
SIX MONTHS ENDED JUNE 30,
-------------------------------------
DEPRECIATION,
DEPLETION AND CAPITAL
AMORTIZATION EXPENDITURES
---------------- -----------------
1995 1996 1995 1996
---- ---- ---- ----
(IN MILLIONS)
Chemicals $29.7 $30.6 $26.2 $31.3
Refined sugar 5.2 5.6 14.7 7.2
Building products 6.0 5.7 5.1 8.6
Fast food and other 4.2 4.7 8.2 3.9
----- ----- ----- -----
$45.1 $46.6 $54.2 $51.0
===== ===== ===== =====
NOTE 4 -MARKETABLE SECURITIES:
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
(IN THOUSANDS)
Noncurrent assets (available-for-sale):
Dresser Industries, Inc. common stock $130,366 $136,204
Other common stocks 13,890 15,715
-------- --------
$144,256 $151,919
======== ========
Valhi holds 5.5 million shares of Dresser common stock with a quoted market
price of $29.50 at June 30, 1996, or an aggregate market value of approximately
$161 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, 1996, the
aggregate cost of other available-for-sale securities was approximately $16
million.
NOTE 5 -INVENTORIES:
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
(IN THOUSANDS)
Raw materials:
Chemicals $ 35,075 $ 34,680
Sugarbeets 47,420 -
Other 15,710 11,817
-------- --------
98,205 46,497
-------- --------
In process products:
Chemicals 9,132 8,439
Refined sugar and by-products 57,967 17,778
Other 6,507 7,472
-------- --------
73,606 33,689
-------- --------
Finished products:
Chemicals 173,195 154,644
Refined sugar and by-products 90,492 60,345
Other 9,052 6,815
-------- --------
272,739 221,804
-------- --------
Supplies 73,754 71,652
-------- --------
$518,304 $373,642
======== ========
NOTE 6 - OTHER NONCURRENT ASSETS:
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
(IN THOUSANDS)
Joint ventures:
TiO2 manufacturing joint venture $183,129 $181,772
Waste Control Specialists LLC 4,625 12,207
Other 2,764 2,610
-------- --------
$190,518 $196,589
======== ========
Natural resource properties:
Timber and timberlands $ 53,099 $ 54,187
Mining properties 42,675 37,543
-------- --------
$ 95,774 $ 91,730
======== ========
Franchise fees and other intangible assets $ 24,786 $ 21,807
Deferred financing costs 19,537 17,431
Other 12,761 12,705
-------- --------
$ 57,084 $ 51,943
======== ========
NOTE 7 -ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
(IN THOUSANDS)
Accounts payable:
Sugarbeet purchases $ 83,027 $ 18,530
Other 153,946 95,519
-------- --------
$236,973 $114,049
======== ========
Accrued liabilities:
Employee benefits $ 63,067 $ 46,753
Sugar processing costs 21,569 12,858
LIFO inventory replacement reserve - 8,702
Environmental costs 6,109 6,144
Plant closure costs - 4,613
Interest 13,208 13,422
Miscellaneous taxes 4,275 5,288
Other 47,918 54,641
-------- --------
$156,146 $152,421
======== ========
NOTE 8 - OTHER NONCURRENT LIABILITIES:
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
(IN THOUSANDS)
Employee benefits $16,626 $15,936
Insurance claims and expenses 15,354 14,590
Deferred technology fee income 8,456 3,041
Other 4,329 3,870
------- -------
$44,765 $37,437
======= =======
NOTE 9 - NOTES PAYABLE AND LONG-TERM DEBT:
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
(IN THOUSANDS)
Notes payable:
Amalgamated:
United States Government loans $ 64,685 $ 62,663
Bank credit agreements 42,000 29,398
---------- ----------
106,685 92,061
Kronos - non-U.S. bank credit agreements
(DM 56,000 and DM 40,000) 39,247 26,268
Valhi - bank revolver - 17,000
---------- ----------
$ 145,932 $ 135,329
========== ==========
Long-term debt:
Valhi - LYONs $ 130,366 $ 136,204
Valcor Senior Notes 99,000 98,910
Amalgamated bank term loan 24,000 24,000
NL Industries:
Senior Secured Notes 250,000 250,000
Senior Secured Discount Notes 132,034 140,616
Deutsche mark bank credit facility
(DM 397,609 and DM 490,609) 276,895 322,134
Joint venture term loan 73,286 65,572
Rheox bank term loan 37,263 25,909
Other 14,225 12,177
---------- ----------
783,703 816,408
---------- ----------
Medite:
Bank term loans 73,770 72,128
Bank working capital facilities 10,830 10,357
Other 4,117 4,004
---------- ----------
88,717 86,489
---------- ----------
Other:
Sybra bank credit agreements 16,770 14,860
Sybra capital leases 5,382 4,963
Other 98 75
---------- ----------
22,250 19,898
---------- ----------
1,148,036 1,181,909
Less current maturities 63,752 103,242
---------- ----------
$1,084,284 $1,078,667
========== ==========
Valcor Senior Notes are stated net of approximately $1 million principal
amount held by Valhi.
NOTE 10 - OTHER INCOME:
SIX MONTHS ENDED
JUNE 30,
------------------
1995 1996
---- ----
(IN THOUSANDS)
Securities earnings:
Interest and dividends $ 5,900 $ 4,659
Securities transactions 1,215 122
------- -------
7,115 4,781
Technology fee income 5,305 5,674
Pension curtailment gain - 4,791
Litigation settlement gain - 2,756
Currency transactions, net (1,555) 3,754
Other, net 3,813 4,473
------- -------
$14,678 $26,229
======= =======
The 1996 pension curtailment gain resulted from NL's reduction of certain
U.S. employee pension benefits, and the litigation settlement gain relates to
the settlement of certain litigation in which NL was a plaintiff.
NOTE 11 - PROVISION FOR INCOME TAXES:
SIX MONTHS ENDED
JUNE 30,
------------------
1995 1996
---- ----
(IN MILLIONS)
Expected tax expense $20.4 $ 3.7
Non-U.S. tax rates (5.1) (2.2)
Incremental tax and rate differences on equity in
earnings of non-tax group companies 14.4 1.8
Change in NL's deferred income tax
valuation allowance (2.5) (1.1)
Other, net .7 .8
----- -----
$27.9 $ 3.0
===== =====
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
Net income was $8.8 million, or $.08 per share, for the second quarter of
1996 compared to $17.4 million, or $.15 per share, in the second quarter of
1995. Net income was $3.1 million, or $.03 per share, in the first half of
1996, which included a $15 million first quarter after-tax charge ($.13 per
share) related to closure of Medite's New Mexico MDF operations, as discussed
below. Net income was $29.8 million, or $.26 per share, in the first half of
1995. Based on the continuing decline in TiO2 selling prices during the second
quarter of 1996 and the current TiO2 industry pricing outlook, the Company
expects consolidated earnings for the third and fourth quarters of 1996 will be
significantly lower than the second quarter.
The statements in this Quarterly Report on Form 10-Q relating to matters
that are not historical facts, including, but not limited to, statements found
in this `Management's Discussion and Analysis of Financial Condition and
Results of Operations,''are forward looking statements that involve a number of
risks and uncertainties. Factors that could cause actual future results to
differ materially from those expressed in such forward looking statements
include, but are not limited to, future supply and demand for the Company's
products (including cyclicality thereof), general economic conditions,
competitive products and substitute products, customer and competitor
strategies, the impact of pricing and production decisions, environmental
matters, government regulations and possible changes therein, and the ultimate
resolution of pending litigation and possible future litigation.
CHEMICALS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, % JUNE 30, %
------------------ ------------------
1995 1996 CHANGE 1995 1996 CHANGE
---- ---- ------ ---- ---- ------
(IN MILLIONS) (IN MILLIONS)
Net sales:
Kronos $249.3 $228.3 - 8% $466.7 $434.6 - 7%
Rheox 34.1 34.9 + 2% 67.6 69.0 + 2%
------ ------ ------ ------
$283.4 $263.2 - 7% $534.3 $503.6 - 6%
====== ====== ====== ======
Operating income:
Kronos $ 42.1 $ 20.6 -51% $ 69.9 $ 45.1 -35%
Rheox 10.0 10.2 + 2% 19.1 22.3 +16%
------ ------ ------ ------
$ 52.1 $ 30.8 -41% $ 89.0 $ 67.4 -24%
====== ====== ====== ======
Kronos' operating income in 1996 declined due to lower average TiO2 selling
prices and lower production volumes. Kronos' average TiO2 selling prices for
the second quarter of 1996 were 7% lower than the second quarter of 1995 and 6%
lower than the first quarter of this year. Selling prices at the end of the
second quarter of 1996 were 2% lower than the average for the quarter. While
Kronos' sales volume for the second quarter of 1996 increased 4% compared to the
second quarter of 1995 due to improved U.S. sales, volumes in the first six
months of the year were 4% lower than the first half of last year.
Rheox's operating results improved due primarily to higher sales volumes,
and included a $2.7 million first quarter gain in 1996 related to the reduction
of certain U.S. employee pension benefits.
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 decreased the dollar value of sales in the first half of 1996
by approximately $4 million compared to 1995.
The Company's purchase accounting adjustments made in conjunction with the
acquisitions of its interest in NL result in additional depreciation, depletion
and amortization expense beyond amounts separately reported by NL. Such
additional non-cash expenses reduce chemicals operating income, as reported by
Valhi, by approximately $20 million annually as compared to amounts separately
reported by NL.
REFINED SUGAR
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, % JUNE 30, %
------------------ ------------------
1995 1996 CHANGE 1995 1996 CHANGE
---- ---- ------ ---- ---- ------
(IN MILLIONS) (IN MILLIONS)
Net sales:
Refined sugar $123.5 $104.6 -15% $219.2 $216.3 - 1%
By-products and other 9.1 3.9 24.6 19.3
------ ------ ------ ------
$132.6 $108.5 -18% $243.8 $235.6 - 3%
====== ====== ====== ======
Operating income:
FIFO basis $ 5.3 $ 6.9 +30% $ 10.3 $ 17.3 +68%
LIFO adjustment 1.0 (3.0) 2.4 (4.7)
------ ------ ------ ------
LIFO (reporting) basis $ 6.3 $ 3.9 -38% $ 12.7 $ 12.6 - 0%
====== ====== ====== ======
Average sugar selling prices for the second quarter of 1996 were up 5%
compared to the 1995 second quarter and were up 3% for the 1996 six-month
period. The generally smaller industry-wide production levels are expected to
continue to result in stabilized/improved refined sugar selling prices for the
remainder of the current crop year, which ends September 30. Sales volumes were
down 4% year-to-date, reflecting a smaller crop, and second quarter 1996 volume
was down 19% from last year, also reflecting the relative timing of sales within
the crop year. Sugar sales volumes during the last half of 1996 are expected to
be below last year's record levels.
Sugarbeet purchase cost is the largest cost component of producing refined
sugar and the price paid for sugarbeets is, under the terms of contracts with
the sugarbeet growers, a function of the average net selling price of
Amalgamated's refined sugar. As a result, changes in sugar selling prices
impact sugarbeet purchase costs as well as revenues and serve as a partial hedge
against changing prices. An increased extraction rate, in part due to recently-
completed productivity improvement capital projects, along with a higher sugar
content of the beets has resulted in a lower beet cost per hundredweight of
sugar produced and improved FIFO-based earnings. However, related LIFO
adjustments can significantly affect operating income and margin comparisons
relative to FIFO basis comparisons.
Contracted acreage for the crop planted in the spring of 1996 was about 5%
lower than last year however, based on preliminary estimates, production from
the crop to be harvested this fall is currently expected to approximate that of
the prior crop.
Amalgamated's collective bargaining agreement with the American Federation
of Grain Millers International expired July 31, 1996, but has been extended
while negotiations with the union continue.
BUILDING PRODUCTS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, % JUNE 30, %
------------------ ------------------
1995 1996 CHANGE 1995 1996 CHANGE
---- ---- ------ ---- ---- ------
(IN MILLIONS) (IN MILLIONS)
Net sales:
Medium density fiberboard $37.5 $34.7 - 7% $ 83.0 $ 71.6 -14%
Traditional timber products 12.2 13.8 +14% 25.8 23.6 - 8%
Eliminations (.3) (.4) (.8) (.6)
----- ----- ------ ------
$49.4 $48.1 - 3% $108.0 $ 94.6 -12%
===== ===== ====== ======
Operating income:
Medium density fiberboard:
Before restructuring charge $ 7.2 $ 4.1 $ 16.8 $ 5.6
Plant closure cost - - - (24.0)
----- ----- ------ ------
7.2 4.1 16.8 (18.4)
Traditional timber products 1.1 1.5 1.8 1.5
----- ----- ------ ------
$ 8.3 $ 5.6 $ 18.6 $(16.9)
===== ===== ====== ======
MDF sales and operating income (excluding the first quarter 1996 plant
closure charge) declined in the first six months of 1996 compared to 1995 as a
9% increase in year-to-date MDF sales volume was more than offset by an 18%
reduction in average selling prices. MDF prices generally peaked in the second
quarter of 1995 and thereafter declined. Second quarter 1996 average prices
approximated first quarter 1996 levels. Increases in European industry capacity
and slower economic growth in North America and Europe contributed to the lower
MDF prices. These factors, along with additional North American capacity
additions expected during the last half of 1996, are currently expected to
continue MDF price pressure. MDF earnings in 1996 were favorably impacted by
lower raw material costs, due in part from improved raw material conversion
rates in the U.S. and lower resin costs in Ireland. Fluctuations in foreign
exchange rates, principally a weakening of the U.K. Pound Sterling, along with a
lower mix of higher-margin specialty MDF products diluted 1996 operating
margins. The closed New Mexico operations accounted for approximately $5.2
million of second quarter 1996 sales compared to $7.4 million in the 1995
quarter, with related operating losses of $.5 million and $1.3 million,
respectively.
As previously reported, Medite recorded a $24 million pre-tax charge ($15
million net of income tax benefits) related to closure of its New Mexico MDF
plant. See Note 3 to the Consolidated Financial Statements.
Medite allocates timber harvested from its fee timberlands between log
sales and its traditional timber products conversion facilities depending upon
prevailing market conditions. Traditional timber products results in 1996 were
impacted by higher volumes of logs sold and higher selling prices for lumber,
offset by lower prices for veneer and chips.
HARDWARE PRODUCTS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, % JUNE 30, %
------------------ ------------------
1995 1996 CHANGE 1995 1996 CHANGE
---- ---- ------ ---- ---- ------
(IN MILLIONS) (IN MILLIONS)
Net sales $19.3 $21.7 +13% $39.4 $42.9 + 9%
Operating income 5.1 5.0 - 1% 10.6 9.4 -11%
Sales increased primarily from higher volumes in the Company's
officeworkstation components and drawer slide lines. Changes in product mix
diluted margins, particularly early in the year, as lower-margin operations
acquired in August 1995 were being integrated.
FAST FOOD
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, % JUNE 30, %
------------------ ------------------
1995 1996 CHANGE 1995 1996 CHANGE
---- ---- ------ ---- ---- ------
(IN MILLIONS) (IN MILLIONS)
Net sales $28.8 $29.3 + 2% $55.6 $56.9 + 2%
Operating income 1.8 2.4 +32% 2.9 4.0 +37%
Comparable store sales increased 3% in both the second quarter and year-to-
date periods. Operating income and margins also improved due to successful
promotions, reduced training and recruiting costs associated with the slower
rate of opening new stores in 1996 and the closure of certain under-performing
stores.
A significant portion of Sybra's restaurant employees work on a part-time
basis and are paid at rates related to the minimum wage rate. Restaurant labor
costs currently approximate 30% of sales. Congress has passed a bill which
provides for a two-step, 90-cent increase in the minimum wage rate starting
October 1, 1996. President Clinton is expected to sign the bill. Such increase
in the minimum wage rate will increase Sybra's labor costs. In addition, Sybra
believes agricultural market factors may result in higher beef costs in the
relatively near future. Although Sybra's competitors would likely experience
similar increases, there can be no assurance that Sybra or its competitors will
be able to increase sales prices to offset future increases in these costs.
Sybra operated 153 restaurants at June 30, 1996, closed three
underperforming stores thus far in the third quarter and may close three to five
more underperforming stores by the end of the year.
WASTE MANAGEMENT
Construction of Waste Control Specialists' (`WCS'') facility in West Texas
for the processing, treatment, storage and disposal of certain hazardous and
toxic wastes continues. WCS reported a loss of $2.4 million in the first six
months of 1996 and expects to continue to report losses during the development
stage. The facility is planned to be ready to accept wastes governed by The
Resource Conservation and Recovery Act (`RCRA'') and the Toxic Substances
Control Act (`TSCA'') in 1997.
OTHER
Interest expense. Interest expense declined due primarily to lower average
variable interest rates. At June 30, 1996, approximately $674 million of
consolidated indebtedness, principally publicly-traded debt, bears interest at
fixed rates averaging 10.9%. The weighted average interest rate on $643 million
of outstanding variable rate borrowings at June 30, 1996 was 5.8%, down from
6.4% at December 31, 1995 and 7.4% at year-end 1994.
Minority interest. Minority interest in earnings in 1996 consists
principally of NL dividends paid to stockholders other than Valhi.
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
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.
LIQUIDITY AND CAPITAL RESOURCES:
Cash flows from operating activities. Cash flow from operating activities
before changes in assets and liabilities in the first six months of 1996
declined $38 million from the same period in 1995, generally reflecting the
decline in earnings. Changes in assets and liabilities include the impact of
significant fluctuations related to Amalgamated's seasonal purchase and
processing of sugarbeets, as discussed below.
Cash flows from investing and financing activities. Capital expenditures
for all of 1996 are estimated to approximate $93 million, down from $115 million
in 1995 in large part due to completion of certain productivity projects at
Amalgamated during 1995.
During the first half of 1996, Valhi purchased an additional $12 million of
NL common stock, Rheox acquired the minority interest in its non-U.S.
subsidiaries for $5 million and, as scheduled, Valhi contributed $10 million to
Waste Control Specialists.
Net borrowings in 1996 include borrowings of DM 95 million ($64 million
when borrowed) under NL's long-term DM bank credit facility used primarily to
fund NL's operations, and $17 million of net borrowings under Valhi short-term
credit facilities primarily to fund purchases of NL common stock and scheduled
capital contributions to Waste Control Specialists.
Credit facilities. At June 30, 1996, unused revolving credit facilities
aggregated $230 million, including $126 million attributable to NL. Of such NL
amount, $82 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, and changes in economic
conditions within the TiO2 industry can significantly impact NL's earnings and
operating cash flows. Although TiO2 selling prices are significantly above the
1993 trough, prices began to decline during the last half of 1995. Relative
changes in NL's working capital (excluding the effect of foreign currency
translation) used $49 million of cash in the first six months of 1996 compared
to using $46 million in the first six months of 1995.
Certain of NL's U.S. and non-U.S. income tax returns are being examined and
tax authorities have or may propose tax deficiencies. NL has reached an
agreement in principle with the German tax authorities regarding examinations
which will resolve certain significant tax contingencies for years through 1990.
NL expects to finalize assessments and pay tax deficiencies during 1996 of
approximately DM 50 million ($33 million at June 30, 1996), including interest,
in settlement of these issues. Certain other German tax contingencies remain
outstanding and will continue to be litigated. Although NL believes that it
will ultimately prevail, NL has granted a DM 100 million lien on its Nordenham,
Germany TiO2 plant in favor of the German tax authorities until the litigation
is resolved. No assurance can be given that this litigation will be resolved in
NL's favor in view of the inherent uncertainties involved in court rulings. 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, PRP, 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. EPA's Superfund National Priorities
List or similar state lists. On a quarterly basis, NL evaluates the potential
range of its liability at sites where it has been named as a PRP or defendant.
NL believes it has provided adequate accruals ($114 million at June 30, 1996)
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 $175 million. NL's estimates of
such liabilities have not been discounted to present value, and NL has not
recognized any potential insurance recoveries. No assurance can be given that
actual costs will not exceed accrued amounts, or the upper end of the range for
sites for which estimates have been made, and no assurance can be given that
costs will not be incurred with respect to sites as to which no estimate
presently can be made. 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. Although no assurance can be given that
NL will not incur future liability in respect of this litigation, based on,
among other things, the results of such litigation to date, NL believes that the
pending lead pigment and paint litigation is without merit. NL has not accrued
any amounts for the pending lead pigment and paint litigation. Liability that
may result, if any, cannot reasonably be estimated. In addition, various
legislation and administrative regulations are, from time to time, enacted or
proposed at the state, local and federal levels seeking 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 to effectively overturn court decisions in which NL and other
pigment manufacturers have been successful. NL currently believes the
disposition of all claims and disputes, individually or in the aggregate, should
not have a material adverse effect on its 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.
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, repurchase or restructure
indebtedness, raise additional capital, modify its dividend policy, 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. In the normal course of its business, NL may also review
opportunities for acquisitions or other business combinations in the chemicals
industry. In the event of any such transaction, NL may consider using its
available cash, issuing its equity securities or increasing its indebtedness to
the extent permitted by the agreements governing NL's existing debt.
Amalgamated. Cash requirements are seasonal in that a major portion of the
total payments for sugarbeets is made, and the cost of processing the sugarbeets
is incurred, in the fall and winter of each year. Accordingly, Amalgamated's
operating activities typically use significant amounts of cash in the first and
fourth calendar quarters and provide significant cash flow in the second and
third quarters of each year. These seasonal cash requirements are financed with
short-term borrowings under the government sugar price support loan program and
bank credit agreements. During the second quarter, Amalgamated obtained a one-
year extension of its bank revolver, to September 1998.
Waste Control Specialists. Estimated capital expenditures to complete WCS
projects in process, substantially all of which relate to the construction of
the new facility in West Texas, are approximately $13 million and are expected
to be incurred principally in 1996. Such capital expenditures, along with its
expected development stage operating losses, will be funded primarily from
Valhi's $25 million of capital contributions ($15 million funded through June
30, 1996). WCS does not expect to begin to generate revenues from its existing
RCRA and TSCA permits until 1997.
Valhi general corporate. Valhi's operations are conducted principally
through subsidiaries and affiliates (NL Industries, Amalgamated, Valcor and
Waste Control Specialists). 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. 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. Neither Valhi nor Valcor has guaranteed any
indebtedness of their respective subsidiaries.
Valhi's remaining $10 million commitment to invest in Waste Control
Specialists ($5 million in 1996 and $5 million in early 1997) will be provided
primarily by cash on hand or available credit facilities. At June 30, 1996,
Valhi has two bank credit facilities aggregating $65 million, of which $48
million was available for borrowing. Of such available amount, $8 million can
only be used to purchase shares of NL common stock.
In May 1996, Valhi entered into a nonbinding Letter of Intent with Snake
River Sugar Company regarding the possible sale/disposition of control of
Amalgamated's sugar business on a tax deferred basis. Snake River is an
agricultural co-op, formed by sugarbeet growers in Amalgamated's area of
operation, to effect the proposed transaction. The Letter of Intent, as
supplemented, includes basic terms of alternative forms of a transaction and is
subject to significant conditions including, among other things, negotiation and
completion of a definitive agreement and Snake River raising funds necessary to
complete a transaction. There can be no assurance that any transaction will be
consummated. The net cash proceeds to Valhi of approximately $250 million from
the proposed transaction, if completed, would be available for Valhi's general
corporate purposes.
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, repurchase or restructure indebtedness, modify
its dividend policy, consider the sale of interests in subsidiaries, affiliates,
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. In this regard, the Indentures governing the publicly-traded
debt of NL and Valcor contain provisions which limit the ability of NL, Valcor
and their respective subsidiaries to incur additional indebtedness or hold
noncontrolling interests in business units.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Reference is made to the 1995 Annual Report and prior 1996 quarterly
periodic reports for descriptions of certain legal proceedings.
Alan Russell Kahn v. Tremont Corporation, et al. In June 1996, the
plaintiff filed an appeal.
In May 1996, the defendants in the previously-reported case American
Federation of Grain Millers International, et al. v. Valhi, Inc., et al. made a
motion for partial summary judgment to dismiss one of the claims. Hearings on
the motion are set for September 1996.
In July 1996, Medite filed a complaint in U.S. District Court in New Mexico
(Medite Corporation v. Public Service Company of New Mexico, CIV96-0929LH)
regarding termination of the electricity supply contract for its New Mexico MDF
facility permanently closed in May 1996. The compliant seeks, among other
things, to declare the contract terminated under New Mexico common law and/or
the force majeure provisions of the agreement. The Company does not expect the
resolution of this matter to have a material adverse impact on its consolidated
results of operations, financial position or liquidity.
The City of New York, et al. v. Lead Industries Association, Inc. et al.
(No. 89-4617). In June 1996, the appeals court reversed the trial court's
dismissal of plaintiffs' restitution and indemnification claims. The time in
which defendants may request permission to appeal has not yet expired.
Wright, et al. v. Lead Industries Association, Inc., et al. (Nos. 94-363042
and 94-363043). In June 1996, the trial court granted defendants' motions for
summary judgment and dismissed NL and certain other defendants from the cases.
The time in which plaintiffs may appeal has not yet expired.
Jefferson v. Lead Industries Association, Inc., et al. (No. 95-2835). In
June 1996, the trial court granted defendants' motions to dismiss the complaints
and entered judgment in favor of all defendants. Plaintiffs have filed a notice
of appeal and the appeal is pending.
German, et al. v. Federal Home Loan Mortgage Corp., et al. (No 93 Civ.
6491). In May 1996, NL and the other former manufacturers of lead pigments
filed motions to dismiss the intervenors' complaint. The motions are pending.
Pedricktown, New Jersey smelter site. In May 1996, certain PRPs, but not
NL, entered into an administrative consent order with the U.S. EPA to perform
the remedial design aspects of the selected remedy.
Granite City, Illinois smelter site. In June 1996, the City of Granite
City brought a motion for a preliminary injunction against the U.S. EPA seeking
to enjoin certain aspects of the cleanup after the U.S. EPA recommenced the
cleanup of residential yard soils. NL and the other PRPs joined in the City's
motion. The court has not yet ruled on the motion.
Flack v. NL Industries, Inc., et al. (Nos. 1842-80 and 3131-92). In June
1996, the previously-reported appeals of NL and the State of New York were both
denied.
In re: Monangalia Mass II (Nos. 93-C-362, et al.). NL has been served with
asserted claims on behalf of approximately 2,800 plaintiffs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Valhi's 1996 Annual Meeting of Stockholders was held on May 10, 1996.
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 98% of the 114.1 million common shares eligible to
vote at the Annual Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 - NL Industries, Inc. Variable Compensation Plan - incorporated by
reference to Exhibit A of NL's Proxy Statement on Schedule 14A
(File No. 1-640) for the annual shareholders meeting held May 8,
1996.
10.1 - 1989 Long Term Performance Incentive Plan of NL Industries, Inc.
- incorporated by reference to Exhibit B of NL's Proxy Statement
on Schedule 14A (File No. 1-640) for the annual shareholders
meeting held May 8, 1996.
27.1 - Financial Data Schedule for the six-month period ended June 30,
1996.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended June 30, 1996 and the month
of July 1996:
April 23, 1996 - Reported Items 5 and 7.
May 10, 1996 - Reported Items 5 and 7.
June 5, 1996 - Reported Items 5 and 7.
July 25, 1996 - 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 August 2, 1996 By /s/ William C. Timm
------------------ ------------------------------
William C. Timm
Vice President - Finance and
Treasurer
(Chief Financial Officer)
Date August 2, 1996 By /s/ J. Thomas Montgomery, Jr.
------------------ -----------------------------
J. Thomas Montgomery, Jr.
Vice President and Controller
(Chief Accounting Officer)