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, 1997 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: (972) 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, 1997: 114,568,214.
VALHI, INC. AND SUBSIDIARIES
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1996
and June 30, 1997 3-4
Consolidated Statements of Operations -
Three months and six months ended June 30, 1996
and 1997 5
Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 1997 6
Consolidated Statements of Cash Flows -
Six months ended June 30, 1996 and 1997 7-8
Notes to Consolidated Financial Statements 9-23
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 24-33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 34
Item 4. Submission of Matters to a Vote of Security Holders. 35
Item 6. Exhibits and Reports on Form 8-K. 35-36
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS DECEMBER 31, JUNE 30,
1996 1997
Current assets:
Cash and cash equivalents $ 255,679 $ 394,616
Marketable securities 142,478 148,810
Accounts and other receivables 155,430 186,338
Refundable income taxes 9,414 4,037
Receivable from affiliates 13,931 16,126
Inventories 251,597 200,108
Prepaid expenses 7,537 6,574
Deferred income taxes 1,597 1,358
Total current assets 837,663 957,967
Other assets:
Marketable securities 51,328 188,313
Investment in and advances to
joint ventures 196,697 198,981
Loans and notes receivable 3,240 91,036
Mining properties 36,441 31,880
Prepaid pension cost 25,313 23,703
Goodwill 258,359 248,548
Deferred income taxes 223 222
Other 45,479 35,419
Total other assets 617,080 818,102
Property and equipment:
Land 37,538 18,275
Buildings 189,875 152,076
Equipment 610,545 506,242
Construction in progress 15,723 5,560
853,681 682,153
Less accumulated depreciation 163,442 116,481
Net property and equipment 690,239 565,672
$2,144,982 $2,341,741
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY DECEMBER 31, JUNE 30,
1996 1997
Current liabilities:
Notes payable $ 38,732 $ 23,168
Current long-term debt 235,648 182,700
Accounts payable 75,307 54,758
Accrued liabilities 127,935 119,355
Payable to affiliates 47,387 15,501
Income taxes 8,148 8,919
Deferred income taxes 30,523 35,474
Total current liabilities 563,680 439,875
Noncurrent liabilities:
Long-term debt 844,468 1,057,585
Accrued pension cost 59,215 53,984
Accrued OPEB cost 56,257 53,539
Accrued environmental costs 109,908 131,977
Deferred income taxes 178,049 194,044
Other 29,237 27,740
Total noncurrent liabilities 1,277,134 1,518,869
Minority interest 249 249
Stockholders' equity:
Common stock 1,248 1,252
Additional paid-in capital 35,258 37,647
Retained earnings 282,766 285,717
Adjustments:
Marketable securities 65,105 149,414
Currency translation (6,210) (17,034)
Pension liabilities (3,160) (3,160)
Treasury stock (71,088) (71,088)
Total stockholders' equity 303,919 382,748
$2,144,982 $2,341,741
Commitments and contingencies (Note 1)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30,
1996* 1997 1996* 1997
Revenues and other income:
Net sales $284,890 $280,221 $546,541 $545,526
Other, net 12,502 23,276 25,044 39,977
297,392 303,497 571,585 585,503
Costs and expenses:
Cost of sales 212,247 212,264 399,538 417,031
Selling, general and 49,153 52,034 98,931 129,686
administrative
Interest 24,297 30,614 49,105 61,273
285,697 294,912 547,574 607,990
11,695 8,585 24,011 (22,487)
Equity in earnings (losses) of:
Waste Control Specialists (2,724) (2,418) (5,482)
(1,267)
Amalgamated Sugar Company 976 - 4,573 -
Income (loss) before income 11,404 5,861 26,166 (27,969)
taxes
Provision for income taxes 3,602 3,205 7,433 (7,493)
(benefit)
Minority interest 2,299 20 4,620 28
Income (loss) from continuing
operations 5,503 2,636 14,113 (20,504)
Discontinued operations 3,247 19,742 (11,051) 35,413
Extraordinary item -
Net income $ 8,750 $ 21,984 $ 3,062 $ 14,515
Earnings (loss) per common share:
Continuing operations $ .05 .02 $ .12 $ (.18)
Discontinued operations .03 .17 (.09) .31
Extraordinary item - - - -
Net income $ .08 $ .19 $ .03 $ .13
Cash dividends per share $ .05 $ .05 $ .10 $ .10
Weighted average common shares 114,639 115,012 114,604 114,902
outstanding
*Reclassified.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
Balance at December 31, $1,248 $35,258 $282,766
1996
Net income - - 14,515
Dividends - - (11,564)
Adjustments, net - - -
Other, net 4 2,389 -
Balance at June 30, 199 $1,252 $37,647 $285,717
ADJUSTMENTS TOTAL
MARKETABLE CURRENCY PENSION TREASURY STOCKHOLDERS'
SECURITIES TRANSLATION LIABILITIES STOCK EQUITY
Balance at December
31, 1996 $ 65,105 $ (6,210) $(3,160) $(71,088)$303,919
Net income - - - 14,515
Dividends - - - - (11,564)
Adjustments,
net 84,309 (10,824) - - 73,485
Other, net - - - - 2,393
Balance at June 30,
1997 $149,414 $(17,034) $(3,160) $(71,088)$382,748
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(IN THOUSANDS)
1996* 1997
Cash flows from operating activities:
Net income $ 3,062 $ 14,515
Depreciation, depletion and amortization 32,345 31,482
Noncash interest expense 16,528 18,245
Change in accounting principle - 30,000
Deferred income taxes (6,177) (13,403)
Minority interest 4,620 28
Other, net (7,240) (7,391)
Equity in (earnings) losses of:
Discontinued operations 11,051 (35,413)
Waste Control Specialists 2,418 5,482
Amalgamated Sugar Company (4,573) -
52,034 43,545
Medite, net 12,595 (39,000)
Sybra, net 4,508 (1,078)
Amalgamated Sugar Company, net 21,388 -
Change in assets and liabilities:
Accounts and notes receivable (38,607) (41,392)
Inventories 9,888 30,055
Accounts payable and accrued liabilities (14,979) (1,971)
Other, net (11,757) 13,568
Net cash provided by operating 35,070 3,727
activities
Cash flows from investing activities:
Capital expenditures (33,027) (18,750)
Purchases of:
Marketable securities - (6,000)
Minority interest (16,971) -
Investment in Waste Control Specialists (10,000) (3,000)
Loans to affiliates:
Loans (7,400) (42,100)
Collections 10,400 18,100
Other loans and notes receivable:
Loans - (200,600)
Collections - 112,411
Pre-close dividend from Amalgamated Sugar - 11,518
Company
Medite, net (8,397) 34,733
Sybra, net (2,126) 53,929
Amalgamated Sugar Company, net (7,225) -
Other, net 1,839 6,417
Net cash used by investing activitie (72,907) (33,342)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(IN THOUSANDS)
1996* 1997
Cash flows from financing activities:
Indebtedness:
Borrowings $ 92,712 $ 390,000
Principal payments (44,135) (221,682)
Deferred financing costs paid - (3,931)
Repayment of loan from affiliate - (7,244)
Valhi dividends paid (11,528) (11,564)
Distributions to minority interest (5,126) -
Medite, net (2,228) (9)
Sybra, net (2,329) 22,381
Amalgamated Sugar Company, net (14,624) -
Other, net 886 2,580
Net cash provided by financing 13,628 170,531
activities
Net change (24,209) 140,916
Currency translation (2,030) (1,979)
Cash and equivalents at beginning of period 170,908 255,679
Cash and equivalents at end of period $144,669 $ 394,616
Supplemental disclosures - cash paid for:
Interest, net of amounts capitalized $ 42,583 $ 43,860
Income taxes, net 17,066 33,098
*Reclassified.
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, 1996 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 1997 and the consolidated statements of
operations, cash flows and stockholders' equity for the interim periods ended
June 30, 1996 and 1997 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, 1996 (the "1996 Annual Report"). Certain 1996 amounts have been
reclassified to conform to the 1997 presentation. See Notes 14 and 15.
The Company adopted the recognition requirements of Statement of Position
("SOP") No. 96-1, "Environmental Remediation Liabilities" in the first quarter
of 1997. The new rule, among other things, expands the types of costs that must
be considered in determining environmental remediation accruals. As a result of
adopting the new SOP, the Company recognized a noncash cumulative pre-tax charge
of $30 million ($19.5 million, or $.17 per share, net-of-tax) related to
environmental matters at 56%-owned NL Industries, Inc., which is comprised
primarily of estimated future undiscounted expenditures (principally legal and
professional fees) associated with managing and monitoring existing
environmental remediation sites. Previously, such expenditures were expensed as
incurred.
The extraordinary loss relates to the write-off of unamortized deferred
financing costs resulting from the early retirement of $27.6 million of Valcor's
Senior Notes in connection with the tender offer completed in April 1997. See
Note 11.
Commitments and contingencies are discussed in Notes 14 and 15,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Legal Proceedings" and the 1996 Annual Report.
Contran Corporation holds, directly or through subsidiaries, approximately
92% of Valhi's outstanding common stock.
NOTE 2 - BUSINESS SEGMENT INFORMATION:
OPERATIONS PRINCIPAL ENTITIES % OWNED
Chemicals NL Industries, Inc. 56%
Component products CompX International Inc. 100%
Waste management Waste Control Specialists 50%
NL's chemicals operations are conducted through its subsidiaries Kronos,
Inc. (titanium dioxide pigments or "TiO2") and Rheox, Inc. (specialty
chemicals). The Company's component products (CompX) subsidiary is owned by
Valcor, Inc., a wholly-owned subsidiary of Valhi. Each of NL (NYSE: NL) and
Valcor file periodic reports pursuant to the Securities Exchange Act of 1934, as
amended. The results of operations of Valcor's wholly-owned building products
subsidiary, conducted by Medite Corporation, and Valcor's wholly-owned fast food
subsidiary, conducted by Sybra, Inc., are presented as discontinued operations.
See Note 14. The refined sugar operations conducted by The Amalgamated Sugar
Company in 1996 are presented on the equity method. See Note 15.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1997 1996 1997
(IN MILLIONS) (IN MILLIONS)
Net sales:
Chemicals $263.2 $252.7 $503.6 $492.2
Component products 21.7 27.5 42.9 53.3
$284.9 $280.2 $546.5 $545.5
Operating income:
Chemicals $ 30.8 $ 23.9 $ 67.4 $ 37.4
Component products 5.0 6.9 9.4 13.2
35.8 30.8 76.8 50.6
General corporate items:
Securities earnings 2.4 16.6 5.1 31.3
Expenses, net (2.1) (8.2) (8.8) (43.1)
Interest expense (24.3) (30.6) (49.1) (61.3)
11.8 8.6 24.0 (22.5)
Equity in earnings (losses) of:
Waste Control Specialists (1.3) (2.8) (2.4) (5.5)
Amalagamated Sugar Company 1.0 - 4.6 -
Income (loss) before income $ 11.5 $ 5.8 $ 26.2 $(28.0)
taxes
SIX MONTHS ENDED JUNE 30,
DEPRECIATION,
DEPLETION AND CAPITAL
AMORTIZATION EXPENDITURES
1996 1997 1996 1997
(IN MILLIONS)
Chemicals $30.6 $29.6 $31.3 $16.3
Component products 1.4 1.5 1.4 1.9
Other .3 .4 .3 .5
$32.3 $31.5 $33.0 $18.7
NOTE 3 - 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 their dilutive effect is not material. The
Company will retroactively adopt Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share," effective December 31, 1997. Basic
earnings per share pursuant to SFAS No. 128 will be equivalent to earnings per
share presented herein, and diluted earnings per share pursuant to SFAS No. 128
is not expected to be materially different from basic earnings per share.
NOTE 4 - MARKETABLE SECURITIES:
DECEMBER 31, JUNE 30,
1996 1997
(IN THOUSANDS)
Current asset (available-for-sale) -
Dresser Industries common stock $142,478 $148,810
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC $ 34,070 $163,311
Other securities 17,258 25,002
$ 51,328 $188,313
At June 30, 1997, Valhi held 5.5 million shares of Dresser common stock with
a quoted market price of $37.25 per share, or an aggregate market value of
approximately $203 million (cost - $44 million). Valhi's LYONs are exchangeable
at any time, at the option of the LYONs holder, for such Dresser shares, and the
carrying value of the Dresser stock is limited to the accreted LYONs obligation.
See Note 11.
The Company's investment in The Amalgamated Sugar Company LLC (cost - $34
million) is discussed in Note 15. The aggregate cost of other securities
(primarily common stocks) is approximately $22 million at June 30, 1997
(December 31, 1996 - $16 million).
NOTE 5 - INVENTORIES:
DECEMBER 31, JUNE 30,
1996 1997
(IN THOUSANDS)
Raw materials:
Chemicals $ 43,284 $ 36,514
Component products 2,556 2,140
Building products 4,306 55
Fast food 1,406 -
51,552 38,709
In process products:
Chemicals 10,356 11,456
Component products 4,974 4,984
Building products 83 -
15,413 16,440
Finished products:
Chemicals 142,956 108,450
Component products 3,300 3,356
Building products 1,096 106
147,352 111,912
Supplies 37,280 33,047
$251,597 $200,108
NOTE 6 - ACCRUED LIABILITIES:
DECEMBER 31, JUNE 30,
1996 1997
(IN THOUSANDS)
Employee benefits $ 47,331 $ 37,222
Interest 11,157 10,583
Environmental costs 6,126 9,115
Plant closure costs 7,669 5,604
Miscellaneous taxes 5,262 5,599
Other 50,390 51,232
$127,935 $119,355
NOTE 7 - ACCOUNTS WITH AFFILIATES:
DECEMBER 31, JUNE 30,
1996 1997
(IN THOUSANDS)
Receivable from affiliates:
Demand loan to Contran $ - $16,000
Net dividend receivable from 11,518 -
Amalgamated
Other 2,413 126
$13,931 $16,126
Payable to affiliates:
Income taxes payable to Contran $29,633 $ 5,279
Demand loan from Contran 7,244 -
Tremont Corporation 3,529 3,157
Louisiana Pigment Company 6,677 7,129
Other, net 304 (64)
$47,387 $15,501
NOTE 8 - LOANS AND NOTES RECEIVABLE:
DECEMBER 31, JUNE 30,
1996 1997
(IN THOUSANDS)
Snake River Sugar Company $ - $80,000
Snake River Farms II - 6,689
Other 4,740 5,759
4,740 92,448
Less current portion 1,500 1,412
Noncurrent portion $3,240 $91,036
Loans to Snake River Sugar Company and Snake River Farms II are discussed in
Note 15. At June 30, 1997, other loans and notes receivable include a $1.5
million loan to the other 50%-owner of Waste Control Specialists which is
collateralized by such owner's interest in Waste Control Specialists.
NOTE 9 - OTHER NONCURRENT ASSETS:
DECEMBER 31, JUNE 30,
1996 1997
(IN THOUSANDS)
Investment in joint ventures:
TiO2 manufacturing joint venture $179,195 $175,688
Waste Control Specialists LLC 15,218 12,736
Other 2,284 2,557
196,697 190,981
Loan to Waste Control Specialists LLC - 8,000
$196,697 $198,981
Franchise fees and other intangible $ 19,215 $ 6,101
assets
Deferred financing costs 15,273 16,264
Property held for sale 4,681 7,457
Other 6,310 5,597
$ 45,479 $ 35,419
In March 1997, the Company entered into an unsecured $10 million revolving
credit facility with Waste Control Specialists. Borrowings by Waste Control
Specialists bear interest at prime plus 1% and are due no later than December
31, 1998. Also in March 1997, Waste Control Specialists granted Valhi the
option to acquire an additional 5% ownership interest in Waste Control
Specialists for $2.5 million.
NOTE 10 - OTHER NONCURRENT LIABILITIES:
DECEMBER 31, JUNE 30,
1996 1997
(IN THOUSANDS)
Insurance claims and expenses $ 13,380 $13,317
Employee benefits 12,050 11,022
Deferred income - 1,540
Other 3,807 1,861
$ 29,237 $27,740
NOTE 11 - NOTES PAYABLE AND LONG-TERM DEBT:
DECEMBER 31, JUNE 30,
1996 1997
(IN THOUSANDS)
Notes payable:
Kronos - non-U.S. bank credit
agreements $ 25,732 $ 23,168
(DM 40,000 and DM 40,000)
Valhi - bank revolver 13,000 $ -
$ 38,732 $ 23,168
Long-term debt:
Valhi: LYONs $ 142,478 148,810
Snake River Sugar Company - 250,000
Valcor Senior Notes 98,910 68,638
NL Industries:
Senior Secured Notes 250,000 250,000
Senior Secured Discount Notes 149,756 159,490
Deutsche mark bank credit facility
(DM 539,971 and DM 288,322) 347,362 166,996
Joint venture term loan 57,858 50,143
Rheox bank credit facility 14,659 140,000
Other 9,411 5,964
Total NL Industries 829,046 772,593
Other:
Medite term loan 3,727 -
Sybra bank credit agreements 1,081 -
Sybra capital leases 4,540 -
Other 334 244
9,682 244
1,080,116 1,240,285
Less current maturities 235,648 182,700
$ 844,468 $1,057,585
Valhi's loans from Snake River Sugar Company are discussed in Note 15. In
January 1997, NL refinanced the Rheox bank term loan and used the net cash
proceeds, along with other available funds, to prepay a portion of the DM bank
credit facility. Medite's term loan was assumed by the purchaser of its Oregon
medium density fiberboard facility in February 1997. Sybra's bank indebtedness
was repaid and terminated in April 1997 immediately prior to Valcor's sale of
Sybra's common stock, and the purchaser of Sybra's common stock assumed Sybra's
capital lease obligations. See Note 14. In April 1997, the Company completed a
tender offer whereby Valcor purchased $27.6 million principal amount of Valcor
Senior Notes at par value, including $1.1 million held by Valhi. In August
1997, Valcor initiated (i) a consent solicitation to amend certain provisions of
the Valcor Senior Note Indenture and (ii) a tender offer to purchase the
remaining outstanding Valcor Senior Notes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Rheox has entered into interest rate collar agreements which effectively
set minimum and maximum U.S. LIBOR interest rates of 5.25% and 8%, respectively,
on $50 million principal amount of its variable-rate bank term loan through May
2001. The margin on such borrowings ranges from .75% to 1.75%, depending upon
the level of a certain Rheox financial ratio. Rheox is exposed to interest rate
risk in the event of nonperformance by the other parties to the agreements,
although Rheox does not anticipate nonperformance by such parties. At June 30,
1997, the estimated fair value of such agreements was estimated to be a $100,000
receivable. Such fair value represents the amount Rheox would receive if it
terminated the collar agreements at that date, and is based upon quotes obtained
from the counter party financial institutions.
NOTE 12 - OTHER INCOME:
SIX MONTHS ENDED
JUNE 30,
1996 1997
(IN THOUSANDS)
Securities earnings:
Interest and dividends $ 5,037 $31,133
Securities transactions 122 166
5,159 31,299
Currency transactions, net 3,918 2,785
Technology fee income 5,674 -
Pension curtailment gain 4,791 -
Litigation settlement gain 2,756 -
Other, net 2,746 5,893
$25,044 $39,977
NOTE 13 - PROVISION FOR INCOME TAXES ATTRIBUTABLE TO CONTINUING OPERATIONS:
SIX MONTHS ENDED
JUNE 30,
1996 1997
(IN MILLIONS)
Expected tax expense (benefit) $ 9.2 $ (9.8)
Non-U.S. tax rates (2.0) (.5)
Incremental tax and rate differences on
equity in - (12.2)
earnings of non-tax group companies
U.S. state income taxes, net 1.1 1.4
Change in NL's deferred income tax
valuation allowance (1.1) 12.8
No tax benefit for goodwill amortization 1.5 1.6
Other, net (1.3) (.8)
$ 7.4 $ (7.5)
NOTE 14 - DISCONTINUED OPERATIONS:
The components of discontinued operations are presented in the following
table.
SIX MONTHS ENDED
JUNE 30,
1996 1997
(IN THOUSANDS)
Medite Corporation $(12,734) $15,667
Sybra, Inc. 1,683 19,746
$(11,051) $35,413
Medite. In the fourth quarter of 1996, Medite Corporation sold its timber
and timberlands and its Irish medium density fiberboard ("MDF") subsidiary. In
February 1997 Medite sold its Oregon MDF facility for approximately $36 million
cash consideration (before fees and expenses) plus the assumption of
approximately $3.7 million of Medite indebtedness. Medite's two remaining
facilities have been closed, and Medite expects to complete the sale of such
facilities later in the year. Accordingly, the accompanying financial
statements present the results of operations of Medite's building products
business segment as discontinued operations for all periods presented.
Medite's first quarter 1996 results include a pre-tax charge of $24 million
for the estimated costs of permanently closing its New Mexico MDF plant. Medite
also recognized a $13 million pre-tax charge in the fourth quarter of 1996 for
the estimated costs of permanently closing the stud lumber and veneer
facilities. Approximately $26 million of such charges represent non-cash costs,
most of which related 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 respective closure plans. Approximately $11
million of such charges represent workforce, environmental and other estimated
cash costs associated with the closure of the facilities, of which approximately
$5 million had been paid at June 30, 1997 ($3 million paid at December 31,
1996).
Condensed income statement data for Medite is presented below. The $24
million pre-tax New Mexico MDF plant closure charge is included in Medite's
operating income for 1996 because the decision to close the New Mexico MDF
facility occurred prior to the decision to permanently dispose of the entire
business segment. The gain on disposal in 1997 relates to the first quarter
sale of the Oregon MDF facility. Interest expense represents interest on
indebtedness of Medite and its subsidiaries.
SIX MONTHS ENDED
JUNE 30,
1996 1997
(IN MILLIONS)
Operations of Medite:
Net sales $ 94.6 $20.5
Operating income (loss) $(16.9) $ 2.8
Interest expense and other, net (4.1) (.2)
Pre-tax income (loss) (21.0) 2.6
Income tax expense (benefit) (8.3) 1.0
(12.7) 1.6
Net gain on disposal:
Pre-tax gain - 22.3
Income tax expense - 8.2
- 14.1
$(12.7) $15.7
Condensed balance sheets for Medite, included in the Company's consolidated
balance sheets, are presented below.
DECEMBER 31, JUNE 30,
1996 1997
(IN MILLIONS)
Current assets $21.2 $13.1
Property and equipment, net 18.2 .4
Property held for sale and other assets 4.8 6.8
$44.2 $20.3
Current liabilities $17.6 $ 8.8
Long-term debt 3.7 .1
Deferred income taxes 1.6 3.7
Other liabilities 3.0 3.1
Stockholder's equity (*) 18.3 4.6
$44.2 $20.3
* Eliminated in consolidation.
Condensed cash flow data for Medite (excluding dividends paid to and
intercompany loans with Valcor) is presented below.
SIX MONTHS ENDED
JUNE 30,
1996 1997
(IN MILLIONS)
Cash flows from operating activities $12.6 $(39.0)
Cash flows from investing activities:
Capital expenditures (8.6) (.4)
Proceeds from disposal of assets - 35.1
Other, net .2 -
(8.4) 34.7
Cash flows from financing activities -
Indebtedness, net (2.2) -
$ 2.0 $ (4.3)
Sybra. On April 30, 1997, the Company completed the disposition of its
fast food operations conducted by Sybra. The disposition was accomplished in
two separate, simultaneous transactions. The first transaction involved the
sale of certain restaurant real estate owned by Sybra for $45 million cash
consideration. Substantially all of the net-of-tax proceeds from this
transaction were distributed to Valcor. The second transaction involved
Valcor's sale of 100% of the common stock of Sybra for $14 million cash
consideration plus the repayment by the purchaser of approximately $23.8 million
of Sybra's intercompany indebtedness owed to Valcor. Under certain conditions,
the purchaser of Sybra's common stock is obligated to pay additional contingent
consideration of approximately $2 million to Valcor in the future. Accordingly,
the accompanying financial statements present the results of operations of
Sybra's fast food operations as discontinued operations for all periods
presented.
Condensed income statement data for Sybra through the date of disposal
is presented below. Interest expense represents interest on indebtedness of
Sybra. The gain on disposal includes both Sybra's sale of its restaurant real
estate and Valcor's sale of Sybra's common stock. The provision for income
taxes applicable to the pre-tax gain on disposal varies from the 35% federal
statutory rate due principally to the excess of tax basis over book basis of the
common stock of Sybra sold for which no deferred income tax benefit was
previously recognized.
SIX MONTHS ENDED
JUNE 30,
1996 1997
(IN MILLIONS)
Operations of Sybra:
Net sales $59.6 $37.9
Operating income $ 4.0 $ 1.7
Interest expense and other, net (1.3) (.6)
Pre-tax income 2.7 1.1
Income tax expense 1.0 .5
1.7 .6
Net gain on disposal:
Pre-tax gain - 23.2
Income tax expense - 4.1
- 19.1
$ 1.7 $19.7
A condensed balance sheet for Sybra at December 31, 1996, included in the
Company's consolidated balance sheet, are presented below.
AMOUNT
(IN MILLIONS)
Current assets $ 6.0
Intangible assets 16.0
Property and equipment, net 53.6
Other assets -
$75.6
Current liabilities $14.4
Long-term debt 4.7
Loan payable to Valcor (*) 20.0
Other liabilities 1.4
Stockholder's equity (*) 35.1
$75.6
(*) Eliminated in consolidation
Condensed cash flow data for Sybra (excluding dividends paid to and
intercompany loans with Valcor, but including the net proceeds from Valcor's
sale of Sybra's common stock) is presented below.
SIX MONTHS ENDED
JUNE 30,
1996 1997
(IN MILLIONS)
Cash flows from operating activities $ 4.5 $ (1.1)
Cash flows from investing activities:
Capital expenditures (2.2) (1.8)
Proceeds on disposal of assets - 55.3
Other, net .1 .4
(2.1) 53.9
Cash flows from financing activities -
Indebtedness, net
(2.3) 22.4
$ .1 $75.2
NOTE 15 - TRANSFER OF CONTROL OF THE AMALGAMATED SUGAR COMPANY:
On January 3, 1997, the Company completed the transfer of control of the
refined sugar operations previously conducted by the Company's wholly-owned
subsidiary, The Amalgamated Sugar Company, to Snake River Sugar Company, an
Oregon agricultural cooperative formed by certain sugarbeet growers in
Amalgamated's areas of operations. Pursuant to the transaction, which by its
terms was to be effective December 31, 1996 for both financial reporting and
income tax purposes, Amalgamated contributed substantially all of its net assets
to the Amalgamated Sugar Company LLC, a limited liability company controlled by
Snake River, on a tax-deferred basis in exchange for a non-voting ownership
interest in the LLC.
Also as part of the transaction, Snake River made certain loans to Valhi
aggregating $250 million in January 1997. These loans bear interest at a
weighted average fixed interest rate of 9.4%, are collateralized by the
Company's interest in the LLC and are due in January 2027. Currently, these
loans are nonrecourse to Valhi. See Note 11. Under certain conditions, up to
$37.5 million of such loans may become recourse to Valhi.
In connection with the transaction, Valhi provided $180 million of loans to
Snake River in January 1997, of which $100 million was prepaid in May 1997 when
Snake River obtained $100 million of third-party term loan financing. Valhi's
remaining $80 million loan to Snake River is unsecured, is subordinate to Snake
River's third-party term loan and bears interest at a fixed rate of 10.99%
through 1998 and 12.99% for 1999 through 2010, with all principal due in 2010.
Snake River's third-party term loan allows Snake River to pay $400,000 to Valhi
for monthly installments for debt service on Valhi's loan to Snake River, and
also allows for an additional annual payment by Snake River to Valhi for debt
service based on Snake River's excess cash flow, as defined. Once Valhi has
received $30 million aggregate debt service payments from Snake River, Valhi is
required to pledge $5 million in cash equivalents or marketable securities to
collateralize Snake River's third-party term loan; such collateral will be
released by the lender once the outstanding principal balance of Snake River's
third-party term loan has been reduced to $50 million. Snake River's third-
party term lender has given Valhi the option to completely buy-out the third-
party term lender's position at any time for an amount equal to the then-
outstanding principal balance of the loan plus a prepayment penalty, as defined.
Also in connection with the transaction, Valhi provided a $12 million loan to
Snake River Farms II, a subsidiary of Snake River, in connection with the
transaction. This loan, as amended, bears interest at a fixed rate of 10%, is
due no later than January 2000, and is guaranteed by Snake River. See Note 8.
The Company and Snake River share in distributions from the LLC up to an
aggregated $26.7 million per year, with a preferential 95% going to the Company.
In addition, the Company may, at its option, require the LLC to redeem the
Company's interest in the LLC beginning in 2010, and the LLC has the right to
redeem the Company's interest in the LLC beginning in 2027. The redemption
price is generally $250 million plus the amount of certain undistributed income
allocable to the Company. In the event the Company requires the LLC to redeem
the Company's interest in the LLC, Snake River has the right to call Valhi's
$250 million loans from Snake River, and under the terms of the LLC Company
Agreement Snake River would contribute to the LLC the cash received from calling
such loans to satisfy all or a substantial portion of the redemption price.
The LLC Company Agreement contains certain restrictive covenants intended
to protect the Company's interest in the LLC, including limitations on capital
expenditures and additional indebtedness of the LLC. The Company also has the
ability to temporarily take control of the LLC, via election of a majority of
the members of the LLC's Management Committee, in the event the Company's
cumulative "base distributions" from the LLC, as defined, become $10 million in
arrears and no default exists under Valhi's $250 million loans from Snake River.
Once any such arrearages have been paid, the Company ceases to have any
representation on the Management Committee. In addition, if Snake River's
third-party term loan has, by its terms, been placed into default, Valhi will be
able to exercise its ability to temporarily take control of the LLC only if
Valhi loans additional funds to Snake River in amounts up to the next three
years of debt service of Snake River's third-party term loan. Snake River will
pledge such funds to the third-party term lender to collateralize Snake River's
third-party term loan; such funds will be released by the third-party term
lender, and repaid to Valhi, when either (i) Snake River's third-party term loan
has been completely repaid or (ii) no default exists under the third-party term
loan and Valhi has relinquished its temporary control of the LLC.
Because the Company no longer controls the operations contributed to the
LLC, the Company ceased consolidating the net assets, results of operations and
cash flows of such business effective December 31, 1996. At December 31, 1996,
the Company reported the net assets contributed to the LLC at cost. Beginning
in 1997, the Company commenced reporting the cash distributions received from
the LLC (approximately $12.7 million in the first six months of 1997) as
dividend income. The amount of such future distributions is dependent upon,
among other things, the future performance of the LLC's operations. For
comparative purposes, Amalgamated's 1996 results of operations and cash flows
are reported by the equity method. Because the Company receives preferential
distributions from the LLC and has the right to require the LLC to redeem its
interest in the LLC for a fixed and determinable amount beginning at a fixed and
determinable date, the Company has classified its investment in the LLC as an
available-for-sale marketable security carried at estimated fair value at June
30, 1997. See Note 4. In determining the estimated fair value of the Company's
interest in the LLC, the Company considers, among other things, the outstanding
balance of the Company's loans to Snake River and the outstanding balance of the
Company's loans from Snake River.
Condensed income statement data for Amalgamated for the six months ended
June 30, 1996 is presented below.
AMOUNT
(IN MILLIONS)
Net sales:
Refined sugar $216.3
By-products and other 19.3
$235.6
Operating income:
FIFO basis $ 17.3
LIFO adjustment (4.7)
LIFO basis 12.6
Interest expense and other, net (5.2)
Pre-tax income 7.4
Income tax expense 2.8
Net income $ 4.6
Condensed cash flow data for Amalgamated for the six months ended June 30,
1996 (excluding dividends paid to Valhi) is presented below.
AMOUNT
(IN MILLIONS)
Cash flows from operating activities:
Before changes in assets and liabilities $ 9.8
Changes in assets and liabilities 11.6
21.4
Cash flows from investing activities -
Capital expenditures (7.2)
Cash flows from financing activities -
Indebtedness, net (14.6)
$ (.4)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
The Company reported income from continuing operations of $2.6 million, or
$.02 per share, for the second quarter of 1997 compared to income of $5.5
million, or $.05 per share, in the second quarter of 1996. For the first six
months of 1997, the Company reported a loss from continuing operations of $20.5
million, or $.18 per share, compared to income of $14.1 million, or $.12 per
share, in the first six months of 1996. The 1997 year-to-date loss includes a
$30 million pre-tax charge ($19.5 million, or $.17 per share, net-of-tax)
related to adoption of a new accounting standard regarding accounting for NL
Industries's environmental remediation liabilities. See Note 1 to the
Consolidated Financial Statements. Also contributing to the lower level of
earnings in 1997 was lower average selling prices for TiO2 at NL. Discontinued
operations include both the results of operations of Medite Corporation and
Sybra, Inc., and in 1997 include (i) a first quarter after-tax gain on disposal
of $14 million ($22 million pre-tax) related to the sale of Medite's Oregon MDF
facility and (ii) a second quarter after-tax gain on disposal of $19 million
($23 million pre-tax) related to the disposition of Sybra's fast food
operations. See Note 14 to the Consolidated Financial Statements.
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, the ultimate resolution of pending
litigation and possible future litigation, completion of pending asset/business
unit dispositions and other risks and uncertainties as discussed in this
Quarterly Report and the 1996 Annual Report.
CHEMICALS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
% %
1996 1997 CHANGE 1996 1997 CHANGE
(IN MILLIONS) (IN MILLIONS)
Net sales:
Kronos $228.3 $214.3 -6% $434.6 $418.7 -4%
Rheox 34.9 38.4 +10% 69.0 73.5 +7%
$263.2 $252.7 -4% $503.6 $492.2 -2%
Operating
income:
Kronos $ 20.6 $ 12.1 -41% $ 45.1 $ 15.9 -65%
Rheox 10.2 11.8 +15% 22.3 21.5 -4%
$ 30.8 $ 23.9 -23% $ 67.4 $ 37.4 -45%
Kronos' operating income in the second quarter and first six months of 1997
decreased from the comparable periods in 1996 due to lower average TiO2 selling
prices, partially offset by higher production and sales volumes. Kronos'
average TiO2 selling prices were 8% and 12% lower in the second quarter and
first six months of 1997, respectively, compared with the same periods in 1996.
However, Kronos' operating income in the second quarter of 1997 increased $8.3
million compared to the first quarter of 1997, as Kronos' average TiO2 selling
prices for the second quarter of 1997 were 3% higher than the first quarter of
1997. Selling prices at the end of the second quarter of 1997 were 1% higher
than the average for the quarter. Kronos achieved record second quarter sales
volumes, reflecting continued strong TiO2 demand, as second quarter and first
six month volumes increased 9% and 14%, respectively, from the year-earlier
periods, with higher volumes worldwide. Kronos' operating income in the second
quarter of 1997 includes a $2.7 million gain related to the sale of certain
surplus assets.
NL currently expects further increases in its TiO2 selling prices during
the second half of the year. However, NL expects its calendar 1997 TiO2
operating income to be below that of 1996, primarily because of expected lower
average selling prices for all of 1997 compared to 1996. While NL currently
expects its full-year 1997 TiO2 sales volumes will be higher than the full-year
1996 volumes, TiO2 sales volumes in the last half of 1997 are currently expected
to be lower than the first half of 1997.
Excluding a $2.7 million first quarter 1996 gain related to the reduction
of certain U.S. employee pension benefits, Rheox's sales and operating income
increased in 1997 compared to 1996 due to higher sales volumes and slightly
higher selling prices.
A significant amount of NL's sales generated from its non-U.S. operations
are denominated in currencies other than the U.S. dollar, primarily major
European currencies and the Canadian dollar, and fluctuations in the value of
the U.S. dollar relative to such other currencies decreased the dollar value of
sales in the first six months of 1997 by approximately $22 million compared to
the same period in 1996. In addition, a portion of NL's sales generated from
its non-U.S. operations are denominated in the U.S. dollar, and exchange rate
fluctuations do not impact the reported amount of net sales. However, exchange
rate fluctuations resulted in an increase in the U.S. dollar value of the
operating margins of such net sales because labor and other production costs are
generally denominated in the foreign local currency. Consequently, fluctuations
in the value of the U.S. dollar relative to other currencies increased NL's
operating income in the first six months of 1997 compared with the same period
in 1996.
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.
COMPONENT PRODUCTS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, % JUNE 30, %
1996 1997 CHANGE 1996 1997 CHANGE
(IN MILLIONS) (IN MILLIONS)
Net sales $21.7 $27.5 +26% $42.9 $53.3 +24%
Operating 5.0 6.9 +38% 9.4 13.2 +40%
income
Sales, operating income and margins increased in 1997 due primarily to
increased volumes in all three major product lines (ergonomic workstations,
drawer slides and locks). Relative changes in product mix also favorably
impacted comparisons, as 1996 sales included a relatively higher volume of
lower-margin products, including those resulting from an August 1995 business
acquisition. Lock sales were also aided by certain price increases instituted
at the beginning of 1997, which helped to partially offset increases in certain
raw material costs (primarily zinc and copper).
WASTE MANAGEMENT
Waste Control Specialists LLC, formed in November 1995, was constructing
its West Texas facility during 1995 and 1996. Waste Control Specialists
reported a loss of $5.5 million during the first six months of 1997 compared to
a loss of $2.4 million in the same period in 1996. The Company received its
first wastes for disposal in February 1997, and net sales in the first six
months of 1997 were approximately $1 million. Waste Control's loss was higher in
the first six months of 1997 as compared to the first six months of 1996 due
principally to start-up expenses associated with the West Texas facility, as
well as larger expenditures in conjunction with the pursuit of permits for the
treatment, storage and disposal of low-level and mixed radioactive wastes.
The Texas Department of Health has issued a draft license to Waste Control
Specialists covering the treatment and storage (but not disposal) of low-level
and mixed radioactive wastes. A public comment period on the draft license has
expired, and in August 1997 an administrative judge will decide if any of the
five groups opposing issuance of the license has proper standing. Should
standing be granted to one or more opposing parties, hearings would be
conducted. If standing is not granted, the license is currently expected to be
issued shortly thereafter. While Waste Control Specialists currently believes
the license will be granted, there can be no assurance that any such license
will be issued by the Texas Department of Health.
OTHER
EQUITY IN EARNINGS OF AMALGAMATED. See Note 15 to the Consolidated
Financial Statements.
General corporate items. Securities earnings increased in 1997 due to
distributions received from The Amalgamated Sugar Company LLC, which are
reported as dividend income, as well as a higher level of funds available for
investment, including interest income earned on debt financing Valhi provided to
Snake River Sugar Company and Snake River Farms II in early 1997 and funds
generated from the Medite and Sybra dispositions. See Notes 14 and 15 to the
Consolidated Financial Statements. General corporate expenses in the first
quarter of 1997 include NL's $30 million pre-tax charge related to adoption of a
new accounting standard regarding environmental remediation liabilities. See
Note 1 to the Consolidated Financial Statements. Net general corporate expenses
in the second quarter of 1996 include a $2.8 million gain related to the
settlement of certain litigation in which NL was a plaintiff, and in the second
quarter of 1997 include $1.5 million of expenses related to the Amalgamated
Sugar Company LLC/Snake River Sugar Company transactions.
Interest expense. Interest expense increased due primarily to Valhi's $250
million in loans from Snake River Sugar Company. See Note 15 to the
Consolidated Financial Statements. At June 30, 1997, approximately $877 million
of consolidated indebtedness, principally publicly-traded debt and Valhi's loans
from Snake River Sugar Company, bears interest at fixed rates averaging 10.7%.
The weighted average interest rate on about $386 million of outstanding variable
rate borrowings at June 30, 1997 was 6.7%, compared to 5.3% at December 31, 1996
and 6.4% at year-end 1995. The weighted average interest rate on outstanding
variable rate borrowings increased from December 31, 1996 to June 30, 1997 due
primarily to NL's January 1997 refinancing of certain indebtedness discussed
below, in which NL refinanced Rheox's term loan and used the net cash proceeds,
along with other available funds, to prepay a portion of Kronos' DM credit
facility. The overall interest rate on the Rheox term loan is higher than the
overall interest rate on the DM credit facility, and the DM LIBOR interest rate
margin on outstanding borrowings under the DM credit facility was increased in
conjunction with the January 1997 prepayment.
Minority interest. Minority interest in earnings in 1996 consisted
principally of NL dividends paid to stockholders other than Valhi. NL's Board of
Directors suspended quarterly dividends in the fourth quarter of 1996.
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. As
discussed in Note 15 to the Consolidated Financial Statements, The Amalgamated
Sugar Company's results of operations in 1996 are presented on the equity
method. Amalgamated is a member of the consolidated U.S. tax group of which
Valhi and Contran are members, and consequently the Company did not provide any
incremental income taxes related to such earnings. Certain subsidiaries,
including NL, are not members of the consolidated U.S. tax group and the Company
does provide incremental income taxes on such earnings. Both of these factors
impact the Company's overall effective tax rate. See Note 13 to the
Consolidated Financial Statements.
Extraordinary item. See Note 1 to the Consolidated Financial Statements.
Discontinued operations. See Note 14 to the Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES:
Cash flows from operating activities. Cash flows from operating activities
attributable to continuing operations before changes in assets and liabilities
declined from $52 million in the first six months of 1996 to $44 million in the
first six months of 1997 primarily due to lower operating results at NL.
Changes in assets and liabilities generally result from the timing of
production, sales, purchases and income tax payments.
Cash flows from investing and financing activities. Capital expenditures
attributable to continuing operations in calendar 1997 are expected to decline
to approximately $42 million from $70 million in calendar 1996 due to lower
planned spending by NL.
During the first six months of 1997, Valhi (i) loaned $180 million to Snake
River Sugar Company and $12.1 million to Snake River Farms II, (ii) collected
$105.4 million principal amount on such loans, (iii) received an $11.5 million
pre-closing dividend from Amalgamated, (iv) contributed the remaining $3 million
capital contribution to Waste Control Specialists, (v) loaned $8 million to
Waste Control Specialists pursuant to a $10 million revolving facility due
December 1998 and (vi) purchased $6 million of certain marketable securities.
Net borrowings in 1997 include $250 million borrowed from Snake River Sugar
Company and the impact of NL's refinancing of its Rheox term loan and prepayment
of a portion of the DM credit facility as discussed below. At June 30, 1997,
unused credit available under existing credit facilities approximated $121
million.
Cash flows from discontinued operations. Condensed cash flow data for
Medite and Sybra are included in Note 14 to the Consolidated Financial
Statements. Under the terms of Internal Revenue Code and similar state
regulations regarding the timing of estimated tax payments, Valcor was not
required to pay income taxes related to Medite's 1996 sales of its timber and
timberlands and Irish MDF subsidiary until the first quarter of 1997, at which
time such payment (approximately $39 million) was shown as a reduction in cash
flows from operating activities even though the pre-tax proceeds from
disposition of such assets were shown as part of cash flows from investing
activities in the fourth quarter of 1996. Similarly, cash income taxes related
to Medite's February 1997 sale of the Oregon MDF facility are also shown as a
reduction in cash flows from operating activities in 1997, and cash income taxes
of approximately $4 million related to the April 1997 disposition of Sybra's
fast food operations are not required to be paid until later in 1997.
Other. At June 30, 1997, assets held for sale, recorded at estimated net
realizable value, consist principally of land, building and equipment from
Medite's former veneer facility and land from Medite's stud lumber facility and
another former Medite facility closed before 1996. The salvageable property and
equipment from the stud facility, included in assets held for sale at December
31, 1996, were sold during the first quarter of 1997 for an amount approximating
previously-estimated net realizable value.
NL Industries. Demand, supply and pricing within the TiO2 industry is
cyclical, and changes in industry economic conditions can significantly impact
NL's earnings and operating cash flows. Declining TiO2 prices unfavorably
impacted NL's operating income and cash flows from operations comparisons in
1997 with 1996. NL generated $19 million in cash flows from operating
activities before changes in assets and liabilities in the first six months of
1997, down from $43 million in the first six months of 1996. Aggregate relative
changes in NL's inventories, receivables and payables, excluding the effect of
foreign currency translation, used $49 million of net cash in the first six
months of 1996 compared to a $5 million use of net cash in the first six months
of 1997.
Average TiO2 selling prices began a downward trend in the last half of
1995, and TiO2 prices continued to decline throughout 1996 and the first quarter
of 1997. While NL's average TiO2 prices began to increase during the second
quarter of 1997, NL's average TiO2 selling price in calendar 1997 is expected to
be lower than the calendar 1996 average. No assurance can be given that price
trends will conform to NL's expectations and future cash flows will be adversely
affected should price trends be lower than NL's expectations. In order to
improve its near-term liquidity, NL refinanced Rheox's term loan in January
1997, obtaining a net $125 million of new long-term financing, and used the net
cash proceeds, along with other available funds, to prepay a portion of the DM
credit facility. In addition, NL and its lenders modified certain financial
covenants of the DM credit facility, and NL guaranteed the facility. As a
result of the refinancing and prepayment, NL's aggregate scheduled debt payments
for 1997 and 1998 decreased by $103 million ($64 million in 1997 and $39 million
in 1998), and NL's total debt was reduced by $28 million.
Certain of NL's U.S. and non-U.S. income tax returns, including Germany,
are being examined and tax authorities have or may propose tax deficiencies. NL
has previously reached an agreement with the German tax authorities, and paid
certain tax deficiencies of approximately DM 44 million ($28 million when paid),
including interest, which resolved certain significant tax contingencies for
years through 1990. Certain other significant German tax contingencies remain
outstanding and will continue to be litigated. NL has received certain tax
assessments aggregating DM 130 million ($75 million), including interest, for
the years through 1996 and expects to receive tax assessments for an additional
DM 20 million ($12 million) related to these remaining tax contingencies. No
payments of income tax or interest deficiencies related to these assessments
will be required until the litigation is resolved, which NL anticipates may take
approximately two to five years. Although NL believes that it will ultimately
prevail in the litigation, NL has granted a DM 100 million ($58 million at June
30, 1997) lien on its Nordenham, Germany TiO2 plant in favor of the German tax
authorities. No assurance can be given that this litigation will be resolved in
NL's favor in view of the inherent uncertainties involved in court proceedings.
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, mining locations and facilities currently or previously owned, operated
or used by NL, certain of which 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 ($138 million at June
30, 1997) for reasonably estimable costs of such matters, but NL's ultimate
liability may be affected by a number of factors, including changes in remedial
alternatives and costs and the allocation of such costs among PRPs. See Note 1
to the Consolidated Financial Statements. It is not possible to estimate the
range of costs for certain sites. The upper end of the range of reasonably
possible costs to NL for sites for which it is possible to estimate costs is
approximately $185 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.
NL has not accrued any amounts for the pending lead pigment and lead-based paint
litigation. There is no assurance that NL will not incur future liability in
respect of this pending litigation in view of the inherent uncertainties
involved in court and jury rulings and proceedings in pending and possible
future cases. However, based on, among other things, the results of such
litigation to date, NL believes that the pending lead pigment and lead-based
paint litigation is without merit. Liability that may result, if any, cannot
reasonably be estimated. In addition, various legislation and administrative
regulations have, from time to time, been enacted or proposed 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 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, issue additional securities, 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 review opportunities for the acquisition, divestiture, joint venture or
other business combinations in the chemicals industry. In the event of any
future acquisition, 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. In this regard, the Indentures
governing NL's publicly-traded debt contain provisions which limit the ability
of NL and its subsidiaries to incur additional indebtedness or hold
noncontrolling interests in business units.
Other. Condensed cash flow data for Medite and Sybra is presented in
Note 14 to the Consolidated Financial Statements. Condensed cash flow data for
Amalgamated in 1996 is presented in Note 15 to the Consolidated Financial
Statements.
General corporate. Valhi's operations are conducted principally through
subsidiaries and affiliates (NL Industries, Valcor and Waste Control
Specialists). Valcor is an intermediate parent company with continuing
operations conducted through CompX. Accordingly, Valhi's and Valcor's long-term
ability to meet their respective parent company level corporate obligations are
dependent in large measure on the receipt of dividends or other distributions
from their respective subsidiaries. NL, which paid dividends in the first three
quarters of 1996, suspended its dividend in the fourth quarter. Suspension of
NL's dividend is not expected to materially adversely impact Valhi's financial
position or liquidity. 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 Valhi's or Valcor's ability to service their respective
parent company level obligations. Neither Valhi nor Valcor has guaranteed any
indebtedness of their respective subsidiaries.
Valhi's LYONs do not require current cash debt service. At June 30, 1997,
Valhi held 5.5 million shares of Dresser common stock, which shares are held in
escrow for the benefit of holders of the LYONs. The LYONs are exchangeable at
any time, at the option of the holder, for the Dresser shares owned by Valhi.
Exchanges of LYONs for Dresser stock would result in the Company reporting
income related to the disposition of the Dresser stock for both financial
reporting and income tax purposes, although no cash proceeds would be generated
by such exchanges. Valhi's potential cash income tax liability that would have
been triggered at June 30, 1997 assuming exchanges of all of the outstanding
LYONs for Dresser stock at such date was approximately $39 million. Valhi
continues to receive regular quarterly Dresser dividends (recently increased
from $.17 per share to $.19 per share beginning in September 1997) on the
escrowed shares. In addition, the Company is required, at the option of the
holder, to purchase the LYONs in October 1997 at the accreted value of
approximately $405 per $1,000 principal amount at maturity (approximately $153
million at such date). Such redemption price may be paid, at the option of
Valhi, in cash, Dresser common stock, or a combination thereof. At June 30,
1997, the LYONs had an accreted value equivalent to approximately $27.25 per
Dresser share, and the market price of the Dresser common stock was $37.25 per
share. As long as the value of the underlying Dresser shares exceeds the
accreted value of the LYONS, the Company does not expect a significant number of
LYON holders to seek redemption. Because the LYONS are redeemable at the option
of the LYON holder in October 1997, the LYONS are classified as a current
liability and the Dresser shares are classified as a current asset at both
December 31, 1996 and June 30, 1997.
The after-tax proceeds from the dispositions of Medite and Sybra, net of
repayments of their respective U.S. bank debt, are available for Valcor's
general corporate purposes, subject to compliance with certain covenants
contained in the Valcor Senior Note Indenture. Also under the terms of the
Indenture, Valcor is required to tender for a portion of the Senior Notes, at
par, to the extent that a specified amount of these proceeds is not used to
either permanently paydown senior indebtedness of Valcor or its subsidiaries or
invest in related businesses, as specified in the Indenture, within one year of
disposition. While Valcor was not yet required to execute a tender offer
related to Medite's asset dispositions, in March 1997 Valcor initiated a tender
offer to purchase up to $86.7 million principal amount of Senior Notes on a pro-
rata basis, at par value, in satisfaction of the covenant contained in the
Indenture related to the Medite asset dispositions. Pursuant to its terms, the
tender offer expired in April 1997, and Valcor purchased $27.6 million principal
amount of Senior Notes which had been properly tendered, including $1.1 million
of Senior Notes held by Valhi. In addition, during the first quarter of 1997,
Valcor also purchased $3.8 million of Senior Notes in open market transactions
prior to the tender offer. To the extent that the net proceeds from the
disposition of Sybra's fast food operations are not used as provided by the
Indenture, a portion of the Notes could be subject to a future tender offer.
On August 6, 1997, Valcor initiated a consent solicitation to amend certain
provisions of the Valcor Senior Note Indenture which, if successfully completed,
would remove restrictions that currently limit the ability of Valcor and its
subsidiaries to, among other things, incur debt, pay dividends, create liens and
enter into transactions or co-invest with affiliates. The proposed amendments
to the Indenture require the consent from holders representing at least a
majority of the $68.6 million principal amount of Senior Notes currently
outstanding. If the consent solicitation is successfully completed, Valcor will
pay to all holders who validly consent on or prior to August 27, 1997 a cash
consent fee of $10 per $1,000 principal amount of Senior Notes. The consent
solicitation also includes a concurrent offer by Valcor to purchase the Senior
Notes of all holders who validly tender on or prior to September 4, 1997 at a
cash purchase price of $1,040 per $1,000 principal amount. Holders who tender
their Senior Notes are generally obligated to consent to the proposed amendments
to the Indenture, but holders may consent to the proposed amendments without
tendering their Senior Notes. However, Valcor's obligation to purchase the
Senior Notes is contingent upon the successful completion of the consent
solicitation.
Valhi received approximately $73 million cash in early 1997 at the transfer
of control of its refined sugar operations to Snake River Sugar Company,
including a net $11.5 million pre-closing dividend received from Amalgamated.
As part of the transaction, Snake River made certain loans to Valhi aggregating
$250 million in January 1997. Snake River's sources of funds for its loans to
Valhi, as well as for the $14 million it contributed to The Amalgamated Sugar
Company LLC for its voting interest in the LLC, included cash capital
contributions by the grower members of Snake River and $192 million in debt
financing provided by Valhi in January 1997, of which $100 million was prepaid
in May 1997 when Snake River obtained $100 million of third-party term loan
financing. See Note 15 to the Consolidated Financial Statements. Valhi
currently expects that distributions received from the LLC, which are dependent
in part upon the future operations of the LLC, will exceed its debt service
requirements under its $250 million loans from Snake River. The cash proceeds
to Valhi from the transfer of control of Amalgamated's operations to Snake
River, including amounts to be collected in the future from Valhi's remaining
loans to Snake River, are and will be available for Valhi's general corporate
purposes.
Redemption of the Company's interest in the LLC, as discussed in Note 15 to
the Consolidated Financial Statements, would result in the Company reporting
income related to the disposition of its LLC interest for both financial
reporting and income tax purposes, although the net cash proceeds that would be
generated from such a disposition would likely be less than the specified
redemption price due to Snake River's ability to simultaneously call its $250
million loans to Valhi. As a result, such net cash proceeds generated by
redemption of the Company's interest in the LLC could be less than the income
taxes that would become payable as a result of the disposition.
In March 1997, the Company entered into a $10 million revolving credit
facility with Waste Control Specialists. Borrowings by Waste Control
Specialists ($8 million outstanding at June 30, 1997) bear interest at prime
plus 1% and are due no later than December 31, 1998.
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, repurchase
indebtedness in the market or otherwise, 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 1996 Annual Report and prior 1997 quarterly
periodic reports for descriptions of certain legal proceedings.
In June 1997, the Delaware Supreme Court en banc reversed and remanded to
the lower court for further proceedings the previously-announced trial court
ruling in favor of the defendants in Kahn v. Tremont Corporation, et al.
Discovery has been stayed in the previously-reported Medite Corporation v.
Public Services Company of New Mexico pending oral arguments at a hearing
scheduled for August 1997 on motions for partial summary judgment and summary
judgment filed by the plaintiff and defendant, respectively.
Trial is currently scheduled to begin in September 1997 in the previously-
reported Midgard Corporation v. Medite of New Mexico, Inc., et al.
Gould Inc. v. NL Industries, Inc. ("Gould Superfund Site"), (No. 91-1091).
In May 1997, the U.S. EPA issued an Amended Record of Decision ("ARD") for the
Gould Superfund Site soils operable unit. The ARD requires construction of an
onsite containment facility estimated to cost between $10.5 million and $12
million, including capital costs and operating and maintenance costs.
German, et al. v. Federal Home Mortgage Loan Corp., et al. (No 93 Civ.
6941). In May 1997, plaintiffs moved for class certification and defendants
moved for summary judgment. In June 1997 the Court stayed all further activity
in the case pending reconsideration of its 1995 decision permitting filing of
the complaint against the manufacturer defendants and joinder of the new
complaint with the pre-existing complaint against New York City and other
landlords.
NL Industries, Inc. v. Commercial Union, et al. (No. 90-2124). In June
1997, NL reached a settlement in principle with its insurers regarding
allocation of defense costs in the lead pigment cases in which reimbursement of
defense costs had been sought.
Parker v. NL Industries, et al. (No. 97085060 CC915). In June 1997,
plaintiffs moved to remand to state court and NL answered the complaint denying
liability. Trial is scheduled to begin in July 1998.
Ritchie v. NL Industries, et al. (No. 5:96-CV-166). In July 1997,
defendants filed a second notice of removal to federal court.
The City of New York, et al. v. Lead Industries Association, Inc., et al.
(No. 89-4617). In July 1997, the trial court's denials of defendants' two
summary judgment motions on the fraud claim were affirmed by the Appellate
Division.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Valhi's 1997 Annual Meeting of Stockholders was held on May 8, 1997.
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 from over 94% of the 114.4 million common shares eligible to vote at
the Annual Meeting. In addition, the proposal to amend and restate the Valhi,
Inc. 1987 Stock Option-Stock Appreciation Right Plan, and the proposal to adopt
the Valhi, Inc. 1997 Long-Term Incentive Plan, were each approved receiving
votes "For" adoption from over 93% of the 114.4 million common shares eligible
to vote.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 - First Amendment to the Company Agreement of The Amalgamated
Sugar Company LLC dated May 14, 1997.
10.2 - Deposit Trust Agreement related to the Amalgamated
Collateral Trust among ASC Holdings, Inc. and Wilmington Trust
Company dated May 14, 1997.
10.3 - Pledge Agreement between the Amalgamated Collateral Trust
and Snake River Sugar Company dated May 14, 1997.
10.4 - Guarantee by the Amalgamated Collateral Trust in favor of
Snake River Sugar Company dated May 14, 1997.
10.5 - Amended and Restated Pledge Agreement between ASC Holdings,
Inc. and Snake River Sugar Company dated May 14, 1997.
10.6 - Collateral Deposit Agreement among Snake River Sugar
Company, Valhi, Inc. and First Security Bank, National
Association dated May 14, 1997.
10.7 - Voting Rights and Forbearance Agreement among the
Amalgamated Collateral Trust, ASC Holdings, Inc. and First
Security Bank, National Association dated May 14, 1997.
10.8 - Voting Rights and Collateral Deposit Agreement among Snake
River Sugar Company, Valhi, Inc., and First Security Bank,
National Association dated May 14, 1997.
10.9 - Subordinated Loan Agreement between Snake River Sugar
Company and Valhi, Inc., as amended and restated effective May
14, 1997.
10.10 - Subordination Agreement between Valhi, Inc. and Snake River
Sugar Company dated May 14, 1997.
10.11 - Form of Option Agreement among Snake River Sugar Company,
Valhi, Inc. and the holders of Snake River Sugar Company's 10.9%
Senior Notes Due 2009 dated May 14, 1997.
27.1 - Financial Data Schedule for the six-month period ended June 30,
1997.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended June 30, 1997.
April 25, 1997 - Reported Items 5 and 7.
April 30, 1997 - Reported Items 2 and 7.
May 2, 1997 - Reported Items 5 and 7.
May 8, 1997 - Reported Items 5 and 7.
May 15, 1997 - Reported Items 5 and 7.
June 17, 1997 - 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 6, 1997 By /s/ Bobby D. O'Brien
Bobby D. O'Brien
(Vice President,
Principal Financial Officer)
Date August 6, 1997 By /s/ Gregory M. Swalwell
Gregory M. Swalwell
(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 August 6, 1997 By
Bobby D. O'Brien
(Vice President,
Principal Financial Officer)
Date August 6, 1997 By
Gregory M. Swalwell
(Controller,
Principal Accounting Officer)