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 SEPTEMBER 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 OCTOBER 31, 1997: 114,663,414.
VALHI, INC. AND SUBSIDIARIES
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1996
and September 30, 1997 3-4
Consolidated Statements of Operations -
Three months and nine months ended September 30,
1996 and 1997 5
Consolidated Statement of Stockholders' Equity -
Nine months ended September 30, 1997 6
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1996 and 1997 7-8
Notes to Consolidated Financial Statements 9-24
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 25-34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 35-36
Item 6. Exhibits and Reports on Form 8-K. 36
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS DECEMBER 31, SEPTEMBER 30,
1996 1997
Current assets:
Cash and cash equivalents $ 255,679 $ 350,933
Marketable securities 142,478 -
Accounts and other receivables 155,430 180,465
Refundable income taxes 9,414 4,282
Receivable from affiliates 13,931 16,614
Inventories 251,597 183,488
Prepaid expenses 7,537 7,101
Deferred income taxes 1,597 5,574
Total current assets 837,663 748,457
Other assets:
Marketable securities 51,328 342,956
Investment in and advances to
joint ventures 196,697 194,761
Loans and notes receivable 3,240 90,429
Mining properties 36,441 31,375
Prepaid pension cost 25,313 24,764
Goodwill 258,359 249,005
Deferred income taxes 223 222
Other 45,479 29,376
Total other assets 617,080 962,888
Property and equipment:
Land 37,538 17,393
Buildings 189,875 149,660
Equipment 610,545 507,642
Construction in progress 15,723 10,006
853,681 684,701
Less accumulated depreciation 163,442 125,582
Net property and equipment 690,239 559,119
$2,144,982 $2,270,464
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY DECEMBER 31, SEPTEMBER 30,
1996 1997
Current liabilities:
Notes payable $ 38,732 $ 17,139
Current long-term debt 235,648 61,669
Accounts payable 75,307 64,684
Accrued liabilities 127,935 126,263
Payable to affiliates 47,387 13,448
Income taxes 8,148 9,295
Deferred income taxes 30,523 2,660
Total current liabilities 563,680 295,158
Noncurrent liabilities:
Long-term debt 844,468 1,096,759
Accrued pension cost 59,215 51,856
Accrued OPEB cost 56,257 52,490
Accrued environmental costs 109,908 130,045
Deferred income taxes 178,049 230,919
Other 29,237 28,013
Total noncurrent liabilities 1,277,134 1,590,082
Minority interest 249 253
Stockholders' equity:
Common stock 1,248 1,253
Additional paid-in capital 35,258 38,107
Retained earnings 282,766 283,524
Adjustments:
Marketable securities 65,105 153,165
Currency translation (6,210) (16,830)
Pension liabilities (3,160) (3,160)
Treasury stock (71,088) (71,088)
Total stockholders' equity 303,919 384,971
$2,144,982 $2,270,464
Commitments and contingencies (Note 1)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS NINE MONTHS ENDED
ENDED SEPTEMBER 30,
SEPTEMBER 30,
1996* 1997 1996* 1997
Revenues and other income:
Net sales $270,216$275,193 $816,757 $820,719
Other, net 7,559 20,040 32,603 60,017
277,775 295,233 849,360 880,736
Costs and expenses:
Cost of sales 210,470 201,067 610,008 618,098
Selling, general and 50,822 45,727 149,753 175,413
administrative
Interest 24,469 30.161 73,574 91,434
285,761 276,955 833,335 884,945
(7,986) 18,278 16,025 (4,209)
Equity in earnings (losses) of:
Waste Control Specialists (3,398) (4,046) (8,880)
(1,628)
Amalgamated Sugar Company 372 - 4,945 -
Income (loss) before income taxes (9,242) 14,880 16,924 (13,089)
Provision for income taxes (benefit (3,653) 6,427 3,780 (1,066)
Minority interest 2,299 7 6,919 35
Income (loss) from continuing
operations (7,888) 8,446 6,225 (12,058)
Discontinued operations 2,978 (950) (8,073) 34,463
Extraordinary item - (3,897) - (4,291)
Net income (loss) $(4,910)$ 3,599 $ (1,848)$ 18,114
Earnings (loss) per common share:
Continuing operations $ (.07)$ .07 $ .05 $ (.10)
Discontinued operations .03 (.01) (.06) .30
Extraordinary item - (.03) - (.04)
Net income (loss) $ (.04) $ .03 $ (.01)$ .16
Cash dividends per share $ .05$ .05 $ .15 $ .15
Weighted average common shares 114,641 115,129 114,616 114,978
outstanding
*Reclassified.
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
Balance at December 31, 1996 $1,248 $35,258 $282,766
Net income - - 18,114
Dividends - - (17,356)
Adjustments, net - - -
Other, net 5 2,849 -
Balance at September 30, 1997 $1,253 $38,107 $283,524
ADJUSTMENTS TOTAL
MARKETABLE CURRENCY PENSION TREASURY STOCKHOLDERS'
SECURITIES TRANSLATION LIABILITIES STOCK EQUITY
Balance at December $ 65,105 $ (6,210) $(3,160) $(71,088) $303,919
31, 1996
Net income - - - - 18,114
Dividends - - - - (17,356)
Adjustments, net 88,060 (10,620) - - 77,440
Other, net - - - - 2,854
Balance at September
30, 1997 $153,165 $(16,830) $(3,160) $(71,088) $384,971
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS)
1996* 1997
Cash flows from operating activities:
Net income (loss) $ (1,848)$ 18,114
Depreciation, depletion and amortization 48,591 46,503
Noncash interest expense 24,998 27,626
Change in accounting principle - 30,000
Deferred income taxes (13,457) (14,109)
Minority interest 6,919 35
Pre-tax loss on early extinguishment of - 6,601
indebtedness
Other, net (11,912) (11,440)
Equity in (earnings) losses of:
Discontinued operations 8,073 (34,463)
Waste Control Specialists 4,046 8,880
Amalgamated Sugar Company (4,945) -
60,465 77,747
Medite, net 15,769 (40,446)
Sybra, net 6,912 (1,078)
Amalgamated Sugar Company, net 92,702 -
Change in assets and liabilities:
Accounts and notes receivable (22,485) (38,094)
Inventories 26,149 45,181
Accounts payable and accrued liabilities (597) 15,747
Other, net (18,604) 9,515
Net cash provided by operating 160,311 68,572
activities
Cash flows from investing activities:
Capital expenditures (54,812) (28,015)
Purchases of:
Marketable securities - (6,000)
Minority interest (17,973) (2,752)
Investment in Waste Control Specialists (10,000) (3,000)
Loans to affiliates:
Loans (7,600) (50,025)
Collections 10,600 23,525
Other loans and notes receivable:
Loans - (280,600)
Collections - 192,869
Pre-close dividend from Amalgamated Sugar - 11,518
Company
Medite, net (6,441) 37,876
Sybra, net (2,977) 53,929
Amalgamated Sugar Company, net (11,280) -
Other, net 7,289 8,760
Net cash used by investing activities (93,194) (41,915)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS)
1996* 1997
Cash flows from financing activities:
Indebtedness:
Borrowings $ 139,712 $ 390,369
Principal payments (108,394) (316,750)
Deferred financing costs paid - (4,643)
Repayment of loan from affiliate - (7,244)
Valhi dividends (17,293) (17,356)
Distributions to minority interest (7,416) (2)
Medite, net (11,012) (1)
Sybra, net (6,900) 22,381
Amalgamated Sugar Company, net (64,685) -
Other, net 916 3,045
Net cash provided (used) by financing
activities
(75,072) 69,799
Net change (7,955) 96,456
Currency translation (2,340) (1,202)
Cash and equivalents at beginning of period 170,908 255,679
Cash and equivalents at end of period $ 160,613 $ 350,933
Supplemental disclosures - cash paid for:
Interest, net of amounts capitalized $ 54,760 $ 60,419
Income taxes, net 26,871 41,167
*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 September 30, 1997 and the consolidated statements
of operations, cash flows and stockholders' equity for the interim periods ended
September 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 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, stated net of allocable income tax benefit, relates
to the write-off of unamortized deferred financing costs and premiums paid in
connection with the early retirement of $93.8 million principal amount of
Valcor's Senior Notes in connection with the tender offers completed in April
1997 and September 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:
% OWNED AT
OPERATIONS PRINCIPAL ENTITIES SEPTEMBER 30, 1997
Chemicals NL Industries, Inc. 56%
Component products CompX International Inc. 100%
Waste management Waste Control Specialists LLC 50%
NL's chemicals operations are conducted through its subsidiaries Kronos,
Inc. (titanium dioxide pigments or "TiO2") and Rheox, Inc. (specialty
chemicals). NL (NYSE: NL) files periodic reports pursuant to the Securities
Exchange Act of 1934, as amended. The Company's component products subsidiary
(CompX) is owned by Valcor, Inc., a wholly-owned subsidiary of Valhi. The
results of Valcor's former building products operations, conducted by Medite
Corporation, and Valcor's former fast food operations, 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. In October 1997, the Company increased its
membership interest in Waste Control Specialists LLC to 58%. See Note 9.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1996 1997
(IN MILLIONS) (IN MILLIONS)
Net sales:
Chemicals $248.5 $248.3 $752.1 $740.5
Component products 21.8 27.0 64.7 80.3
$270.3 $275.3 $816.8 $820.8
Operating income:
Chemicals $ 14.1 $ 32.1 $ 81.5 $ 69.5
Component products 5.4 6.9 14.8 20.1
19.5 39.0 96.3 89.6
General corporate items:
Securities earnings 2.4 17.3 7.5 48.6
Expenses, net (5.4) (7.8) (14.2) (50.9)
Interest expense (24.5) (30.2) (73.6) (91.5)
(8.0) 18.3 16.0 (4.2)
Equity in earnings (losses) of:
Waste Control Specialists (1.6) (3.4) (4.0) (8.9)
Amalagamated Sugar Company .3 - 4.9 -
Income (loss) before income $ (9.3) $ 14.9 $ 16.9 $(13.1)
taxes
NINE MONTHS ENDED SEPTEMBER 30,
DEPRECIATION, CAPITAL
DEPLETION AND EXPENDITURES
AMORTIZATION
1996 1997 1996 1997
(IN MILLIONS)
Chemicals $46.1 $43.7 $52.3 $23.3
Component products 2.1 2.3 2.1 4.1
Other .4 .5 .4 .6
$48.6 $46.5 $54.8 $28.0
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 - INVENTORIES:
DECEMBER 31, SEPTEMBER 30,
1996 1997
(IN THOUSANDS)
Raw materials:
Chemicals $ 43,284 $ 40,139
Component products 2,556 1,982
Building products 4,306 22
Fast food 1,406 -
51,552 42,143
In process products:
Chemicals 10,356 5,767
Component products 4,974 4,987
Building products 83 -
15,413 10,754
Finished products:
Chemicals 142,956 95,081
Component products 3,300 3,276
Building products 1,096 -
147,352 98,357
Supplies 37,280 32,234
$251,597 $183,488
NOTE 5 - MARKETABLE SECURITIES:
DECEMBER 31, SEPTEMBER 30,
1996 1997
(IN THOUSANDS)
Current asset (available-for-sale) -
Dresser Industries common stock $142,478 $ -
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC $ 34,070 $163,769
Dresser Industries common stock - 149,283
Other securities 17,258 29,904
$ 51,328 $342,956
At September 30, 1997, Valhi held 5.3 million shares of Dresser common stock
with a quoted market price of $43 per share, or an aggregate market value of
$230 million (cost - $43 million). Valhi's LYONs are exchangeable at any time,
at the option of the LYON holder, for such Dresser shares, and the carrying
value of the Dresser stock is limited to the accreted LYONs obligation. The
Dresser common stock was classified as a current asset at December 31, 1996
because the LYONs, which were redeemable at the option of the holder on October
20, 1997, were classified as a current liability at such date. Holders
representing only a nominal amount of LYONs exercised their right to redeem
their LYONs in October 1997 for an amount of cash equal to the accreted LYONs
obligation, and accordingly both the LYONs obligation and the Dresser shares
were classified as noncurrent at September 30, 1997. 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 September 30, 1997
(December 31, 1996 - $16 million).
NOTE 6 - ACCRUED LIABILITIES:
DECEMBER SEPTEMBER 30,
31, 1997
1996
(IN THOUSANDS)
Employee benefits $ 47,331 $ 41,042
Interest 11,157 14,750
Environmental costs 6,126 9,110
Plant closure costs 7,669 5,525
Miscellaneous taxes 5,262 1,577
Other 50,390 54,259
$127,935 $126,263
NOTE 7 - ACCOUNTS WITH AFFILIATES:
DECEMBER 31, SEPTEMBER 30,
1996 1997
(IN THOUSANDS)
Receivable from affiliates:
Demand loan to Contran $ - $16,500
Net dividend receivable from Amalgamate 11,518 -
Other 2,413 114
$13,931 $16,614
Payable to affiliates:
Income taxes payable to Contran $29,633 $ 3,251
Demand loan from Contran 7,244 -
Tremont Corporation 3,529 3,534
Louisiana Pigment Company 6,677 6,842
Other, net 304 (179)
$47,387 $13,448
NOTE 8 - LOANS AND NOTES RECEIVABLE:
DECEMBER 31, SEPTEMBER 30,
1996 1997
(IN THOUSANDS)
Snake River Sugar Company $ - $80,000
Snake River Farms II - 6,231
Other 4,740 5,505
4,740 91,736
Less current portion 1,500 1,307
Noncurrent portion $3,240 $90,429
Loans to Snake River Sugar Company and Snake River Farms II are discussed in
Note 15. At September 30, 1997, other loans and notes receivable include a $1.5
million loan to the other owner of Waste Control Specialists which is
collateralized by such owner's interest in Waste Control Specialists.
NOTE 9 - OTHER NONCURRENT ASSETS:
DECEMBER SEPTEMBER 30,
31, 1997
1996
(IN THOUSANDS)
Investment in joint ventures:
TiO2 manufacturing joint venture $179,195 $173,359
Waste Control Specialists LLC 15,218 9,338
Other 2,284 2,064
196,697 184,761
Loan to Waste Control Specialists LLC - 10,000
$196,697 $194,761
Franchise fees and other intangible asset $ 19,215 $ 5,341
Deferred financing costs 15,273 13,833
Property held for sale 4,681 4,288
Other 6,310 5,914
$ 45,479 $ 29,376
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. In October 1997, Valhi contributed $10 million to Waste Control
Specialists' equity, thereby increasing its membership interest to 58%.
Approximately $8 million of such equity contribution was used by Waste Control
Specialists to reduce the balance of its revolving borrowings from the Company.
The owner of the remaining 42% membership interest in Waste Control Specialists
is controlled by an individual who has been granted the duties of its
chief executive
officer under an employment agreement effective through at least 2000. Such
individual has the ability to establish management policies and procedures, and
has the authority to make routine operating decisions, for Waste Control
Specialists. These rights overcome the Company's presumption of control at the
new 58% membership interest level, and the Company will continue to account for
its interest in Waste Control Specialists by the equity method. Valhi continues
to hold an option, granted in March 1997, to increase its membership interest in
Waste Control Specialists to 60% for an additional $2.5 million equity
contribution.
NOTE 10 - OTHER NONCURRENT LIABILITIES:
DECEMBER SEPTEMBER 30,
31, 1997
1996
(IN THOUSANDS)
Insurance claims and expenses $13,380 $13,833
Employee benefits 12,050 10,932
Deferred income - 1,510
Other 3,807 1,738
$29,237 $28,013
NOTE 11 - NOTES PAYABLE AND LONG-TERM DEBT:
DECEMBER SEPTEMBER 30,
31, 1997
1996
(IN THOUSANDS)
Notes payable:
Kronos - non-U.S. bank credit agreement
(DM 40,000 and DM 30,000) $ 25,732 $ 17,139
Valhi - bank revolver 13,000 -
$ 38,732 $ 17,139
Long-term debt:
Valhi: LYONs $ 142,478 $ 149,283
Snake River Sugar Company - 250,000
Valcor Senior Notes 98,910 2,431
NL Industries:
Senior Secured Notes 250,000 250,000
Senior Secured Discount Notes 149,756 164,535
Deutsche mark bank credit facility
(DM 539,971 and DM 288,322) 347,362 164,718
Joint venture term loan 57,858 46,286
Rheox bank credit facility 14,659 125,250
Other 9,411 5,351
Total NL Industries 829,046 756,140
Other:
Medite term loan 3,727 -
Sybra bank credit agreements 1,081 -
Sybra capital leases 4,540 -
Other 334 574
9,682 574
1,080,116 1,158,428
Less current maturities 235,648 61,669
$ 844,468 $1,096,759
Valhi's loans from Snake River Sugar Company are discussed in Note 15. In
January 1997, NL refinanced the Rheox bank credit facility 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, Valcor purchased $27.6
million principal amount of Valcor Senior Notes at par value, including $1.1
million held by Valhi, pursuant to a tender offer. In September 1997, Valcor (i)
completed a consent solicitation whereby holders approved certain amendments to
the Valcor Senior Note Indenture which removed the restrictions which had
limited 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 and (ii) purchased $66.2 million principal amount of Senior Notes for
$1,057.50 per $1,000 principal amount pursuant to a subsequent tender. 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 September
30, 1997, the estimated fair value of such collar agreements was a nominal
liability. Such fair value represents the amount Rheox would pay 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:
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1997
(IN THOUSANDS)
Securities earnings:
Interest and dividends $ 7,505 $46,348
Securities transactions 122 2,110
7,627 48,458
Currency transactions, net 4,591 2,795
Technology fee income 8,280 -
Pension curtailment gain 4,791 -
Litigation settlement gain 2,756 -
Disposal of property and equipment 648 2,453
Other, net 3,910 6,311
$32,603 $60,017
Interest and dividend income in 1997 includes $19 million of distributions
received from The Amalgamated Sugar Company LLC. See Note 15. Securities
transactions in both 1996 and 1997 relate to dispositions of a portion of the
shares of Dresser Industries common stock held by the Company when certain
holders of the Company's LYONs debt obligation exercised their right to exchange
their LYONs for such Dresser shares. See Notes 5 and 11.
NOTE 13 - PROVISION FOR INCOME TAXES ATTRIBUTABLE TO CONTINUING OPERATIONS:
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1997
(IN MILLIONS)
Expected tax expense (benefit) $ 5.9 $(4.6)
Non-U.S. tax rates (.3) (.7)
Incremental tax and rate differences on
equity in (3.0) (9.2)
earnings of non-tax group companies
U.S. state income taxes, net 1.5 2.1
Change in NL's deferred income tax
valuation allowance (1.1) 10.5
No income tax benefit for goodwill 2.2 2.4
amortization
Other, net (1.4) (1.6)
$ 3.8 $(1.1)
NOTE 14 - DISCONTINUED OPERATIONS:
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1997
(IN THOUSANDS)
Medite Corporation $(10,674) $14,717
Sybra, Inc. 2,601 19,746
$ (8,073) $34,463
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 smaller stud lumber
and veneer facilities were closed and sold in 1997 for aggregate cash
consideration approximating previously-estimated net realizable value.
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 September 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.
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1997
(IN MILLIONS)
Operations of Medite:
Net sales $138.2 $23.6
Operating income (loss) $(11.9) $ 1.7
Interest expense and other, net (5.8) (.3)
Pre-tax income (loss) (17.7) 1.4
Income tax expense (benefit) (7.0) .6
(10.7) .8
Net gain on disposal:
Pre-tax gain - 22.3
Income tax expense - 8.4
- 13.9
$(10.7) $14.7
A condensed balance sheet for Medite at December 31, 1996, included in the
Company's consolidated balance sheet, is presented below.
AMOUNT
(IN MILLIONS)
Current assets $21.2
Property and equipment, net 18.2
Property held for sale and other assets 4.8
$44.2
Current liabilities $17.6
Long-term debt 3.7
Deferred income taxes 1.6
Other liabilities 3.0
Stockholder's equity (*) 18.3
$44.2
* Eliminated in consolidation.
At September 30, 1997, only a nominal amount of assets and liabilities
related to Medite remain.
Condensed cash flow data for Medite (excluding dividends paid to and
intercompany loans with Valcor) is presented below.
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1997
(IN MILLIONS)
Cash flows from operating activities $ 15.8 $(40.4)
Cash flows from investing activities:
Capital expenditures (12.5) (.4)
Proceeds from disposal of assets 6.1 38.3
(6.4) 37.9
Cash flows from financing activities -
Indebtedness, net (11.0) -
$ (1.6) $ (2.5)
Sybra. In April 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.
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1997
(IN MILLIONS)
Operations of Sybra:
Net sales $85.9 $37.9
Operating income $ 6.0 $ 1.7
Interest expense and other, net (1.8) (.6)
Pre-tax income 4.2 1.1
Income tax expense 1.6 .5
2.6 .6
Net gain on disposal:
Pre-tax gain - 23.2
Income tax expense - 4.1
- 19.1
$ 2.6 $19.7
A condensed balance sheet for Sybra at December 31, 1996, included in the
Company's consolidated balance sheet, is presented below.
AMOUNT
(IN MILLIONS)
Current assets $ 6.0
Intangible assets 16.0
Property and equipment, net 53.6
$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 through the date of disposal (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.
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1997
(IN MILLIONS)
Cash flows from operating activities $ 6.9 $(1.1)
Cash flows from investing activities:
Capital expenditures (3.0) (1.8)
Proceeds on disposal of assets - 55.3
Other, net - .4
(3.0) 53.9
Cash flows from financing activities -
Indebtedness, net
(6.9) 22.4
$(3.0) $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 (the "Snake River Loan"), of which $100 million was
prepaid in May 1997 when Snake River obtained an equal amount 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. Covenants contained in Snake River's
third-party term loan allow Snake River to generally pay $400,000 to Valhi for
monthly installments for debt service on the Snake River Loan, and also allow
for an additional annual payment on the Snake River Loan based on Snake River's
excess cash flow, as defined. Under certain conditions, Valhi is required to
pledge $5 million in cash equivalents or marketable securities to collateralize
Snake River's third-party term loan as a condition to permit continued repayment
of the Snake River Loan. 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.
Under certain conditions, the Company is entitled to receive additional cash
distributions from the LLC. 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 accelerate the maturity of and 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. As a condition to exercising
temporary control, Valhi is required to effectively pledge funds in amounts up
to the next three years of debt service of Snake River's third-party term loan
until 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 $19 million in the first nine 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 September 30, 1997.
See Note 5. 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 nine months ended
September 30, 1996 is presented below.
AMOUNT
(IN MILLIONS)
Net sales:
Refined sugar $331.2
By-products and other 21.5
$352.7
Operating income:
FIFO basis $ 24.2
LIFO adjustment (9.8)
LIFO basis 14.4
Interest expense and other, net (6.6)
Pre-tax income 7.8
Income tax expense 2.9
Net income $ 4.9
Condensed cash flow data for Amalgamated for the nine months ended
September 30, 1996 (excluding dividends paid to Valhi) is presented below.
AMOUNT
(IN MILLIONS)
Cash flows from operating activities:
Before changes in assets and liabilities $ 10.7
Changes in assets and liabilities 82.0
92.7
Cash flows from investing activities -
Capital expenditures (11.3)
Cash flows from financing activities -
Indebtedness, net (64.7)
$ 16.7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
The Company reported income from continuing operations of $8.4 million, or
$.07 per share, for the third quarter of 1997 compared to a loss of $7.8
million, or $.07 per share, in the third quarter of 1996. For the first nine
months of 1997, the Company reported a loss from continuing operations of $12.1
million, or $.10 per share, compared to income of $6.3 million, or $.05 per
share, in the first nine months of 1996.
The Company's consolidated results of operations are significantly impacted
by the results of operations at 56%-owned NL Industries. The 1997 year-to-date
loss includes a $30 million first quarter 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's environmental remediation liabilities. See Note 1
to the Consolidated Financial Statements.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
% %
1996 1997 CHANGE 1996 1997 CHANGE
(IN MILLIONS) (IN MILLIONS)
Net sales:
Kronos $215.1 $210.5 -2% $649.7 $629.1 -3%
Rheox 33.4 37.8 +13% 102.4 111.4 +9%
$248.5 $248.3 -0% $752.1 $740.5 -2%
Operating
income:
Kronos $ 4.7 $ 20.3 +334% $ 49.8 $ 36.3 -27%
Rheox 9.4 11.8 +26% 31.7 33.2 +5%
$ 14.1 $ 32.1 +129% $ 81.5 $ 69.5 -15%
Kronos' operating income in the third quarter of 1997 increased from the
comparable period in 1996 due to income resulting from refunds of German
franchise taxes, higher TiO2 sales and production volumes and slightly higher
average TiO2 selling prices. Operating income in the first nine months of 1997
declined compared with the same period in 1996 as the impact of an 8% decline in
average selling prices more than offset the effect of higher sales and
production volumes and the German franchise tax refunds. Kronos' average
selling prices for the third quarter of 1997 were 1% higher than the same period
in 1996, were 3% higher than the average for the second quarter of 1997 and 6%
higher than the first-quarter 1997 average. Selling prices at the end of the
third quarter of 1997 were 2% higher than the overall average for the quarter.
Kronos achieved record third quarter sales volumes reflecting continued strong
demand, particularly in Europe, as Kronos' TiO2 sales volumes in the third
quarter and first nine months of 1997 increased 7% and 12%, respectively,
compared with the same periods in 1996.
Kronos' operating income in the third quarter of 1997 includes income of
$9.7 million related to refunds of German franchise taxes related to prior
years, including interest. The German tax authorities were required to remit
the refunds based on (i) recent German court decisions which resulted in a
reduction of the base upon which the German franchise taxes were computed and
(ii) prior agreements between Kronos and the German tax authorities regarding
payment of disputed taxes. Kronos' operating income in the second quarter of
1997 includes a $2.7 million gain from the disposal of certain surplus assets.
NL currently expects further increases in its TiO2 selling prices during
the fourth quarter of the year. While TiO2 selling prices have been increasing
since the second quarter of 1997, Kronos expects its overall average selling
prices for 1997 will be lower than the overall average for 1996. NL expects its
full-year 1997 TiO2 operating income will exceed that of 1996.
Rheox's sales and operating income increased in 1997 compared to 1996 due
to higher sales and production volumes. In addition, Rheox's operating income
in the first quarter of 1996 includes a $2.7 million gain related to the
reduction of certain U.S. employee pension benefits.
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
NL's sales in the third quarter and first nine months of 1997 by approximately
$23 million and $46 million, respectively, compared to the same periods in 1996.
Although fluctuations in the value of the U.S. dollar relative to other
currencies had an overall unfavorable impact on NL's operating income in the
third quarter of 1997 compared with the same period in 1996, such exchange rate
fluctuations only had a nominal impact on NL's operating income in the first
nine 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 noncash 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 NINE MONTHS
ENDED % ENDED %
SEPTEMBER SEPTEMBER
30, 30,
1996 1997 CHANGE 1996 1997 CHANGE
(IN MILLIONS) (IN MILLIONS)
Net sales $21.8 $27.0 +24% $64.7 $80.3 +24%
Operating income 5.4 6.9 +29% 14.8 20.1 +36%
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 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 $8.9 million during the first nine months of 1997 compared to
a loss of $4.0 million in the same period in 1996. Waste Control Specialists
commenced operations in February 1997, and net sales in the first nine months of
1997 were approximately $2.4 million. Waste Control Specialists' loss was higher
in the first nine months of 1997 as compared to the first nine months of 1996
due principally to start-up expenses associated with its new facility for the
treatment, storage and disposal of hazardous and toxic wastes, as well as larger
expenditures in conjunction with its on-going pursuit of permits for the
treatment, storage and disposal of low-level and mixed radioactive wastes.
In November 1997, Waste Control Specialists was issued a license by the
Texas Department of Health for the treatment and storage (but not disposal) of
low-level and mixed radioactive wastes. The current provisions of the license
generally enable Waste Control Specialists to accept low-level and mixed
radioactive wastes for treatment and storage from the Department of Energy
("DOE"). See also "Legal Proceedings."
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 disposal of discontinued operations. See Notes 14 and 15 to
the Consolidated Financial Statements. Securities earnings in the first nine
months of 1997 also include aggregate securities transaction gains of $2.1
million related to the disposition of a portion of the shares of Dresser
Industries common stock held by the Company when certain holders of the
Company's LYONs debt obligation exercised their right to exchange their LYONs
for such Dresser shares. During the period from October 1 to November 4, 1997,
holders representing $156.3 million principal amount at maturity of the LYONs
exercised their right to exchange their LYONs for Dresser shares, and the
Company will report a pre-tax securities transaction gain of $43.8 million in
the fourth quarter of 1997 related to such exchanges. Any additional
exchanges would similarly result in additional securities transaction gains.
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 also include (i) a $2.8
million gain in the second quarter of 1996 related to the settlement of certain
litigation in which NL was a plaintiff, (ii) a $2.3 million gain on disposition
of a surplus grain facility in the third quarter of 1996 and (iii) $1.5 million
of expenses in the second quarter of 1997 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 September 30, 1997, approximately $817
million of consolidated indebtedness, principally publicly-traded debt and
Valhi's loans from Snake River Sugar Company, bears interest at fixed rates
averaging 10.8%. The weighted average interest rate on about $359 million of
outstanding variable rate borrowings at September 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 September 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
increased from $60 million in the first nine months of 1996 to $78 million in
the first nine months of 1997. 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 nine months of 1997, Valhi (i) loaned $180 million to
Snake River Sugar Company and $12.1 million to Snake River Farms II, (ii)
collected $105.9 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 $10
million to Waste Control Specialists pursuant to a $10 million revolving
facility due December 1998 and (vi) purchased $6 million of certain marketable
securities and $2.8 million of additional shares of NL common stock.
Changes in indebtedness in 1997 include $250 million borrowed from Snake
River Sugar Company, the impact of NL's refinancing of its Rheox term loan and
prepayment of a portion of the DM credit facility and the Valcor Senior Notes
purchased pursuant to the tender offers completed in April and September 1997,
all as discussed below. At September 30, 1997, unused credit available under
existing credit facilities approximated $129 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 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 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 both Medite's February 1997 sale of the
Oregon MDF facility (approximately $10 million) and the April 1997 disposition
of Sybra's fast food operations (approximately $4 million) are also shown as a
reduction in cash flows from operating activities in 1997 eventhough the pre-tax
proceeds from such dispositions are also shown as part of cash flows from
investing activities in 1997.
Other. At September 30, 1997, assets held for sale, recorded at estimated
net realizable value, consist principally of land from former Medite facilities.
The salvageable property and equipment from the stud and veneer facilities were
sold in 1997 for amounts approximating the 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 $39 million in cash flows from operating
activities before changes in assets and liabilities in the first nine months of
1997, down from $50 million in the first nine months of 1996. Aggregate
relative changes in NL's assets and liabilities, excluding the effect of foreign
currency translation, used $11 million of net cash in the first nine months of
1996 compared to providing $32 million of net cash in the first nine 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 could be
adversely affected should price trends be lower than NL's expectations. In
order to improve its near-term liquidity, NL refinanced Rheox's bank credit
facility 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 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 ($74 million), including interest, for the years through 1996 and
may receive tax assessments for an additional DM 20 million ($11 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. A recent German tax court proceeding involving a tax
issue substantially the same as that involved in NL's primary remaining German
income tax contingency was decided in favor of the taxpayer. The German tax
authorities have appealed the decision to the German Supreme Court and NL
believes that the decision by the German Supreme Court will be rendered within
two years and will become a legal precedent which will likely determine the
outcome of NL's primary dispute with the German tax authorities. Although NL
believes that it will ultimately prevail in the litigation, NL has granted a DM
100 million ($57 million at September 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 ($136 million at
September 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 $180 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 from 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 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 such
transaction, NL may consider using its available cash, issuing its equity
securities or refinancing 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, CompX and Waste Control
Specialists). Accordingly, Valhi's long-term ability to meet its parent company
level corporate obligations is dependent in large measure on the receipt of
dividends or other distributions from its 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 certain 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
ability to service its parent company level obligations. In September 1997, the
Indenture governing Valcor's Senior Notes was amended which, among other things,
removed restrictions which had limited the ability of Valcor to pay dividends to
Valhi, as discussed below. Valhi has not guaranteed any indebtedness of its
subsidiaries.
Valhi's LYONs do not require current cash debt service. At September 30,
1997, Valhi held 5.3 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 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 are
generated by such exchanges. See Note 12 to the Consolidated Financial
Statements. Valhi's potential cash income tax liability that would have been
triggered at September 30, 1997, assuming exchanges of all of the outstanding
LYONs for Dresser stock at such date, was approximately $40 million. During the
period from October 1 to November 4, 1997, holders representing $156.3 million
principal amount at maturity of LYONs exercised their right to exchange their
LYONs for Dresser shares. 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. At September 30, 1997, the LYONs had an
accreted value equivalent to approximately $27.95 per Dresser share, and the
market price of the Dresser common stock was $43 per share. The LYONS were
redeemable at the option of the LYON holder in October 1997, and holders
representing only a nominal amount of LYONs exercised their right to redeem
their LYONs for an amount of cash equal to the accreted LYONs obligation. The
September 30, 1997 market price of Dresser common stock is equal to the
equivalent accreted LYONs obligation in July 2002.
In January 1997, Valcor purchased $3.8 million principal amount of its
Senior Notes in open market transactions, substantially all at par value. In
April 1997, Valcor purchased $27.6 million principal amount of its Senior Notes
at par value pursuant to a tender offer. In September 1997, Valcor (i)
completed a consent solicitation whereby holders approved certain amendments to
the Valcor Senior Note Indenture which removed the restrictions which limited
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 and (ii) purchased $66.2 million principal amount of its Senior Notes
for $1,057.50 per $1,000 principal amount pursuant to a subsequent tender offer.
Valcor paid an aggregate of $685,000 for consent fees in the solicitation.
Following these transactions, $2.4 million principal amount of Valcor Senior
Notes remains outstanding. Funds for these repurchases of Valcor Senior Notes
were provided primarily from the proceeds from the disposition of Medite and
Sybra. The remaining after-tax proceeds from such dispositions, net of
repayments of Medite's and Sybra's bank debt, are available for Valhi's general
corporate purposes.
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 ($10 million outstanding at September 30, 1997) bear interest at
prime plus 1% and are due no later than December 31, 1998. In October 1997,
Valhi contributed $10 million to Waste Control Specialists' equity, thereby
increasing its membership interest to 58%. See Note 9 to the Consolidated
Financial Statements.
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 contain provisions which limit the ability of NL and its 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 October 1997, oral arguments upon remand were heard in the previously-
reported Alan Russell Kahn v. Tremont Corporation, et al. The judge has
requested additional testimony, which is currently expected to be presented in
January 1998.
Discovery has been completed in the previously-reported Frank D. Seinfeld
v. Harold C. Simmons et al. The trial docket setting of November 1997 has been
vacated with a pretrial conference scheduled for December 1997.
In September 1997, the jury in the previously-reported Midgard Corporation
v. Medite of New Mexico, Inc., et al. awarded damages to the plaintiff of
approximately $1.6 million. Medite intends to appeal the ruling if its pending
motions for a judgment notwithstanding the verdict and a new trial are denied.
Trial in the previously-reported Medite Corporation v. Public Services
Company of New Mexico is currently expected to begin in the spring of 1998.
Wright v. Lead Industries, et al., (Nos. 94 363042 and 363043). In October
1997, the Maryland court of appeals affirmed the previously-reported summary
judgment in defendants' favor. The time in which plaintiffs' may seek to review
the court of appeals decision has not yet expired.
Gates v. American Cyanamid Co., et al., (No. I1996-2114). In October 1997,
plaintiffs indicated that they intend to dismiss this case with prejudice as to
all defendants.
Ritchie v. NL Industries, et al., (No. 5:96-CV-166). In August 1997,
plaintiffs dismissed the complaint with prejudice against all defendants.
Gould v. NL Industries, Inc., (No. 91-1091) ("Gould Superfund Site,"
Portland, Oregon). The U.S. EPA, NL and other PRPs are negotiating the terms of
a consent decree to perform the remedial action selected in the amended record
of decision. Trial in the action for contribution among the PRPs, previously
set for September 1997, has been rescheduled for January 1998.
Granite City Superfund Site. In September 1997, the U.S. EPA informed NL
that the past and future cleanup costs are estimated to total approximately
$63.5 million.
Cherokee County Sites. In August 1997, the U.S. EPA issued the record of
decision for the Baxter Springs and Treece subsites. The U.S. EPA has estimated
that the selected remedy will cost approximately $7.1 million.
State of Illinois vs. NL Industries. Inc. et al., (No. 88-CH-11618). In
August 1997, the trial court dismissed the case. The State has filed a notice
of appeal.
Flacke v. NL Industries, Inc., (No. 1842-80). The case has been settled
within previously-accrued amounts.
Rhodes, et al. v. ACF Industries, Inc., et al., (No. 95-C-261). An
agreement in principle has been reached settling this matter, with NL being
indemnified by another party.
At the DOE's request, Waste Control Specialists previously submitted a
proposal to the DOE for the disposal at its West Texas facility of DOE-generated
low-level and mixed radioactive wastes. Currently, the DOE only has one off-
site source for disposal of such wastes at a competitor's facility in Utah.
After several months of discussions, the DOE rejected Waste Control
Specialists's proposal. Waste Control Specialists believed the DOE acted
arbitrarily and capriciously and not in accordance with applicable law when it
rejected such proposal, and in response filed a lawsuit in federal court against
the DOE (Waste Control Specialists LLC v. United States Department of Energy, et
al., U.S. District Court for the Northern District of Texas, Civil Action No. 7-
97CV-202-X). The complaint seeks, among other things, (i) a preliminary
injunction to enjoin the DOE during the pendency of the proceedings from
refusing to accept any bid by Waste Control Specialists or to award any contract
to Waste Control Specialists for the disposal of DOE-generated low-level and
mixed radioactive wastes on the grounds that Waste Control Specialists is not
legally authorized to receive such wastes, (ii) a declatory judgment that Waste
Control Specialists's proposal is authorized by applicable law and (iii) a
remand of Waste Control Specialists's proposal back to the DOE for the DOE's
reconsideration. In October 1997, the court granted plaintiff a preliminary
injunction against the defendants which, among other things, stipulates that
during the pendency of the proceedings the DOE is enjoined from denying any bid
from Waste Control Specialists or from awarding any contract to Waste Control
Specialists for the disposal of DOE-generated low-level and mixed radioactive
waste on the grounds that (i) Waste Control Specialists is not or cannot be
licensed by the state of Texas for the disposal of such wastes or (ii) Waste
Control Specialists is not licensed by the Nuclear Regulatory Commission for the
disposal of such wastes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 - Financial Data Schedule for the nine-month period ended
September 30, 1997.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended September 30, 1997.
July 24, 1997 - Reported Items 5 and 7.
August 6, 1997 - Reported Items 5 and 7.
August 29, 1997 - Reported Items 5 and 7.
September 4, 1997 - Reported Items 5 and 7.
September 10, 1997 - Reported Items 5 and 7.
September 19, 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 November 5, 1997 By /s/ Bobby D. O'Brien
Bobby D. O'Brien
(Vice President,
Principal Financial Officer)
Date November 5, 1997 By /s/ Gregory M. Swalwell
Gregory M. Swalwell
(Controller,
Principal Accounting Officer)