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, 1999 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 29, 1999: 114,570,514.
VALHI, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets -
December 31, 1998 and September 30, 1999 3-4
Consolidated Statements of Income -
Three months and nine months ended
September 30, 1998 and 1999 5-6
Consolidated Statements of Comprehensive Income -
Nine months ended September 30, 1998 and 1999 7
Consolidated Statement of Stockholders' Equity -
Nine months ended September 30, 1999 8
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1998 and 1999 9-10
Notes to Consolidated Financial Statements 11-18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 19-40
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 41-42
Item 6. Exhibits and Reports on Form 8-K. 42
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, September 30,
1998 1999
---- ----
Current assets:
Cash and cash equivalents ...................... $ 224,572 $ 205,574
Accounts and other receivables ................. 167,660 216,186
Refundable income taxes ........................ 16,443 3,511
Receivable from affiliates ..................... 11,890 14,198
Inventories .................................... 246,338 201,474
Prepaid expenses ............................... 3,723 9,812
Deferred income taxes .......................... 4,836 14,717
---------- ----------
Total current assets ....................... 675,462 665,472
---------- ----------
Other assets:
Marketable securities .......................... 265,567 264,364
Investment in and advances to affiliates ....... 370,654 340,867
Loans and notes receivable ..................... 82,290 85,895
Mining properties .............................. 15,581 18,291
Prepaid pension cost ........................... 24,190 24,461
Goodwill ....................................... 259,336 264,578
Deferred income taxes .......................... -- 2,619
Other .......................................... 21,737 22,247
---------- ----------
Total other assets ......................... 1,039,355 1,023,322
---------- ----------
Property and equipment:
Land ........................................... 16,364 19,689
Buildings ...................................... 150,879 154,695
Equipment ...................................... 511,042 517,070
Construction in progress ....................... 7,918 28,571
---------- ----------
686,203 720,025
Less accumulated depreciation .................. 158,867 180,659
---------- ----------
Net property and equipment ................. 527,336 539,366
---------- ----------
$2,242,153 $2,228,160
========== ==========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, September 30,
1998 1999
---- ----
Current liabilities:
Notes payable .................................. $ 36,391 $ 32,428
Current maturities of long-term debt ........... 65,448 70,512
Accounts payable ............................... 67,592 58,262
Accrued liabilities ............................ 148,838 174,991
Payable to affiliates .......................... 20,137 10,112
Income taxes ................................... 12,943 11,427
Deferred income taxes .......................... 1,237 1,734
---------- ----------
Total current liabilities .................. 352,586 359,466
---------- ----------
Noncurrent liabilities:
Long-term debt ................................. 630,554 628,847
Accrued pension costs .......................... 44,929 45,745
Accrued OPEB costs ............................. 41,981 37,910
Accrued environmental costs .................... 83,922 63,228
Deferred income taxes .......................... 353,717 261,641
Other .......................................... 44,220 39,784
---------- ----------
Total noncurrent liabilities ............... 1,199,323 1,077,155
---------- ----------
Minority interest ................................ 111,722 167,826
---------- ----------
Stockholders' equity:
Common stock ................................... 1,255 1,256
Additional paid-in capital ..................... 42,789 43,444
Retained earnings .............................. 512,468 569,552
Accumulated other comprehensive income:
Marketable securities ........................ 122,826 126,608
Currency translation ......................... (22,712) (35,475)
Pension liabilities .......................... (2,845) (6,413)
Treasury stock ................................. (75,259) (75,259)
---------- ----------
Total stockholders' equity ................. 578,522 623,713
---------- ----------
$2,242,153 $2,228,160
========== ==========
Commitments and contingencies (Note 1)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
1998 1999 1998 1999
Revenues and other income:
Net sales ........................... $ 260,218 $ 303,282 $ 808,939 $ 847,592
Gain on:
Disposal of business unit ......... -- -- 330,217 --
Reduction in interest in CompX .... -- -- 67,902 --
Other, net .......................... 12,531 15,511 62,729 52,488
--------- ----------- ----------- ---------
272,749 318,793 1,269,787 900,080
--------- ----------- ----------- ---------
Costs and expenses:
Cost of sales ....................... 180,062 228,981 563,772 626,457
Selling, general and administrative . 41,034 45,812 164,956 135,087
Interest ............................ 23,005 18,020 71,889 54,383
--------- ----------- ----------- ---------
244,101 292,813 800,617 815,927
--------- ----------- ----------- ---------
28,648 25,980 469,170 84,153
Equity in earnings of:
Tremont Corporation ................. 2,986 (1,102) 2,986 3,389
Waste Control Specialists (prior to
consolidation) ..................... (2,706) -- (9,552) (8,496)
--------- ----------- ----------- ---------
Income before income taxes ........ 28,928 24,878 462,604 79,046
Provision for income taxes (benefit) .. 531 7,330 184,908 (61,849)
Minority interest in after-tax earnings 15,322 9,341 61,997 68,453
--------- ----------- ----------- ---------
Income from continuing operations . 13,075 8,207 215,699 72,442
Discontinued operations ............... -- -- -- 2,000
Extraordinary item .................... (1,424) -- (2,747) --
--------- ----------- ----------- ---------
Net income ...................... $ 11,651 $ 8,207 $ 212,952 $ 74,442
========= =========== =========== =========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
1998 1999 1998 1999
Basic earnings per share:
Continuing operations ............... $ .11 $ .07 $ 1.87 $ .63
Discontinued operations ............. -- -- -- .02
Extraordinary item .................. (.01) -- (.02) --
--------- ----------- ----------- ---------
Net income .......................... $ .10 $ .07 $ 1.85 $ .65
========= =========== =========== =========
Diluted earnings per share:
Continuing operations ............... $ .11 $ .07 $ 1.86 $ .62
Discontinued operations ............. -- -- -- .02
Extraordinary item .................. (.01) -- (.02) --
--------- ----------- ----------- ---------
Net income .......................... $ .10 $ .07 $ 1.84 $ .64
========= =========== =========== =========
Cash dividends per share .............. $ .05 $ .05 $ .15 $ .15
========= =========== =========== =========
Shares used in the calculation of per share amounts:
Basic earnings per common share ..... 114,946 115,061 115,011 115,018
Dilutive impact of outstanding
stock options ...................... 1,337 1,190 1,090 1,191
--------- ----------- ----------- ---------
Diluted earnings per share .......... 116,283 116,251 116,101 116,209
========= =========== =========== =========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Nine months ended September 30, 1998 and 1999
(In thousands)
1998 1999
---- ----
Net income ....................................... $ 212,952 $ 74,442
---------- ----------
Other comprehensive income, net of tax:
Marketable securities adjustment:
Unrealized gains (losses) arising
during the period ........................... (799) 4,225
Less reclassification for gains included
in net income ............................... (5,204) (443)
---------- ----------
(6,003) 3,782
Currency translation adjustment ................ 2,313 (12,763)
Pension liabilities adjustment ................. 1,013 (3,568)
---------- ----------
Total other comprehensive income, net ........ (2,677) (12,549)
---------- ----------
Comprehensive income ....................... $ 210,275 $ 61,893
========== ==========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended September 30, 1999
(In thousands)
Additional Accumulated other comprehensive income Total
Common paid-in Retained Marketable Currency Pension Treasury stockholders'
stock capital earnings securities translation liabilities stock equity
------ -------- -------- --------- --------- -------- ------- ------
Balance at December 31, 1998 .. $1,255 $42,789 $ 512,468 $122,826 $(22,712) $(2,845) $(75,259) $ 578,522
Net income .................... -- -- 74,442 -- -- -- -- 74,442
Dividends ..................... -- -- (17,358) -- -- -- -- (17,358)
Other comprehensive income, net -- -- -- 3,782 (12,763) (3,568) -- (12,549)
Other, net .................... 1 655 -- -- -- -- -- 656
------ ------- --------- -------- -------- ------- -------- ---------
Balance at September 30, 1999 . $1,256 $43,444 $ 569,552 $126,608 $(35,475) $(6,413) $(75,259) $ 623,713
====== ======= ========= ======== ======== ======= ======== =========
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1998 and 1999
(In thousands)
1998 1999
---- ----
Cash flows from operating activities:
Net income ..................................... $ 212,952 $ 74,442
Depreciation, depletion and amortization ....... 43,881 48,091
Gain on:
Disposal of business unit .................... (330,217) --
Reduction in interest in CompX ............... (67,902) --
Noncash interest expense ....................... 23,107 7,261
Deferred income taxes .......................... 139,240 (80,610)
Minority interest .............................. 61,997 68,453
Other, net ..................................... (15,000) (8,114)
Equity in:
Tremont Corporation .......................... (2,986) (3,389)
Waste Control Specialists (prior to consolidation) 9,552 8,496
Discontinued operations ...................... -- (2,000)
Extraordinary item ........................... 2,747 --
Distributions from:
Manufacturing joint venture .................. -- 12,050
Tremont Corporation .......................... 215 655
---------- ----------
77,586 125,335
Change in assets and liabilities:
Accounts and other receivables ............... (36,285) (48,164)
Inventories .................................. (15,886) 40,337
Accounts payable and accrued liabilities ..... 14,099 (7,083)
Accounts with affiliates ..................... (29,806) (7,333)
Income taxes ................................. (5,307) 11,747
Other, net ................................... 5,827 (14,289)
---------- ----------
Net cash provided by operating activities 10,228 100,550
---------- ----------
Cash flows from investing activities:
Capital expenditures ........................... (20,446) (38,820)
Purchases of:
Business units ............................... (33,372) (53,121)
Tremont Corporation common stock ............. (172,918) (1,945)
NL common stock .............................. (13,890) --
CompX common stock ........................... (5,587) (624)
Marketable securities ........................ (3,766) --
Investment in Waste Control Specialists ........ (10,000) (10,000)
Proceeds from disposal of:
Business unit ................................ 435,080 --
Marketable securities ........................ 6,875 6,588
Discontinued operations ...................... -- 2,000
Loans to affiliates:
Loans ........................................ (123,250) (6,000)
Collections .................................. 120,250 6,000
Other, net ..................................... 590 (616)
---------- ----------
Net cash provided (used) by investing activitie 179,566 (96,538)
---------- ----------
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine months ended September 30, 1998 and 1999
(In thousands)
1998 1999
---- ----
Cash flows from financing activities:
Indebtedness:
Borrowings ................................... $ 31,012 $ 97,271
Principal payments ........................... (288,479) (94,319)
Deferred financing costs paid ................ (220) --
Loans from affiliate:
Loans ........................................ 3,000 35,700
Repayments ................................... -- (45,200)
Valhi dividends paid ........................... (17,347) (17,358)
Distributions to minority interest ............. (1,287) (2,278)
Proceeds from issuance of CompX common stock ... 110,378 --
Common stock reacquired ........................ (3,692) --
Other, net ..................................... 1,267 854
---------- ----------
Net cash used by financing activities ...... (165,368) (25,330)
---------- ----------
Cash and cash equivalents - net change from:
Operating, investing and financing activities .. 24,426 (21,318)
Currency translation ........................... (297) (2,571)
Business units acquired ........................ -- 4,157
Consolidation of Waste Control Specialists ..... -- 734
Business unit sold ............................. (7,630) --
Cash and equivalents at beginning of period ...... 360,369 224,572
---------- ----------
Cash and equivalents at end of period ............ $ 376,868 $ 205,574
========== ==========
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized ........... $ 40,326 $ 39,238
Income taxes, net .............................. 77,917 7,375
Business units acquired - net assets consolidated:
Cash and cash equivalents ...................... $ -- $ 4,157
Goodwill and other intangible assets ........... 23,399 15,837
Other non-cash assets .......................... 17,782 52,799
Liabilities .................................... (7,809) (19,672)
---------- ----------
Cash paid ...................................... $ 33,372 $ 53,121
========== ==========
Waste Control Specialists - net assets consolidated:
Cash and cash equivalents ...................... $ -- $ 734
Property and equipment ......................... -- 23,128
Other non-cash assets .......................... -- 9,843
Liabilities .................................... -- (22,201)
---------- ----------
Net investment at date of consolidation ........ $ -- $ 11,504
========== ==========
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, 1998 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at September 30, 1999 and the consolidated statements
of income, comprehensive income, stockholders' equity and cash flows for the
interim periods ended September 30, 1998 and 1999 have been prepared by the
Company, without audit. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
consolidated financial position, results of operations and cash flows have been
made. The results of operations for the interim periods are not necessarily
indicative of the operating results for a full year or of future operations.
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, 1998 (the "1998 Annual Report").
Basic earnings per share of common stock is based upon the weighted
average number of common shares actually outstanding during each period. Diluted
earnings per share of common stock includes the impact of outstanding dilutive
stock options.
Commitments and contingencies are discussed in "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Legal
Proceedings" and the 1998 Annual Report.
Discontinued operations in 1999 represent $2 million of additional
consideration received by the Company related to the 1997 disposal of the
Company's former fast food operations. No income tax provision is required with
respect to such additional consideration.
Contran Corporation holds, directly or through subsidiaries,
approximately 92% of Valhi's outstanding common stock. Substantially all of
Contran's outstanding voting stock is held either by trusts established for the
benefit of certain children and grandchildren of Harold C. Simmons, of which Mr.
Simmons is sole trustee, or by Mr. Simmons directly. Mr. Simmons, the Chairman
of the Board and Chief Executive Officer of Valhi and Contran, may be deemed to
control such companies.
The Company will adopt Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended, no later than the first quarter of 2001. Under SFAS No. 133, all
derivatives will be recognized as either assets or liabilities and measured at
fair value. The accounting for changes in fair value of derivatives will depend
upon the intended use of the derivative. The impact on the Company of adopting
SFAS No. 133, if any, has not yet been determined but will be dependent upon the
extent to which the Company is a party to derivative contracts or hedging
activities covered by SFAS No. 133 at the time of adoption.
Note 2 - Business segment information:
% owned at
Operations Principal entities September 30, 1999
Chemicals NL Industries, Inc. 58.2%*
Component products CompX International Inc. 64.2%
Waste management Waste Control Specialists 68.8%
Titanium metals Tremont Corporation 49.7%*
* Tremont owns an additional 19.7% of NL.
Three months ended Nine months ended
September 30, September 30,
1998 1999 1998 1999
(In millions)
Net sales:
Chemicals ........................... $ 221.5 $ 242.7 $ 698.4 $ 676.8
Component products .................. 38.7 55.9 110.5 166.1
Waste management (after consolidation) -- 4.7 -- 4.7
--------- ----------- ----------- ---------
$ 260.2 $ 303.3 $ 808.9 $ 847.6
========= =========== =========== =========
Operating income:
Chemicals ........................... $ 40.2 $ 30.0 $ 119.6 $ 95.2
Component products .................. 8.8 9.8 22.2 29.0
Waste management (after consolidation) -- (1.5) -- (1.5)
--------- ----------- ----------- ---------
49.0 38.3 141.8 122.7
Gain on:
Disposal of business unit ........... -- -- 330.2 --
Reduction in interest in CompX ...... -- -- 67.9 --
General corporate items:
Interest and dividend income ........ 8.2 10.7 42.9 32.2
Securities transactions ............. .1 .1 8.0 .7
Expenses, net ....................... (5.6) (5.0) (49.7) (17.0)
Interest expense ...................... (23.0) (18.0) (71.9) (54.4)
--------- ----------- ----------- ---------
28.7 26.1 469.2 84.2
Equity in:
Tremont Corporation ................. 3.0 (1.1) 3.0 3.4
Waste Control Specialists (prior
to consolidation) .................. (2.8) -- (9.6) (8.5)
--------- ----------- ----------- ---------
Income before income taxes ........ $ 28.9 $ 25.0 $ 462.6 $ 79.1
========= =========== =========== =========
In January 1999, CompX acquired Thomas Regout Holding N.V., a producer
of precision ball bearing slides, for $53 million cash consideration. CompX has
signed a definitive agreement to acquire a Taiwanese slide producer for $11.5
million cash consideration. CompX expects this transaction will close in
November 1999.
In February 1999, Valhi contributed $10 million to Waste Control
Specialists' equity, thereby increasing its membership interest from 64.3% to
68.8%. The Company also holds an option, as amended in July 1999, to make an
additional $20 million equity contribution to Waste Control Specialists which,
if contributed, would increase its membership interest to 90%. Prior to June 30,
1999, the Company did not consolidate Waste Control Specialists. The Company was
not deemed to control Waste Control Specialists because the controlling general
partner of the other owner of Waste Control Specialists had been granted the
duties of chief executive officer of Waste Control Specialists under an
employment agreement. As of June 1999, that individual resigned as CEO and a new
CEO unrelated to the other owner was appointed. Accordingly, the Company is now
deemed to control Waste Control Specialists. The Company commenced consolidating
Waste Control Specialists' balance sheet at June 30, 1999, and commenced
consolidating its results of operations and cash flows in the third quarter of
1999.
Each of NL (NYSE: NL), CompX (NYSE: CIX), Tremont (NYSE: TRE) and
Tremont's 39%-owned affiliate Titanium Metals Corporation ("TIMET," NYSE: TIE)
file periodic reports pursuant to the Securities Exchange Act of 1934, as
amended.
Note 3 - Marketable securities:
December 31, September 30,
1998 1999
---- ----
(In thousands)
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC ................ $ 170,000 $ 170,000
Halliburton Company common stock ................. 79,710 89,861
Other securities ................................. 15,857 4,503
---------- ----------
$ 265,567 $ 264,364
========== ==========
At September 30, 1999, Valhi held 2.7 million shares of Halliburton
common stock (aggregate cost of $22 million) with a quoted market price of $41
per share, or an aggregate market value of $110 million. Valhi's LYONs are
exchangeable at any time, at the option of the LYON holder, for such Halliburton
shares, and the carrying value of the Halliburton stock is limited to the
accreted LYONs obligation. See Note 8. See the 1998 Annual Report for a
discussion of the Company's investment in The Amalgamated Sugar Company LLC. The
aggregate cost of other available-for-sale securities (primarily common stocks)
is $8 million at September 30, 1999. In the second quarter of 1999, the Company
sold certain available-for-sale marketable securities with a cost basis of $6
million for aggregate proceeds of $6.6 million.
Note 4 - Inventories:
December 31, September 30,
1998 1999
---- ------
(In thousands)
Raw materials:
Chemicals ...................................... $ 46,114 $ 40,191
Component products ............................. 6,520 8,851
---------- ----------
52,634 49,042
---------- ----------
In process products:
Chemicals ...................................... 11,530 8,073
Component products ............................. 5,748 7,907
---------- ----------
17,278 15,980
---------- ----------
Finished products:
Chemicals ...................................... 137,000 100,116
Component products ............................. 4,634 8,270
---------- ----------
141,634 108,386
---------- ----------
Supplies (primarily chemicals) ................... 34,792 28,066
---------- ----------
$ 246,338 $ 201,474
========== ==========
Note 5 - Accrued liabilities:
December 31, September 30,
1998 1999
---- ----
(In thousands)
Current:
Employee benefits .............................. $ 42,665 $ 42,048
Environmental costs ............................ 46,059 58,141
Interest ....................................... 7,397 15,267
Deferred income ................................ 4,353 7,538
Other .......................................... 48,364 51,997
---------- ----------
$ 148,838 $ 174,991
========== ==========
Noncurrent:
Insurance claims and expenses .................. $ 15,321 $ 15,077
Employee benefits .............................. 12,523 11,853
Deferred income ................................ 13,693 10,603
Other .......................................... 2,683 2,251
---------- ----------
$ 44,220 $ 39,784
========== ==========
Note 6 - Other noncurrent assets:
December 31, September 30,
1998 1999
---- ----
(In thousands)
Investment in affiliates:
Tremont Corporation ............................ $ 179,452 $ 181,715
TiO2 manufacturing joint venture ............... 171,202 159,152
Waste Control Specialists LLC .................. 10,000 --
---------- ----------
360,654 340,867
Loan to Waste Control Specialists LLC ............ 10,000 --
---------- ----------
$ 370,654 $ 340,867
========== ==========
Loans and notes receivable:
Snake River Sugar Company ...................... $ 80,000 $ 80,000
Other .......................................... 5,912 9,280
---------- ----------
85,912 89,280
Less current portion ........................... 3,622 3,385
---------- ----------
Noncurrent portion ............................. $ 82,290 $ 85,895
========== ==========
Deferred financing costs ......................... $ 5,674 $ 4,137
Intangible assets ................................ 4,923 7,184
Other ............................................ 11,140 10,926
---------- ----------
$ 21,737 $ 22,247
========== ==========
At September 30, 1999, Valhi held 3.2 million shares of Tremont common
stock with a quoted market price of $23.88 per share, or an aggregate of $76
million. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of the Company's net carrying value of
its investment in Tremont. The Company commenced consolidating Waste Control
Specialists at June 30, 1999. See Note 2.
Note 7 - Accounts with affiliates:
December 31, September 30,
1998 1999
---- ----
(In thousands)
Receivables from affiliates:
Income taxes, net .............................. $ 11,719 $ 12,045
Other .......................................... 171 2,153
---------- ----------
$ 11,890 $ 14,198
========== ==========
Payables to affiliates:
Loan from Contran .............................. $ 9,500 $ --
Louisiana Pigment Company ...................... 8,264 7,131
Tremont Corporation ............................ 3,053 2,953
Other, net ..................................... (680) 28
---------- ----------
$ 20,137 $ 10,112
========== ==========
Note 8 - Notes payable and long-term debt:
December 31, September 30,
1998 1999
---- ----
(In thousands)
Notes payable -
Kronos - non-U.S. bank credit agreements
(DM 60,500 and DM 60,500) ..................... $ 36,391 $ 32,428
========== ==========
Long-term debt:
Valhi:
Snake River Sugar Company .................... $ 250,000 $ 250,000
LYONs ........................................ 84,104 89,861
Bank credit facility ......................... -- 21,000
---------- ----------
334,104 360,861
---------- ----------
NL Industries:
Senior Secured Notes ......................... 244,000 244,000
Deutsche mark bank credit facility
(DM 187,322 and DM 120,072) ................. 112,674 64,359
Other ........................................ 955 552
---------- ----------
357,629 308,911
---------- ----------
Other subsidiaries:
CompX bank credit facility ................... -- 20,000
Waste Control Specialists bank term loan ..... -- 4,437
Valcor Senior Notes .......................... 2,431 2,431
Other ........................................ 1,838 2,719
---------- ----------
4,269 29,587
---------- ----------
696,002 699,359
Less current maturities ........................ 65,448 70,512
---------- ----------
$ 630,554 $ 628,847
========== ==========
In November 1999, the maturity date of Valhi's revolving bank credit
facility was extended one year to November 2000.
Note 9 - Other income:
Nine months ended
September 30,
1998 1999
---- ----
(In thousands)
Securities earnings:
Dividends and interest ......................... $ 42,855 $ 32,191
Securities transactions ........................ 8,006 681
---------- ----------
50,861 32,872
Noncompete agreement income ...................... 2,667 3,000
Currency transactions, net ....................... 3,085 8,505
Other, net ....................................... 6,116 8,111
---------- ----------
$ 62,729 $ 52,488
========== ==========
Note 10 - Provision for income taxes:
Nine months ended
September 30,
1998 1999
---- ----
(In millions)
Income from continuing operations:
Expected tax expense ........................... $ 161.9 $ 27.7
Incremental U.S. tax and rate differences on
equity in earnings of non-tax group companies . 74.5 13.9
Change in NL's deferred income tax
valuation allowance ........................... (49.7) (89.9)
Resolution of German income tax audits ......... -- (36.5)
Change in German income tax law ................ -- 24.1
U.S. state income taxes, net ................... 8.0 (.6)
Refund of prior year withholding tax ........... (8.2) --
No tax benefit for goodwill amortization ....... 11.6 3.0
Non-U.S. tax rates ............................. .1 (.4)
Excess of tax basis over book basis of the
common stock of foreign subsidiaries sold ..... (12.1) --
Other, net ..................................... (1.2) (3.1)
---------- ----------
$ 184.9 $ (61.8)
========== ==========
Comprehensive provision (benefit) for income taxes allocated to:
Continuing operations .......................... $ 184.9 $ (61.8)
Discontinued operations ........................ -- --
Extraordinary item ............................. (2.8) --
Other comprehensive income:
Marketable securities ........................ (3.2) 1.4
Currency translation ......................... 1.0 (7.9)
Pension liabilities .......................... .6 (2.3)
---------- ----------
$ 180.5 $ (70.6)
========== ==========
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of a $90 million non-cash income tax
benefit recognized by NL in the second quarter of 1999.
Note 11 - Minority interest:
The components of minority interest in net assets and income from
continuing operations of subsidiaries are presented in the following tables.
December 31, September 30,
1998 1999
---- ----
(In thousands)
Minority interest in net assets:
NL Industries .................................... $ 64,268 $ 113,022
CompX ............................................ 46,817 51,853
Subsidiaries of NL ............................... 633 2,853
Subsidiaries of CompX ............................ 4 98
---------- ----------
$ 111,722 $ 167,826
========== ==========
Nine months ended
September 30,
1998 1999
---- ----
(In thousands)
Minority interest in net earnings (losses) income from continuing operations:
NL Industries .................................... $ 57,011 $ 59,808
CompX ............................................ 5,082 6,478
Subsidiaries of NL ............................... 36 2,261
Subsidiaries of CompX ............................ (132) (94)
---------- ----------
$ 61,997 $ 68,453
========== ==========
Waste Control Specialists was formed in 1995 by Valhi and another
entity. Waste Control Specialists assumed certain liabilities of the other owner
and such liabilities exceeded the carrying value of the assets contributed by
the other owner. Consequently, all of Waste Control Specialists' net losses or
net income will accrue to the Company for financial reporting purposes until
Waste Control Specialists reports positive equity attributable to the other
owner. Accordingly, no minority interest in Waste Control Specialists' net
assets or net losses is reported at September 30, 1999, and no minority interest
in Waste Control Specialists' net assets, net earnings or net losses is expected
to be reported at least through the remainder of 1999.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
The Company reported income from continuing operations for the first
nine months of 1999 of $72.4 million, or $.62 per diluted share, compared to
income of $215.7 million, or $1.86 per diluted share, in the first nine months
of 1998. For the third quarter of 1999, Valhi reported income from continuing
operations of $8.2 million, or $.07 per diluted share, compared to income of
$13.1 million, or $.11 per diluted share, in the third quarter of 1998. The 1999
year-to-date results include a second quarter $90 million non-cash income tax
benefit ($52 million, or $.45 per diluted share, net of minority interest)
recognized by NL, as discussed below. The 1998 year-to-date results include
gains aggregating $196 million, or $1.69 per diluted share, net of income taxes
and minority interest, related to the sale of NL Industries' specialty chemicals
business and the initial public offering of CompX International common stock, a
charge of $32 million ($21 million, or $.18 per diluted share, net of income
taxes) related to the settlement of two lawsuits and a third quarter $8 million
tax benefit ($5 million, or $.04 per diluted share, net of minority interest)
resulting from refunds of prior-year German withholding taxes received by NL.
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 represent
management's belief and assumptions based on currently available information.
Forward-looking statements can be identified by the use of words such as
"believes," "intends," "may," "should," "anticipates," "expected" or comparable
terminology, or by discussions of strategies or trends. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it cannot give any assurances that these expectations will prove to
be correct. Such statements by their nature involve substantial risks and
uncertainties that could significantly impact expected results, and actual
future results could differ materially from those described in such
forward-looking statements. Among the factors that could cause actual future
results to differ materially are the risks and uncertainties discussed in this
Quarterly Report and those described from time to time in the Company's other
filings with the Securities and Exchange Commission, including, but not limited
to, future supply and demand for the Company's products, the extent of the
dependence of certain of the Company's businesses on certain market sectors
(such as the dependence of TIMET's titanium metals business on the aerospace
industry), the cyclicality of certain of the Company's businesses (such as NL's
TiO2 operations and TIMET's titanium metals operations), the impact of certain
long-term contracts on certain of the Company's businesses (such as the impact
of TIMET's long-term contracts with certain of its customers on its ability to
raise selling prices and the impact of TIMET's long-term contracts with certain
of its vendors on its ability to reduce or increase supply or achieve lower
costs), the possibility of labor disruptions, general global economic
conditions, competitive products and substitute products, customer and
competitor strategies, the impact of pricing and production decisions, potential
difficulties in integrating completed acquisitions, the possibility of labor
disruptions, environmental matters, government regulations and possible changes
therein, the ultimate resolution of pending litigation, possible future
litigation and possible disruptions of normal business activity from Year 2000
issues. Should one or more of these risks materialize (or the consequences of
such a development worsen), or should the underlying assumptions prove
incorrect, actual results could differ materially from those forecasted or
expected. The Company disclaims any intention or obligation to update or revise
any forward-looking statement whether as a result of new information, future
events or otherwise.
Chemicals
NL's titanium dioxide pigments ("TiO2") operations are conducted
through its wholly-owned subsidiary Kronos, Inc. NL sold its specialty chemicals
business unit, conducted by its wholly-owned subsidiary Rheox, Inc., in January
1998.
Three months ended Nine months ended
September 30, % September 30, %
1998 1999 Change 1998 1999 Change
(In millions) (In millions)
Net sales:
Kronos ........ $ 221.5 $242.7 +10% $685.7 $676.8 -1%
Rheox ......... -- -- 12.7 --
------ ------ ------ ------
$ 221.5 $242.7 +10% $698.4 $676.8 -3%
====== ====== ====== ======
Operating income:
Kronos ........ $ 40.2 $ 30.0 -26% $116.9 $ 95.2 -19%
Rheox ......... -- -- 2.7 --
------ ------ ------ ------
$ 40.2 $ 30.0 -26% $119.6 $ 95.2 -20%
====== ====== ====== ======
Kronos' TiO2 operating income decreased in the third quarter of 1999
compared to the third quarter of 1998 due primarily to lower average TiO2
selling prices and lower Ti02 production volumes, partially offset by higher
TiO2 sales volumes. Kronos' TiO2 operating income declined in the first nine
months of 1999 compared to the same period in 1998 due primarily to lower TiO2
production volumes, as average TiO2 selling prices and sales volumes were each
approximately the same in both periods. In addition, operating income in the
1999 year-to-date period includes a second quarter $5.3 million foreign currency
transaction gain related to certain of NL's short-term intercompany cross-border
financings that were settled in July 1999.
NL's average TiO2 selling prices in the third quarter of 1999 were 4%
lower than the third quarter of 1998 and were 2% lower than the second quarter
of this year. NL's TiO2 selling prices at the end of the third quarter of 1999
approximated the average for the quarter. NL's average TiO2 selling prices in
the first nine months of 1999 approximated average selling prices in the same
period in 1998, with slightly higher North American prices offset by lower
prices in export markets and slightly lower prices in Europe. NL and certain of
its competitors have announced worldwide TiO2 price increases, and NL expects
its average selling prices should increase beginning in late in 1999 or early
2000.
Kronos' record TiO2 sales volumes in the third quarter of 1999
increased 18% compared to the third quarter of 1998, and increased 6% compared
to the second quarter of this year, with strong demand in all major regions.
Sales volumes in the first nine months of 1999 approximated volumes in the first
nine months of 1998. Kronos' TiO2 production volumes in the third quarter of
1999 were 10% lower than the comparable period in 1998 and were 8% lower than
the second quarter of 1999 primarily as a result of scheduled downtime in the
third quarter of 1999 for maintenance at NL's chloride-process TiO2 facilities.
Production volumes in the first nine months of 1999 were 8% lower than the first
nine months of 1998 primarily due to this maintenance downtime and NL's decision
to manage inventory levels by curtailing production in the first quarter of
1999. Kronos' average production capacity utilization was 90% in the third
quarter of 1999 and 91% for the first nine months of the year. Kronos produced
at full capacity during 1998. Due to strong worldwide demand and Kronos' modest
inventory levels, NL intends to increase its TiO2 production volumes in the
fourth quarter of 1999, but NL expects its TiO2 production volumes in calendar
1999 will be below its TiO2 sales volumes for the year.
Overall, NL expects its calendar 1999 TiO2 operating income will be
lower than 1998 primarily because of lower TiO2 production volumes and slightly
lower average TiO2 selling prices, partially offset by higher TiO2 sales
volumes.
As discussed above, worldwide demand for TiO2 was strong in the second
and third quarters of 1999, and NL expects the strong demand will continue in
the fourth quarter of 1999. NL believes the increased demand is primarily a
result of strong worldwide market conditions, although NL believes a portion of
this increased demand is related to customers building their inventory levels.
Customers' decision to increase their inventory levels may be influenced by (i)
announced price increases, as discussed above in more detail, and (ii) general
concerns regarding the Year 2000 issue. NL believes that TiO2 demand in the
first half of 2000 could be lower than the last half of 1999 should customers
build significant inventories prior to year-end 1999.
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. Consequently, the translated
U.S. dollar value of NL's foreign sales and operating results are subject to
currency exchange rate fluctuations which may favorably or adversely impact
reported earnings and affect the comparability of period to period operating
results. 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 such net sales. Certain raw materials,
primarily titanium-containing feedstocks, are purchased in U.S. dollars, while
labor and other production costs are denominated primarily in the local
currencies. Fluctuations in the value of the U.S. dollar relative to other
currencies decreased NL's sales in the third quarter and first nine months of
1999 by $5 million and $4 million, respectively, compared to the same periods in
1998. Fluctuations in the value of the U.S. dollar relative to other currencies
similarly impacted NL's foreign currency-denominated operating expenses. The net
impact of currency exchange rate fluctuations on NL's operating income
comparisons, other than the $5.3 million foreign currency transaction gain
discussed above, was not significant in 1999 compared to 1998.
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 those amounts separately reported by
NL. Such additional non-cash expense currently reduces NL's operating income, as
reported by Valhi, by approximately $19 million per year.
Component Products
Three months ended Nine months ended
September 30, % September 30, %
1998 1999 Change 1998 1999 Change
(In millions) (In millions)
Net sales ....... $ 38.7 $ 55.9 +45% $ 110.5 $ 166.1 +50%
Operating income 8.8 9.8 +12% 22.2 29.0 +31%
Component products sales increased in 1999 compared to the same periods
in 1998 due primarily to sales generated by the Thomas Regout slide operations
acquired in January 1999 and sales generated by two lock producers acquired in
March and November 1998. Component products operating income in the first nine
months of 1998 included a $3.3 million first quarter non-recurring pre-tax
charge related to certain stock awarded in conjunction with CompX's March 1998
initial public offering.
Excluding the effect of these acquisitions, component products net
sales increased 9% in the third quarter of 1999 compared to the third quarter of
1998, and operating income increased 3% in the same period. The increase in
sales is due primarily to a 13% increase in sales of slide and ergonomic
products reflecting strengthened demand in the office furniture industry and a
3% increase in sales of security products.
Excluding the effect of these acquisitions and the stock award charge
discussed above, component products net sales increased 6% in the first nine
months of 1999 compared to the same period in 1998, and operating income
decreased 2% in the same period. The increase in sales is due primarily to a 10%
increase in sales of security products and a 3% increase in sales of slide and
ergonomic products. This year-to-date percentage increase in sales of slide and
ergonomic products is less than the comparable percentage increase in the third
quarter of this year due primarily to the slowdown in CompX's product sales to
the office furniture industry (primarily slide and ergonomic products) during
the first half of the year, partially offset by an increase in product sales to
the office furniture industry in the third quarter of 1999 due to the
strengthened demand.
Waste Management
As discussed in Note 2 to the Consolidated Financial Statements, the
Company commenced consolidating Waste Control Specialists' results of operations
in the third quarter of 1999. During the third quarter of 1999, Waste Control
Specialists reported net sales of $4.7 million and an operating loss of $1.5
million compared to net sales of $3.5 million and an operating loss of $2.4
million in the third quarter of 1998. For the first nine months of 1999, Waste
Control Specialists reported net sales of $13 million and an operating loss of
$9.5 million compared to net sales of $6.9 million and an operating loss of $8.7
million in the first nine months of 1998. While Waste Control Specialists
continued to report losses in the third quarter of 1999 due primarily to weak
demand for its hazardous and toxic waste disposal services, its operating loss
in the third quarter of 1999 was less than the second quarter of this year due
in part to the favorable effect of certain cost control measures implemented
during the third quarter of 1999.
Waste Control Specialists currently has permits which allow it to
treat, store and dispose of a broad range of hazardous and toxic wastes, and to
treat and store a broad range of low-level and mixed radioactive wastes. As
previously-reported, the hazardous waste industry (other than low-level and
mixed radioactive waste) currently has excess industry capacity caused by a
number of factors, including a relative decline in the number of environmental
remediation projects generating hazardous wastes and efforts on the part of
generators to reduce the volume of waste and/or manage wastes onsite at their
facilities. These factors have led to reduced demand and increased price
pressure for non-radioactive hazardous waste management services. While Waste
Control Specialists believes its broad range of permits for the treatment and
storage of low-level and mixed radioactive waste streams provides certain
competitive advantages, a key element of Waste Control Specialists' strategy to
provide "one-stop shopping" for hazardous, low-level and mixed radioactive
wastes includes obtaining permits for the disposal of low-level and mixed
radioactive wastes.
The current state law in Texas (where Waste Control Specialists'
disposal facility is located) prohibits the applicable Texas regulatory agency
from issuing a permit for the disposal of low-level radioactive waste to a
private enterprise. During the latest Texas legislative session which ended in
May 1999, Waste Control Specialists was supporting a proposed change in state
law which would allow the regulatory agency to issue a disposal permit to a
private entity. While the legislative session ended without any change in state
law, Waste Control Specialists has been pursuing other alternatives with respect
to the disposal of low-level and mixed radioactive wastes, including obtaining
certain modifications to its existing permits that would allow Waste Control
Specialists to dispose of certain types of low-level and mixed radioactive
wastes. Waste Control Specialists has obtained additional authority that allows
Waste Control Specialists to dispose of certain categories of low-level
radioactive materials, including naturally occurring radioactive material
("NORM") and exempt level materials (radioactive materials that do not exceed
certain specified radioactive concentrations and are exempt from licensing).
Although there are other categories of low-level and mixed radioactive wastes
that continue to be ineligible for disposal under the increased authority, Waste
Control Specialists will continue to pursue permit modifications to further
expand its treatment and disposal capabilities for low-level and mixed
radioactive wastes. In addition, Waste Control Specialists currently expects to
continue to support a change in state law, as discussed above, during the next
Texas legislative session which begins in January 2001. Expenditures associated
with any additional permit modifications concerning the disposal of low-level
and mixed radioactive wastes in the next few quarters are expected to be
significantly lower than those incurred in connection with the Texas legislative
session which ended in May 1999. There can be no assurance that Waste Control
Specialists will be successful in obtaining any future permit modifications.
In June 1999, Waste Control Specialists was awarded a contract by the
Kansas City District of the Corps of Engineers for the disposal of NORM,
low-level radioactive materials and certain hazardous wastes, all of which are
eligible for treatment and disposal under Waste Control Specialists' permits
currently in place. The Corps of Engineers oversees the Formerly Utilized Sites
Remedial Action Program ("FUSRAP") that involves the remediation of 46
government sites in 14 states throughout the U.S. The contract provides for
disposal of FUSRAP wastes for a minimum volume of $500,000 and a maximum volume
of $96 million over a five-year period ending July 2004, with an option to
extend the contract for an additional five years (the maximum contract value
remains $96 million). Waste Control Specialists believes this contract provides
a convenient vehicle for a variety of federal facilities to directly contract
with Waste Control Specialists for disposal of such wastes at listed prices.
Waste Control Specialists began receiving orders under this contract in the
third quarter of 1999. Waste Control Specialists' ability to realize significant
future sales pursuant to this contract is dependent upon a number of factors,
including the availability of government funding for the clean-up of specified
sites and Waste Control Specialists' successful marketing efforts that will
focus on getting managers and operators of these sites to select this contract
vehicle for disposal of specified wastes.
The completion of the Texas legislative session in May 1999 resulted in
a significant reduction in the Company's expenditures for permitting during the
third quarter of 1999 compared to the first half of this year. Waste Control
Specialists' program to improve operating efficiencies at its West Texas
facility and to curtail certain of its corporate and administrative costs has
also reduced operating costs in the third quarter of 1999 compared to the first
half of the year. Waste Control Specialists is also refocusing its sales and
marketing efforts to (i) emphasize opportunities where Waste Control Specialists
believes it has unique permitting capabilities for the treatment and storage of
mixed radioactive wastes that currently provide Waste Control Specialists with
certain competitive advantages and (ii) capitalize on the recent permit
modifications regarding disposal of certain types of low-level radioactive
wastes. Realizing significant sales volumes from these types of waste streams
may involve lengthy negotiations and due diligence processes necessary to
satisfy potential customers of the adequacy of Waste Control Specialists'
permitting ability for its facility and compliance with regulatory procedures.
The ability of Waste Control Specialists to achieve increased volumes of these
waste streams, together with improved operating efficiencies through further
cost reductions and increased capacity utilization, are important factors in
Waste Control Specialists' ability to achieve improved cash flows. The Company
currently believes Waste Control Specialists can become a viable, profitable
operation with its current operating permits. However, there can be no assurance
that Waste Control Specialists' efforts will prove successful in improving its
cash flows. In the event such efforts are not successful or Waste Control
Specialists is not successful in expanding its disposal capabilities for
low-level radioactive wastes, it is possible that Valhi will consider other
strategic alternatives with respect to Waste Control Specialists.
Equity affiliate - Tremont Corporation
As previously reported, Valhi commenced reporting equity in Tremont's
earnings in the third quarter of 1998. The Company's equity in Tremont's
earnings differs from the amount that would be expected by applying the
Company's ownership percentage to Tremont's separately-reported earnings because
of the effect of amortization of purchase accounting adjustments made in
conjunction with the Company's acquisitions of its interest in Tremont. Such
non-cash amortization currently reduces earnings (or increases losses)
attributable to Tremont as reported by the Company by approximately $3 million
per year.
Tremont accounts for its interests in both NL and TIMET by the equity
method. In the first nine months of 1999, Tremont reported net income of $12.3
million comprised primarily of equity in earnings of NL of $25.7 million, equity
in losses of TIMET of $4.6 million and a provision for income taxes of $6.6
million. For the third quarter of 1999, Tremont reported a net loss of $.5
million comprised primarily of equity in earnings of NL of $2.5 million, equity
in losses of TIMET of $2.7 million and an income tax benefit of $.7 million. For
the third quarter of 1998, Tremont reported net income of $7.5 million comprised
primarily of equity in earnings of TIMET and NL of $5 million and $4.8 million,
respectively, and a provision for income taxes of $1.8 million. Tremont's equity
in earnings of TIMET and NL differs from the amounts that would be expected by
applying Tremont's ownership percentage to TIMET's and NL's separately-reported
earnings because of the effect of amortization of purchase accounting
adjustments made by Tremont in conjunction with Tremont's acquisitions of its
interests in TIMET and NL. Amortization of such basis differences generally
increases earnings (or reduces losses) attributable to TIMET as reported by
Tremont, and generally reduces earnings (or increases losses) attributable to NL
as reported by Tremont.
NL's operating results are discussed above. Tremont's equity in
earnings of NL in the first nine months of 1999 includes Tremont's pro-rata
share ($17.7 million) of NL's second quarter non-cash income tax benefit
discussed below.
For the first nine months of 1999, TIMET reported sales of $374.5
million, an operating loss of $8.2 million and a net loss of $13.9 million
compared to sales, operating income and net income of $551.4 million, $82.9
million and $48.2 million, respectively, in the first nine months of 1998. In
the third quarter of 1999, TIMET reported sales of $112.7 million, an operating
loss of $7.8 million and a net loss of $7.5 million compared to sales, operating
income and net income of $173.5 million, $27.3 million and $16.1 million,
respectively, in the third quarter of 1998.
TIMET's results in 1999 were below those of 1998 principally due to a
25% decline in year-to-date mill products sales volumes caused by the
previously-reported lower demand in both its aerospace and industrial markets.
TIMET's sales in the third quarter of 1999 were 12% lower than TIMET's sales in
the second quarter of this year due to the lower sales volumes and to changes in
TIMET's product mix, as lower-priced industrial products represented a higher
percentage of TIMET's mill products sales volumes during the third quarter.
TIMET's average mill product selling prices decreased in the third quarter of
1999 compared to the prior quarter due largely to this mix change. TIMET's ingot
sales volumes in the third quarter of 1999 were also lower than the second
quarter. TIMET's volumes in the third quarter of 1999 were impacted by declines
in demand, including cancellations and push-outs by major aerospace customers,
and by production difficulties and inefficiencies at TIMET's North American
operations. TIMET's yield, rework and deviated material costs were higher, plant
operating rates were lower and resumption of production following certain
maintenance shutdowns took longer than expected. TIMET is focusing additional
attention and resources on immediately improving certain aspects of its
operating performance.
The downturn in TIMET's commercial aerospace markets is lasting longer
and is more pronounced than TIMET had previously expected. TIMET's backlog was
approximately $260 million at September 30, 1999 compared to $350 million at
September 30, 1998. TIMET currently believes its results in the fourth quarter
of 1999, excluding restructuring charges, will improve from third quarter 1999
levels, although TIMET expects to report an operating loss for the quarter. The
mid-October failure of a 2,500 ton press in TIMET's Ohio mill products plant may
result in lower sales volumes. TIMET is currently evaluating alternatives for
production originally scheduled on this press. TIMET is also considering further
personnel reductions and rationalization of plant capacity in light of its
revised market outlook and, as a result, TIMET believes it will likely incur a
restructuring charge in the fourth quarter of this year.
TIMET believes the year 2000 presents continuing challenges as the
commercial aerospace market is expected to remain depressed. TIMET believes its
results for next year will be heavily dependent upon volumes actually ordered
under its long-term agreements, particularly TIMET's contract with Boeing. TIMET
is continuing to work with Boeing to determine sales volumes for 2000 and to
improve the way the contract is administered by Boeing within its supplier base
in order to achieve the intended benefits of both parties. TIMET is continuing
its efforts to return to profitability by focusing on its manufacturing
processes and reducing overall costs, in addition to its efforts to work closely
with other major customers to solidify its sales volumes for 2000.
Tremont periodically evaluates the net carrying value of its long-term
assets, principally its investments in NL and TIMET, to determine if there has
been any decline in value below their net carrying amounts that is other than
temporary and would, therefore, require a write-down which would be accounted
for as a realized loss. Tremont's per share net carrying amount of its
investment in NL at September 30, 1999 was $11.12 per share, compared to a NYSE
per share market price of $12.63 at that date. At September 30, 1999, the NYSE
price of $8.94 per TIMET share indicated an aggregate NYSE market value of
Tremont's investment in TIMET of $110 million, or $44 million less than
Tremont's $154 million net carrying value of its investment in TIMET at that
date ($12.56 per TIMET share held). TIMET's NYSE price was $5.63 per share at
November 11, 1999. TIMET's NYSE stock price was highest to date during 1999 on
July 28 ($13.25 per share) and it was the lowest on November 2 ($4.50 per
share). Tremont believes NYSE stock prices (particularly in the case of
companies such as TIMET which have a major shareholder) are not necessarily
indicative of a company's enterprise value or the value that could be realized
if the company were sold. Tremont believes no writedown of its investment in
TIMET is required at September 30, 1999.
Valhi periodically evaluates the net carrying value of its long-term
assets, including its investment in Tremont, to determine if there has been any
decline in value below their carrying amounts that is other than temporary and
would, therefore, require a write-down which would be accounted for as a
realized loss. At September 30, 1999, the NYSE price of $23.88 per Tremont share
indicated an aggregate NYSE market value of Valhi's investment in Tremont common
stock of approximately $76 million, or $106 million less than Valhi's $182
million net carrying value of its investment in Tremont at that date. Tremont's
NYSE stock price was $15.75 per share at November 11, 1999. The Company believes
NYSE stock prices (particularly in the case of companies such as Tremont that
have a major shareholder and are not widely followed or traded) are not
necessarily indicative of a company's enterprise value or the value that could
be realized if the company were sold. After considering what it believes to be
all relevant factors including, among other things, the NYSE market prices of
Tremont's holdings of NL and TIMET, the length of time during which Tremont's
NYSE price has been less than the Company's per share net investment in Tremont,
recent ranges of Tremont's market price, Tremont's (and hence NL's and TIMET's)
operating results, financial position, estimated asset values and prospects, the
Company concluded that there had been no other than temporary decline in value
of the Company's investment in Tremont below its net carrying value at September
30, 1999.
As discussed above or as recently reported by TIMET, the commercial
aerospace market is expected to remain depressed in 2000. TIMET's results for
next year will be heavily dependent upon sales volumes actually ordered under
its long-term agreements, particularly TIMET's contract with Boeing. TIMET is
seeking to amend or replace its U.S. credit agreement. TIMET is considering
further personnel reductions and rationalization of plant capacity in light of
its revised market outlook and, as a result, TIMET believes it will likely incur
a restructuring charge in the fourth quarter of this year. In addition, in early
November 1999 TIMET suspended its regular quarterly common stock dividend. TIMET
is continuing its efforts to return to profitability by focusing on its
manufacturing processes and reducing overall costs, in addition to its efforts
to work closely with other major customers to solidify its volume position for
2000.
Tremont will continue to monitor and evaluate the value of its
investment in TIMET, and the Company will continue to monitor and evaluate the
value of its investment in Tremont. The Company and Tremont believe that TIMET's
financial position and prospects for next year will be more fully clarified
during the fourth quarter of 1999. The resolution of this uncertainty may either
positively or negatively impact Tremont's ongoing evaluation of TIMET's
prospects, and similarly positively or negatively impact the Company's ongoing
evaluation of Tremont's prospects. As Tremont's ongoing evaluation of TIMET's
near-term prospects are largely dependent upon the resolution of the current
uncertainty relating to TIMET's sales volumes for the next year, Tremont can
give no assurance that it will not conclude at the end of 1999 that there has
been an other than temporary decline in the value of its investment in TIMET
that would, at that time, require a writedown that would be accounted for as a
realized loss. Similarly, the Company can give no assurance that it will not
conclude at the end of 1999 that there has been an other than temporary decline
in the value of its investment in Tremont that would, at that time, require a
writedown that would be accounted for as a realized loss.
Other
General corporate items. Interest and dividend income decreased in the
first nine months of 1999 compared to the first nine months of 1998 due
primarily to a lower level of funds available for investment, partially offset
by a higher level of dividend distributions received from The Amalgamated Sugar
Company LLC. Interest and dividend income in the third quarter of 1999 was
higher than the third quarter of 1998 due primarily to a higher level of LLC
dividend distributions, partially offset by a lower level of funds available for
investment. Dividend distributions from The Amalgamated Sugar Company LLC are
dependent, in part, upon the LLC's results of operations. The Company received
$17.6 million of distributions from the LLC in the first nine months of 1999
compared to $12 million in the first nine months of 1998 ($5.9 million and nil
in the third quarter of 1999 and 1998, respectively). Based on the LLC's current
projections, the Company currently expects aggregate dividend distributions from
the LLC in calendar 1999 will be higher than the $18.4 million received in
calendar 1998. Despite the higher level of LLC distributions expected to be
received in 1999 compared to 1998, aggregate general corporate interest and
dividend income is expected to be lower in 1999 compared to 1998 due primarily
to a lower level of funds available for investment.
Securities transaction gains in both periods include gains related to
the disposition of a portion of the shares of Halliburton common stock held by
the Company when certain holders of the Company's LYONs debt obligations
exercised their right to exchange their LYONs for such Halliburton shares. Any
additional exchanges in 1999 or later would similarly result in additional
securities transaction gains. Securities transactions gains in 1999 also include
an aggregate $.6 million second quarter gain from the sale of certain
available-for-sale marketable securities. See Notes 3 and 9 to the Consolidated
Financial Statements.
NL's previously-reported $20 million of proceeds from the disposal of
its specialty chemicals business unit related to its agreement not to compete in
the rheological products business is being recognized as a component of general
corporate income (expense) ratably over the five-year non-compete period ($2.7
million and $3 million in the first nine months of 1998 and 1999, respectively).
Net general corporate expenses in 1998 includes an aggregate $32 million second
quarter pre-tax charge associated to the settlement of two lawsuits.
Interest expense. Interest expense decreased in 1999 compared to 1998
due primarily to a lower average level of outstanding indebtedness (primarily
related to NL's Senior Secured Discount Notes redeemed in October 1998).
Interest expense is expected to continue to be lower during the fourth quarter
of 1999 compared to the same period in 1998.
Provision for income taxes. The principal reasons for the difference
between the Company's effective income tax rates and the U.S. federal statutory
income tax rate are explained in Note 10 to the Consolidated Financial
Statements. Certain subsidiaries, including NL and, beginning in March 1998,
CompX, are not members of the consolidated U.S. tax group of which Valhi is a
member, and the Company provides incremental income taxes on such earnings.
In the second quarter of 1999, NL recognized a $90 million non-cash
income tax benefit related to (i) a favorable resolution of NL's
previously-reported tax contingency in Germany ($36 million) and (ii) a net
reduction in NL's deferred income tax valuation allowance due to a change in
estimate of NL's ability to utilize certain income tax attributes under the
"more-likely-than-not" recognition criteria ($54 million). With respect to the
German tax contingency, the German government has conceded substantially all of
its income tax claims against NL, and the government has released a DM 94
million ($50 million) lien on one of NL's German TiO2 plants that secured the
government's claim. The $54 million net reduction in NL's deferred income tax
valuation allowance is comprised of (i) a $78 million decrease in the valuation
allowance to recognize the benefit of certain deductible income tax attributes
which NL now believes meets the recognition criteria as a result of, among other
things, a corporate restructuring of NL's German subsidiaries and (ii) a $24
million increase in the valuation allowance to reduce the previously-recognized
benefit of certain other deductible income tax attributes which NL now believes
do not meet the recognition criteria due to a change in German tax law. The
German tax law change, enacted on April 1, 1999, was effective retroactively to
January 1, 1999 and resulted in an additional $6 million of current income tax
expense during the first nine months of 1999 for NL.
Also during the first nine months of 1999, NL reduced its deferred
income tax valuation allowance by $12 million primarily as a result of
utilization of certain tax attributes for which the benefit had not been
previously recognized under the "more-likely-than-not" recognition criteria.
Minority interest and discontinued operations. See Notes 11 and 1,
respectively, to the Consolidated Financial Statements. Minority interest in
NL's subsidiaries in 1999 relates principally to NL's majority-owned
environmental management subsidiary, NL Environmental Management Services, Inc.
("EMS").
Year 2000 Issue
General. As a result of certain computer programs being written using
two digits rather than four to define the applicable year, certain computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in normal business activities.
NL. NL has evaluated and substantially upgraded its computer systems,
both information technology ("IT") systems and non-IT systems involving embedded
chip technology, and software applications to ensure that the systems function
properly beginning January 1, 2000. To achieve its Year 2000 compliance plan, NL
is utilizing internal and external resources to identify, correct or reprogram,
and test its systems.
NL has conducted an inventory of its IT systems worldwide and is
currently testing, where practical, the systems and applications that have been
corrected or reprogrammed for Year 2000 compliance. NL has completed an
inventory of its non-IT systems and is in the process of correcting or replacing
date-deficient systems. The remediation effort for all critical IT and non-IT
systems is complete. Once systems undergo remediation, they are tested for Year
2000 compliance. For critical systems, the testing process usually involves
subjecting the remediated system to a simulated change of date from the year
1999 to the year 2000 using, in many cases, computer resources. NL uses a number
of packaged software products that have been upgraded to a Year 2000 compliant
version in the normal course of business. Excluding the cost of these software
upgrades, NL's cost of becoming Year 2000 compliant is expected to be
approximately $2 million, substantially all of which has been spent through
September 30, 1999.
NL has approximately 30 major computer systems which have been assessed
for Year 2000 compliance. At September 30, 1999, NL believes all of such systems
are Year 2000 compliant. Each operating unit has responsibility for its own
conversion, in line with overall guidance and oversight provided by a
corporate-level coordinator. The status of each of the remaining non-major
systems will be specifically tracked and monitored.
As part of its Year 2000 compliance plan, NL has requested
confirmations from its major domestic and foreign software and hardware vendors,
primary suppliers and major customers that they are developing and implementing
plans to become, or that they have become, Year 2000 compliant. Confirmations
received by NL to date indicate that such parties generally are in the process
of implementing remediation plans to ensure their systems are Year 2000
compliant by December 31, 1999. The major software vendors used by NL have
already delivered Year 2000 compliant software. Notwithstanding these efforts,
NL's ability to affect the Year 2000 preparedness of such vendors, suppliers and
customers is limited.
NL is in the process of developing a contingency plan to address
potential Year 2000 issues related to business interruption that may occur on
January 1, 2000 or thereafter. NL's plan is expected to be completed in the
fourth quarter of 1999. As part of the contingency plan, NL presently intends to
idle its manufacturing facilities shortly before the end of 1999 as an
additional safeguard against the unexpected loss of utility services and resume
production shortly after midnight of year-end 1999.
Although NL expects its systems to be Year 2000 compliant before
December 31, 1999, it cannot predict the outcome or success of the Year 2000
compliance programs of its vendors, suppliers and customers. NL also cannot
predict whether its major software vendors, who continue to test for Year 2000
compliance, will find additional problems that would result in unplanned
upgrades of their applications after December 31, 1999. As a result of these
uncertainties, NL cannot predict the impact on its consolidated financial
condition, results of operations or cash flows resulting from noncompliant Year
2000 systems that NL directly or indirectly relies upon. Should NL's Year 2000
compliance plan not be successful or be delayed beyond January 1, 2000, or
should one or more suppliers, vendors or customers fail to adequately address
their Year 2000 issues, the consequences to NL could be far-reaching and
material, including an inability to produce TiO2 at its manufacturing
facilities, which could lead to an indeterminate amount of lost revenue. Other
potential negative consequences could include plant malfunction, impeded
communications or power supplies, or slower transaction processing and financial
reporting. Although not anticipated, the most reasonably likely worst-case
scenario of failure by NL or its key suppliers or customers to become Year 2000
compliant would be a short-term slowdown or cessation of manufacturing
operations at one or more of its facilities and a short-term inability on the
part of NL to process orders and billings in a timely manner, and to deliver
products to customers.
CompX. CompX has installed information systems upgrades for both its
U.S. and Canadian facilities which contain, among many other features, software
compatibility with the Year 2000 issue. Excluding the cost of the information
systems upgrades, CompX's expenditures to-date to address the Year 2000
compliance have not been significant, and CompX does not currently anticipate
spending significant additional funds to address Year 2000 compliance in the
future. Thomas Regout's Year 2000 preparedness is substantially similar to
CompX's other operations.
As part of its Year 2000 compliance plan, CompX is seeking confirmation
from its major software and hardware vendors, primary suppliers and major
customers that they are developing and implementing plans to become, or that
they have become, Year 2000 compliant. Confirmations received by CompX to-date
indicate that such vendors, suppliers and customers generally are in the process
of becoming Year 2000 compliant by December 31, 1999. The major software vendors
used by CompX have already delivered Year 2000 compliant software.
Notwithstanding these efforts, CompX's ability to affect the Year 2000
preparedness of such vendors, suppliers and customers is limited.
CompX is developing a contingency plan to deal with potential Year 2000
issues related to business interruption that may occur on January 1, 2000 or
thereafter. CompX's plan is expected to be completed in the fourth quarter of
1999.
Although CompX expects its systems to be Year 2000 compliant before
December 31, 1999, it cannot predict the outcome or success of the Year 2000
compliance programs of its vendors, suppliers, and customers. CompX also cannot
predict whether its major software vendors, who continue to test for Year 2000
compliance, will find additional problems that might result in unplanned
upgrades of their applications after December 31, 1999. As a result of these
uncertainties, CompX cannot predict the impact on its consolidated financial
condition, results of operations or cash flows resulting from noncompliant Year
2000 systems that CompX directly or indirectly relies upon. Should CompX's Year
2000 compliance plan not be successful or be delayed beyond January 2000, or
should one or more suppliers, vendors or customers fail to adequately address
their Year 2000 issues, the consequences to CompX could be far-reaching and
material, including an inability to produce products at its manufacturing
facilities, which could lead to an indeterminate amount of lost revenue.
Although not anticipated, the most reasonably likely worst-case scenario of
failure by CompX or its key suppliers or customers to become Year 2000 compliant
would be a short-term slowdown or cessation of manufacturing operations at one
or more of CompX's facilities, delays in delivering products to customers and a
short-term inability on the part of CompX to process orders and billings in a
timely manner.
TIMET. Most of TIMET's information systems have been replaced in
connection with the implementation of its business-enterprise SAP system. The
initial implementation of SAP has been completed. The cost of the new system,
including related equipment and networks, aggregated $50 million ($41 million
capital; $9 million expense).
TIMET, with the help of outside specialists and consultants (i) has
completed an assessment of potential Year 2000 issues in its non-information
systems (e.g., its manufacturing and communication systems), as well as in those
information systems that were not replaced by the new SAP system and (ii) has
completed its system remediation and testing. Beginning in the third quarter of
1999, TIMET's Year 2000 efforts shifted from remediation and testing to
contingency planning. Nevertheless, TIMET will continue its Year 2000 testing
and monitoring throughout the end of 1999 and into 2000 to help ensure that
TIMET's systems will continue to operate without Year 2000 problems. TIMET has
developed contingency plans to be implemented in the event that mission critical
systems and/or associated processes experience a Year 2000 failure. The
contingency plans will be tested and rehearsed through the remainder of 1999. In
this regard, TIMET is considering the temporary shutdown of certain sensitive
production operations for a few days around the end of 1999 and early 2000 as an
additional safeguard against the unexpected loss of utilities service. TIMET
expects to schedule production to provide for such temporary shutdowns. TIMET
has expended approximately $4 million through September 1999 ($2 million in the
first nine months of 1999) on non-information system issues, principally
embedded system technology, and expects to additionally incur less than $1
million on such issues in the remainder of 1999. TIMET's evaluation of potential
Year 2000 exposure related to key suppliers and customers is also in process and
will continue throughout 1999.
Although TIMET believes its key information and non-information systems
are Year 2000 ready, it cannot predict whether it will find additional problems
that would result in unplanned upgrades of applications during the rest of 1999
or even after December 1999. As a result of these uncertainties, TIMET cannot
predict the impact on its consolidated financial condition, results of
operations or cash flows resulting from Year 2000 failures in systems that TIMET
directly or indirectly relies upon. Should TIMET's Year 2000 readiness plans not
be successful or be delayed beyond December 1999, the consequences to TIMET
could be far-reaching and material, including an inability to produce titanium
metal products at its manufacturing facilities, which could lead to an
indeterminate amount of lost revenue. Other potential negative consequences
could include impeded communications or power supplies, slower transaction
processing and financial reporting, and potential liability to third parties.
Although not anticipated, the most reasonably likely worst-case scenario of
failure by TIMET or its key suppliers or customers to become Year 2000 ready
would be a short-term slowdown or cessation of manufacturing operations at one
or more of TIMET's facilities and a short-term inability on the part of TIMET to
process orders and billings in a timely manner, and to deliver products to
customers.
Waste Control Specialists. Waste Control Specialists'
recently-installed information system is Year 2000 compliant. The cost of such
new information system was not material to Waste Control Specialists. Waste
Control Specialists is in the process of evaluating any potential Year 2000
issues with respect to embedded chip technology associated with the equipment at
its disposal facility; however, because such facility was constructed in the
past few years, Waste Control Specialists does not expect such equipment to
present any significant Year 2000 compliance issues. Waste Control Specialists
is also in the process of contacting its major suppliers and customers to
confirm they are developing and implementing plans to become, or that they have
become, Year 2000 compliant. Notwithstanding these efforts, Waste Control
Specialists' ability to affect the Year 2000 preparedness of such suppliers and
customers is limited. Waste Control Specialists has substantially completed its
evaluation of embedded chip technology and will continue to update Year 2000
compliance issues at significant suppliers and customers through the end of
1999. Any required remedial actions are expected to be completed prior to the
end of 1999. Assuming Waste Control Specialists does not encounter a significant
Year 2000 compliance issue with respect to the equipment at its disposal
facility, Waste Control Specialists does not expect its costs associated with
Year 2000 compliance will be material.
Although Waste Control Specialists believes its information systems and
equipment at its disposal facility will be Year 2000 compliant before December
31, 1999, it cannot predict the outcome or success of the Year 2000 compliance
programs at its significant suppliers and customers. As a result, Waste Control
Specialists cannot predict the impact on its financial position, results of
operations or cash flows resulting from noncompliant Year 2000 systems that
Waste Control Specialists directly or indirectly relies upon. Should Waste
Control Specialists' Year 2000 compliance program not be successful or delayed
beyond January 2000, or should one or more suppliers or customers fail to
adequately address their Year 2000 issues, the consequences to Waste Control
Specialists could be far-reaching and material, including an inability to
operate the disposal facility, which could lead to an indeterminate amount of
lost revenue. Other potential adverse consequences could include impeded
communications or power supplies or slower transaction processing and financial
reporting.
Tremont. As a holding company, Tremont does not have numerous
applications or systems. Tremont has completed an assessment of potential Year
2000 issues in its information systems and has implemented remedial actions,
including testing. The cost for Tremont's Year 2000 readiness is not significant
to Tremont. Although not anticipated, the most reasonably likely worst-case
scenario of failure by Tremont or its key service providers to become Year 2000
ready would be a short-term inability on the part of Tremont to process banking
transactions.
Valhi. As a holding company, Valhi does not have numerous applications
or systems. Valhi believes its corporate information systems are Year 2000
compliant. However, for the reasons discussed above with respect to its
subsidiaries and affiliates, Valhi cannot predict the impact on its consolidated
financial position, results of operations or cash flows resulting from
noncompliant Year 2000 systems that Valhi, it subsidiaries and affiliates
directly or indirectly rely upon. The consequences to the Company could be
far-reaching and material, including the loss of an indeterminate amount of
revenue. Other potential negative consequences could include manufacturing
equipment malfunctions, impeded communications or power supplies or slower
transaction processing and financial reporting.
Other. The completion dates for these planned Year 2000 modifications
are based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no assurance that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.
European monetary conversion
Beginning January 1, 1999, 11 of the 15 members of the European Union
("EU"), including Germany, Belgium, the Netherlands and France, established
fixed conversion exchange rates between their existing sovereign currencies and
the European currency unit ("euro"). Such members adopted the euro as their
common legal currency on that date. The remaining four EU members (including the
United Kingdom) may convert their sovereign currencies to the euro at a later
date. Certain European countries, such as Norway, are not members of the EU and
their sovereign currencies will remain intact. Each national government retained
authority to establish their own tax and fiscal spending policies and public
debt levels, although such public debt will be issued in, or re-denominated
into, the euro. However, monetary policies, including money supply and official
euro interest rates, are now established by a new European Central Bank.
Following the introduction of the euro, the participating countries' national
currencies are scheduled to remain legal tender as denominations of the euro
through January 1, 2002, although the exchange rates between the euro and such
currencies will remain fixed.
NL. NL conducts substantial operations in Europe, principally in
Germany, Belgium, the Netherlands, France and Norway. In addition, NL has a
significant amount of outstanding indebtedness denominated in the Deutsche Mark.
The national currency of the country in which such operations are located are
such operation's functional currency. The functional currency of the German,
Belgian, Dutch and French operations will convert from their respective
sovereign currencies to the euro over a two-year period that began in 1999. NL
has assessed and evaluated the impact of the euro conversion on its business and
has made the necessary system conversions. The euro conversion may impact NL's
operations including, among other things, changes in product pricing decisions
necessitated by cross-border price transparencies. Such changes in product
pricing decisions could impact both sales prices and purchasing costs, and
consequently favorably or unfavorably impact NL's reported consolidated results
of operations, financial condition or liquidity.
CompX. The functional currency of CompX's recently-acquired Thomas
Regout operations in the Netherlands and CompX's French lock operations will
convert to the euro from their respective national currencies over a two-year
period that began in 1999. The euro conversion may impact CompX's operations
including, among other things, changes in product pricing decisions necessitated
by cross-border price transparencies. Such changes in product pricing decisions
could impact both selling prices and purchasing costs and, consequently,
favorably or unfavorably impact results of operations.
In 1998, CompX assessed and evaluated the impact of the euro conversion
on its business and made the necessary system conversions. Modifications of
information systems to handle euro-denominated transactions have been
implemented and were not extensive. Because of the inherent uncertainty of the
ultimate effect of the euro conversion, CompX cannot accurately predict the
impact of the euro conversion on its consolidated results of operations,
financial condition or liquidity.
TIMET. TIMET also has operations and assets located in Europe,
principally in the United Kingdom. The United Kingdom has not adopted the euro.
Approximately one-half of TIMET's European sales are denominated in currencies
other than the U.S. dollar, principally the major European currencies. Certain
purchases of raw materials for TIMET's European operations, principally titanium
sponge and alloys, are denominated in U.S. dollars while labor and other
production costs are primarily denominated in local currencies. The U.S. dollar
value of TIMET's foreign sales and operating costs are subject to currency
exchange rate fluctuations that can impact reported earnings and may affect the
comparability of period-to-period operating results. Costs associated with
modification of certain of TIMET's systems to handle euro-denominated
transactions have not been significant.
LIQUIDITY AND CAPITAL RESOURCES:
Cash flows from operating activities. Trends in cash flows from
operating annual activities (excluding the impact of significant asset
dispositions and relative changes in assets and liabilities) are generally
similar to trends in the Company's earnings. Changes in assets and liabilities
generally result from the timing of production, sales, purchases and income tax
payments. In addition, cash flows from operating activities in 1998 include the
impact of the payment of cash income taxes related to the disposal of NL's
specialty chemicals business unit, even though the pre-tax proceeds from the
disposal are reported as a component of cash flows from investing activities.
Noncash interest expense consists of amortization of original issue discount on
certain Valhi and NL indebtedness and amortization of deferred financing costs.
Cash flows from investing and financing activities. Approximately
two-thirds of the Company's aggregate capital expenditures in the first nine
months of 1999 relates to NL, and substantially all of the remaining amount
relates to CompX.
During the first nine months of 1999, (i) CompX acquired a precision
ball bearing slide producer for approximately $53 million using funds on hand
and $20 million of borrowing under its unsecured revolving bank credit facility,
(ii) Valhi contributed an additional $10 million to Waste Control Specialists'
equity, (iii) Valhi purchased $1.9 million of additional shares of Tremont
common stock and $.6 million of additional shares of CompX common stock, (iv)
Valhi sold certain marketable securities for an aggregate of $6.6 million and
(v) Valhi received $2 million of additional consideration related to the 1997
disposal of its former fast food operations.
Net repayments of indebtedness in the first nine months of 1999 include
(i) NL's repayment in full of the remaining DM 107 million outstanding under the
term loan portion of its DM credit facility ($60 million when repaid) using
funds on hand and a net DM 40 million ($23 million) increase in the revolver
portion of the DM facility, (ii) CompX's $20 million of borrowing under its
revolving bank credit facility and (iii) Valhi's $21 million of borrowing under
its revolving bank credit facility and Valhi's repayment of $9.5 million of
short-term borrowings from Contran. NL reduced the DM revolver's September 30,
1999 outstanding balance of DM 120 million ($64 million) by DM 20 million ($11
million) in October 1999. The remaining DM 100 million balance will be repaid or
refinanced on or before its scheduled maturity date in September 2000.
At September 30, 1999, unused credit available under existing credit
facilities approximated $187 million, which was comprised of $80 million
available to CompX under its unsecured revolving senior credit facility, $78
million available to NL under non-U.S. credit facilities and $29 million
available to Valhi under its bank credit facility. Of such $78 million available
to NL, $59 million relates to NL's DM credit facility.
Chemicals - NL Industries
Certain of NL's U.S. and non-U.S. tax returns are being examined and
tax authorities have or may propose tax deficiencies, including non-income tax
related items and interest. As discussed above, in the second quarter of 1999
certain significant German tax contingencies aggregating an estimated DM 188
million ($100 million) through 1998 were resolved in NL's favor.
On April 1, 1999, the German government enacted certain income tax law
changes that were retroactively effective as of January 1, 1999. Based on these
changes, NL's effective current (cash) income tax rate in Germany increased
beginning in the second quarter of 1999.
During 1997, NL received a tax assessment from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($7 million at
September 30, 1999) relating to 1994. NL has appealed this assessment and a
local Norwegian court is scheduled to hear the case in January 2000. During
1998, NL was informed by the Norwegian tax authorities that additional tax
deficiencies of NOK 39 million ($5 million) will likely be proposed for 1996. NL
intends to vigorously contest this issue and litigate, if necessary. Although NL
believes that it will ultimately prevail, NL has granted a lien for the 1994 tax
assessment on its Norwegian Ti02 plant in favor of the Norwegian tax authorities
and will be required to grant security on the 1996 assessment when received.
No assurance can be given that these tax matters will be resolved in
NL's favor in view of the inherent uncertainties involved in court proceedings.
NL believes that it has provided adequate accruals for additional taxes and
related interest expense which may ultimately result from all such examinations
and believes that the ultimate disposition of such examinations should not have
a material adverse effect on its consolidated financial position, results of
operations or liquidity.
NL has been named as a defendant, potentially responsible party
("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, including sites for which EMS has
contractually assumed NL's obligation as discussed above. NL believes it has
provided adequate accruals ($117 million at September 30, 1999) 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. 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 $160 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. Examples of such proposed
legislation include bills which would permit civil liability for damages on the
basis of market share, rather than requiring plaintiffs to prove that the
defendant's product caused the alleged damage. 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 capital resources, 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,
repurchase shares of its common stock, 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 or other industries. 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.
Component products - CompX International
In January 1999, CompX acquired a precision ball bearing slide producer
for approximately $53 million, using available cash on hand and $20 million of
borrowing under its revolving bank credit facility. CompX has 2 signed a
definitive agreement to acquire a Taiwanese slide producer for $11.5 million
cash consideration. CompX currently expects this transactions will close in
November 1999.
CompX periodically evaluates its liquidity requirements, alternative
uses of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements in light of its capital resources
and estimated future operating cash flows. As a result of this process, CompX
may in the future seek to raise additional capital, refinance or restructure
indebtedness, issue additional securities, modify its dividend policy or take a
combination of such steps or other steps to manage its liquidity and capital
resources. In the normal course of business, CompX may review opportunities for
acquisitions, joint ventures or other business combinations in the component
products industry. In the event of any such transaction, CompX may consider
using available cash, issuing additional equity securities or increasing the
indebtedness of CompX or its subsidiaries.
Certain of CompX's sales generated by its Canadian operations are
denominated in U.S. dollars. To manage a portion of the foreign exchange rate
market risk associated with such receivables, in July 1999 CompX entered into a
series of short-term forward exchange contracts maturing through November 1999
to exchange an aggregate of $7 million for an equivalent amount of Canadian
dollars at exchange rates ranging between Cdn$ 1.49 and Cdn$ 1.50 per U.S.
dollar. At September 30, 1999, $5 million of such contracts remain outstanding.
In October 1999, CompX entered into an additional series of short-term forward
contracts maturing through March 2000 to exchange an aggregate of $9.5 million
for an equivalent amount of Canadian dollars at an exchange rate of Cdn$ 1.49
per U.S. dollar.
Tremont Corporation
Tremont is primarily a holding company which, at September 30, 1999,
owned approximately 39% of TIMET and 20% of NL. At September 30, 1999, the
market value of the 12.3 million shares of TIMET and the 10.2 million shares of
NL held by Tremont was approximately $110 million and $129 million,
respectively.
In 1998, Tremont entered into a revolving advance agreement with
Contran. Through September 30, 1999, Tremont had borrowed $13 million from
Contran under such facility, primarily to fund Tremont's purchases of shares of
NL and TIMET common stock. The revolving advance agreement is currently a
significant source of liquidity to Tremont and is expected to be a significant
source of liquidity in the future absent an increase in dividends on Tremont's
shares of NL common stock or Tremont's receipt of cash from other sources.
At September 30, 1999, Tremont reported total assets of $309 million
and stockholders' equity of $207 million. Tremont's total assets at such date
include its investments in TIMET ($154 million), NL ($114 million) and other
joint ventures ($14 million) and $3 million in cash and cash equivalents;
Tremont's total liabilities at such date include the demand loan owed to Contran
($13 million), accrued OPEB costs ($22 million), accrued insurance claims and
claim expenses related to its wholly-owned captive insurance subsidiary ($16
million) and deferred income taxes ($36 million).
Based upon certain technical provisions of the Investment Company Act
of 1940 (the "1940 Act"), Tremont might arguably be deemed to be an "investment
company" under the 1940 Act, despite the fact that Tremont does not now engage,
nor has it engaged or intended to engage, in the business of investing,
reinvesting, owning, holding or trading of securities. Tremont has taken the
steps necessary to give itself the benefits of a temporary exemption under the
1940 Act and has sought an order from the Securities and Exchange Commission
that Tremont is primarily engaged, through TIMET and NL, in a non-investment
company business. Tremont believes another exemption may be currently available
to it under the 1940 Act should the Commission deny Tremont's application for an
exemptive order.
Tremont periodically evaluates its liquidity requirements, capital
needs and availability of resources in view of, among other things, its
alternative uses of capital, its debt service requirements, the cost of debt and
equity capital and estimated future operating cash flows. As a result of this
process, Tremont has in the past and may in the future seek to obtain financing
from related parties or third parties, raise additional capital, modify its
dividend policy, restructure ownership interests of subsidiaries and affiliates,
incur, refinance or restructure indebtedness, purchase shares of its common
stock, consider the sale of interests in subsidiaries, affiliates, marketable
securities or other assets, or take a combination of such steps or other steps
to increase or manage liquidity and capital resources. In the normal course of
business, Tremont may investigate, evaluate, discuss and engage in acquisition,
joint venture and other business combination opportunities. In the event of any
future acquisition or joint venture opportunities, Tremont may consider using
available cash, issuing equity securities or incurring indebtedness.
General corporate - Valhi
Valhi's operations are conducted primarily through subsidiaries and an
affiliate (NL Industries, CompX, Tremont 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 of
1996. Suspension of NL's dividend did not materially adversely impact Valhi's
financial position or liquidity. Starting in the second quarter of 1998, NL
resumed regular quarterly dividends at a rate of $.03 per NL share, and NL
increased its quarterly dividend to $.035 per share in the first quarter of
1999. At the $.035 per share quarterly rate, and based on the 30.1 million NL
shares held by Valhi at September 30, 1999, Valhi would receive aggregate annual
dividends from NL of approximately $4.2 million. Tremont currently pays a
quarterly dividend of $.07 per share, and Valhi began to receive quarterly
dividends from Tremont in the third quarter of 1998. At that rate, and based
upon the 3.2 million Tremont shares owned by Valhi at September 30, 1999, Valhi
would receive aggregate annual dividends from Tremont of approximately $890,000.
Various credit agreements to which certain subsidiaries or affiliates 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. Valhi has not guaranteed any indebtedness of its subsidiaries or
affiliates. At September 30, 1999, Valhi had $5 million of parent level cash and
cash equivalents, including a portion held by Valcor which could be distributed
to Valhi, and had $21 million of short-term bank borrowings. In addition, Valhi
had $29 million of borrowing availability under its bank credit facility.
Valhi's LYONs do not require current cash debt service. At September
30, 1999, Valhi held 2.7 million shares of Halliburton 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 Halliburton
shares owned by Valhi. Exchanges of LYONs for Halliburton stock result in the
Company reporting income related to the disposition of the Halliburton stock for
both financial reporting and income tax purposes, although no cash proceeds are
generated by such exchanges. Valhi's potential cash income tax liability that
would have been triggered at September 30, 1999, assuming exchanges of all of
the outstanding LYONs for Halliburton stock at such date, was approximately $26
million. Valhi continues to receive regular quarterly Halliburton dividends
(currently $.125 per share) on the escrowed shares. At September 30, 1999, the
LYONs had an accreted value equivalent to approximately $33.45 per Halliburton
share, and the market price of the Halliburton common stock was $41 per share.
Based on The Amalgamated Sugar Company LLC's current projections, Valhi
currently expects that distributions received from the LLC in 1999, which are
dependent in part upon the future operations of the LLC, will approximate its
debt service requirements under its $250 million loans from Snake River. Certain
covenants contained in Snake River Sugar Company's third-party senior debt limit
the amount of debt service payments (principal and interest) which Snake River
is permitted to remit to Valhi under Valhi's $80 million loan to Snake River,
and such loan is subordinated to Snake River's third-party senior debt. Due to
these covenants, Snake River has not made any principal or interest payments on
the $80 million loan in 1998 or to-date in 1999 other than payment of the
accrued and unpaid interest owed as of December 31, 1997 ($3 million) paid in
December 1998 and $3.6 million of accrued and unpaid interest from 1998 paid in
September 1999. The Company currently expects to receive at least an additional
$3.6 million of 1998 unpaid interest in the fourth quarter of 1999. Assuming the
additional $3.6 million is paid in the fourth quarter, Snake River's aggregate
accrued and unpaid interest would be approximately $12 million at December 31,
1999. The Company believes both such accrued and unpaid interest as well as the
$80 million principal amount outstanding at September 30, 1999, will ultimately
be collected.
Redemption of the Company's interest in the LLC 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.
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 policies, 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 and related entities routinely evaluate 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 1998 Annual Report and prior 1999 periodic
reports for descriptions of certain legal proceedings.
In October 1999, defendant was denied a judgment notwithstanding the
verdict, and defendant's motion for a new trial was denied, in the
previously-reported Kenneth F. Jackson v. Waste Control Specialists LLC, et al.
Defendant has filed a notice of appeal.
In October 1999, NL was served with a complaint in State of Rhode
Island v. Lead Industries Association, et al. (Superior Court of Rhode Island,
No. 99-5226). Rhode Island, by and through its Attorney General, seeks
compensatory and punitive damages for medical, school and public and private
building abatement expenses that the State alleges were caused by lead paint,
and for funding of a public education campaign and screening programs. Plaintiff
seeks judgments of joint and several liability against NL, seven other companies
alleged to have manufactured lead products in paint and the Lead Industries
Association. Plaintiffs allege public nuisance, violation of the Rhode Island
Unfair Trade Practices and Consumer Protection Act, strict liability,
negligence, negligent misrepresentation and omissions, fraudulent
misrepresentation and omissions, civil conspiracy, unjust enrichment, indemnity
and equitable relief to protect children. NL intends to deny all allegations of
wrongdoing or liability and to defend the case vigorously.
In October 1999, NL was served with a complaint in Cofield, et al. v.
Lead Industries Association, et al. (Circuit Court for Baltimore City, Maryland,
Case No. 24-C-99-004491). Plaintiffs, six homeowners, seek to represent a class
of all owners of non-rental residential properties in Maryland. Plaintiffs seek
compensatory and punitive damages for the existence of lead-based paint in their
homes, including funds for monitoring, detecting and abating lead-based paint in
those residences. Plaintiffs allege that NL, fourteen other companies alleged to
have manufactured lead pigment, paint and/or gasoline additives, the Lead
Industries Association and the National Paint and Coatings Association are
jointly and severally liable for alleged negligent product design, negligent
failure to warn, supplier negligence, strict liability/defective design, strict
liability/failure to warn, nuisance, indemnification, fraud and deceit,
conspiracy, concert of action, aiding and abetting, and enterprise liability.
Plaintiffs seek damages in excess of $20,000 per household. In October 1999,
defendants removed the case to Maryland federal court. NL intends to deny all
allegations of wrongdoing or liability and to defend the case vigorously.
In October 1999, NL was served with a complaint in Smith, et al. v.
Lead Industries Association, et al. (Circuit Court for Baltimore City, Maryland,
Case No. 24-C-99-004490). Plaintiffs, six minors, each seek compensatory damages
of $5 million and punitive damages of $10 million. Plaintiffs allege that NL,
fourteen other companies alleged to have manufactured lead pigment, paint and/or
gasoline additives, the Lead Industries Association and the National Paint and
Coatings Association are jointly and severally liable for alleged negligent
product design, negligent failure to warn, supplier negligence, fraud and
deceit, conspiracy, concert of action, aiding and abetting, strict
liability/failure to warn and strict liability/defective design. In October
1999, defendants removed the case to Maryland federal court, and in November
1999 the case was remanded to state court. NL intends to deny all allegations of
wrongdoing or liability and to defend the case vigorously.
In October 1999, NL was served with an amended complaint in Thomas v.
Lead Industries Association, et al. (Circuit Court, Milwaukee, Wisconsin, Case
No. 99-CV-6411) adding as defendants NL and seven other companies alleged to
have manufactured lead products in paint to a suit originally filed against
plaintiff's landlords. Plaintiff, a minor, alleges injuries purportedly caused
by lead on the surfaces of premises in homes in which he resided. Plaintiff
seeks compensatory and punitive damages. Plaintiff alleges strict liability,
negligence, negligent misrepresentation and omissions, fraudulent
misrepresentations and omissions, concert of action, civil conspiracy and
enterprise liability causes of action against NL, six other former manufacturers
of lead products contained in paint and the Lead Industries Association. NL
intends to deny all allegations of wrongdoing or liability and to defend the
case vigorously.
City of New York, et al. v. Lead Industries Association, et al (No.
89-4617). In September 1999, the trial court denied the previously-reported
plaintiffs' motions for summary judgment on market share and conspiracy issues
and denied defendants' April 1999 motion for summary judgment on statute of
limitations grounds. Plaintiffs have appealed the denial of their motions.
Parker v. NL Industries, et al. (No. 97085060 CC 915). In September
1999, the Special Court of Appeals reversed the previously-reported grant of
summary judgment to defendants. Defendants have requested review from the Court
of Appeals.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 - Financial Data Schedule for the nine-month period ended
September 30, 1999.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended September 30, 1999.
July 29, 1999 - Reported Items 5 and 7.
August 27 1999 - 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 12, 1999 By /s/ Bobby D. O'Brien
---------------------------------------------
Bobby D. O'Brien
(Vice President and Treasurer,
Principal Financial Officer)
Date November 12, 1999 By /s/ Gregory M. Swalwell
---------------------------------------------
Gregory M. Swalwell
(Vice President and Controller,
Principal Accounting Officer)