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 MARCH 31, 1996 COMMISSION FILE NUMBER 33-63044
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VALCOR, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 74-2678674
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ FREEWAY, SUITE 1700, DALLAS, TEXAS 75240-2697
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 233-1700
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS. YES X NO
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THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF VALHI, INC. (FILE NO. 1-5467) AND
MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(A) AND (B) OF FORM
10-Q FOR REDUCED DISCLOSURE FORMAT.
VALCOR, INC.
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements.
Consolidated Balance Sheets - December 31, 1995
and March 31, 1996 3-4
Consolidated Statements of Operations - Three months
ended March 31, 1995 and 1996 5
Consolidated Statements of Cash Flows - Three months
ended March 31, 1995 and 1996 6
Consolidated Statement of Stockholder's Equity -
Three months ended March 31, 1996 7
Notes to Consolidated Financial Statements 8-11
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations. 12-15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 16
VALCOR, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS DECEMBER 31, MARCH 31,
1995 1996
------------ ----------
Current assets:
Cash and cash equivalents $ 17,618 $ 21,379
Accounts receivable 30,949 31,672
Receivable from affiliates 3,538 3,379
Inventories 36,385 32,033
Prepaid expenses 3,105 2,872
Deferred income taxes 2,409 5,656
-------- --------
Total current assets 94,004 96,991
-------- --------
Other assets:
Timber and timberlands 53,099 53,131
Intangible assets 18,145 17,634
Other 8,630 8,615
-------- --------
Total other assets 79,874 79,380
-------- --------
Property and equipment:
Land 22,290 21,814
Buildings 50,007 50,009
Equipment 184,240 183,985
Construction in progress 8,393 9,592
-------- --------
264,930 265,400
Less accumulated depreciation 111,216 125,770
-------- --------
Net property and equipment 153,714 139,630
-------- --------
$327,592 $316,001
======== ========
VALCOR, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDER'S EQUITY DECEMBER 31, MARCH 31,
1995 1996
------------ ----------
Current liabilities:
Current maturities of long-term debt $ 12,383 $ 12,394
Accounts payable 19,933 20,151
Accrued liabilities 21,470 29,170
Payable to affiliates 17 50
Income taxes 2,275 2,391
-------- --------
Total current liabilities 56,078 64,156
-------- --------
Noncurrent liabilities:
Long-term debt 198,584 196,331
Deferred income taxes 24,461 17,760
Other 4,245 7,109
-------- --------
Total noncurrent liabilities 227,290 221,200
-------- --------
Stockholder's equity:
Common stock 1 1
Additional paid-in capital 520 520
Retained earnings 45,871 32,320
Adjustments:
Currency translation adjustment 30 2
Pension liabilities (2,198) (2,198)
-------- --------
Total stockholder's equity 44,224 30,645
-------- --------
$327,592 $316,001
======== ========
[FN]
Commitments and contingencies (Note 1)
VALCOR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(IN THOUSANDS)
1995 1996
---- ----
Revenues and other income:
Net sales $105,546 $ 95,233
Other, net 920 365
-------- --------
106,466 95,598
-------- --------
Costs and expenses:
Cost of sales 82,822 80,990
Plant closure charge - 24,000
Selling, general and administrative 7,643 7,065
Interest 4,973 4,911
-------- --------
95,438 116,966
-------- --------
Income (loss) before income taxes 11,028 (21,368)
Provision for income taxes (benefit) 4,275 (8,200)
-------- --------
Net income (loss) $ 6,753 $(13,168)
======== ========
VALCOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(IN THOUSANDS)
1995 1996
---- ----
Cash flows from operating activities:
Net income (loss) $ 6,753 $(13,168)
Depreciation, depletion and amortization 4,921 5,122
Plant closure charge - 24,000
Deferred income taxes (771) (9,994)
Other, net 372 506
-------- --------
11,275 6,466
Change in assets and liabilities:
Accounts receivable (7,657) (1,419)
Inventories 2,598 3,313
Accounts payable and accrued liabilities 3,084 2,589
Accounts with affiliates 3,218 192
Other, net (512) 26
-------- --------
Net cash provided by operating activities 12,006 11,167
-------- --------
Cash flows from investing activities:
Capital expenditures (8,562) (4,991)
Other, net (8) 232
-------- --------
Net cash used by investing activities (8,570) (4,759)
-------- --------
Cash flows from financing activities:
Indebtedness:
Borrowings 8,680 6,913
Principal payments (14,589) (9,155)
Dividends (2,172) (383)
-------- --------
Net cash used by financing activities (8,081) (2,625)
-------- --------
Net increase (decrease) (4,645) 3,783
Currency translation (17) (22)
Cash and cash equivalents at beginning of period 23,256 17,618
-------- --------
Cash and cash equivalents at end of period $ 18,594 $ 21,379
======== ========
Supplemental disclosures - cash paid for:
Interest, net of amounts capitalized $ 2,615 $ 2,522
Income taxes 2,234 1,478
VALCOR, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS)
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
------ ----------- --------
Balance at December 31, 1995 $1 $520 $ 45,871
Net loss - - (13,168)
Dividends - - (383)
Other, net - - -
-- ---- --------
Balance at March 31, 1996 $1 $520 $ 32,320
== ==== ========
ADJUSTMENTS
------------------------
CURRENCY TOTAL
TRANSLATION PENSION STOCKHOLDER'S
ADJUSTMENT LIABILITIES EQUITY
----------- ----------- --------------
Balance at December 31, 1995 $ 30 $(2,198) $ 44,224
Net loss - - (13,168)
Dividends - - (383)
Other, net (28) - (28)
----- ------- --------
Balance at March 31, 1996 $ 2 $(2,198) $ 30,645
===== ======= ========
VALCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -BASIS OF PRESENTATION:
The consolidated balance sheet at December 31, 1995 has been condensed from
the Company's audited consolidated financial statements at that date. The
consolidated balance sheet at March 31, 1996 and the consolidated statements of
operations, cash flows and stockholder's equity for the interim periods ended
March 31, 1995 and 1996 have been prepared by the Company, without audit. In
the opinion of management, all adjustments necessary to present fairly the
consolidated financial position, results of operations and cash flows have been
made. The results of operations for the interim periods are not necessarily
indicative of the operating results for a full year or of future operations.
Certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted. The accompanying consolidated financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 (the "1995 Annual Report"). Commitments and contingencies are
discussed in Note 8, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the 1995 Annual Report.
NOTE 2 -BUSINESS SEGMENT INFORMATION:
THREE MONTHS ENDED
MARCH 31,
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1995 1996
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(IN MILLIONS)
Net sales:
Building products - Medite Corporation $ 58.6 $ 46.5
Hardware products - National Cabinet Lock, Inc. 20.1 21.2
Fast food - Sybra, Inc. 26.8 27.6
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$105.5 $ 95.3
====== ======
Operating income:
Building products:
Before restructuring charge $ 10.3 $ 1.5
Plant closure charge - (24.0)
------ ------
10.3 (22.5)
Hardware products 5.5 4.4
Fast food 1.1 1.6
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Total operating income (loss) 16.9 (16.5)
Interest expense (5.0) (4.9)
General corporate, net (.9) -
------ -------
Income (loss) before income taxes $ 11.0 $(21.4)
====== ======
NOTE 3 -INVENTORIES:
DECEMBER 31, MARCH 31,
1995 1996
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(IN THOUSANDS)
Raw materials:
Building products $12,404 $ 9,273
Hardware products 1,927 1,992
Fast food 1,379 1,288
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15,710 12,553
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In process products:
Building products 2,187 2,153
Hardware products 4,320 4,315
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6,507 6,468
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Finished products:
Building products 6,131 5,118
Hardware products 2,921 3,238
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9,052 8,356
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Supplies 5,116 4,656
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$36,385 $32,033
======= =======
NOTE 4 -ACCRUED LIABILITIES:
DECEMBER 31, MARCH 31,
1995 1996
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(IN THOUSANDS)
Current accrued liabilities:
Employee benefits $ 7,894 $ 7,009
Plant closure costs - 5,759
Interest 3,636 5,842
Insurance claims and expenses 2,357 2,557
Other 7,583 8,003
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$21,470 $29,170
======= =======
Other noncurrent liabilities:
Insurance claims and expenses $ 1,066 $ 1,166
Environmental costs 750 3,650
Accrued pension and OPEB costs 957 957
Other 1,472 1,336
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$ 4,245 $ 7,109
======= =======
NOTE 5 - LONG-TERM DEBT:
DECEMBER 31, MARCH 31,
1995 1996
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(IN THOUSANDS)
Valcor - 9 5/8% Senior Notes Due 2003 $100,000 $100,000
-------- --------
Medite:
Bank term loans 73,770 72,128
Bank working capital facilities 10,830 10,782
Other 4,117 4,065
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88,717 86,975
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Other:
Sybra bank credit agreements 16,770 16,494
Sybra capital leases 5,382 5,170
National Cabinet Lock capital leases 98 86
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22,250 21,750
-------- --------
210,967 208,725
Less current maturities 12,383 12,394
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$198,584 $196,331
======== ========
Medite has entered into interest rate swaps to mitigate the impact of
changes in interest rates for $26 million of bank debt due in 1998-2000 that
result in a weighted average fixed interest rate of 7.6% for such borrowings.
At March 31, 1996, the fair value of the interest rate swaps, based upon quotes
obtained from the counter party financial institution, is a $.5 million
receivable, representing the estimated amount Medite would receive if it were to
terminate the swap agreements at that date.
NOTE 6 - PROVISION FOR INCOME TAXES:
THREE MONTHS ENDED
MARCH 31,
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1995 1996
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(IN MILLIONS)
Expected tax expense (benefit) $ 3.9 $(7.5)
Non-U.S. tax rates (1.4) (.1)
Incremental tax on non-U.S. earnings 1.5 .2
State income taxes and other, net .3 (.8)
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$ 4.3 $(8.2)
===== =====
NOTE 7 - INTANGIBLE AND OTHER NONCURRENT ASSETS:
DECEMBER 31, MARCH 31,
1995 1996
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(IN THOUSANDS)
Intangible assets:
Goodwill $ 5,162 $ 5,119
Franchise fees 5,605 5,316
Other 7,378 7,199
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$18,145 $17,634
======= =======
Other assets:
Deferred financing costs $ 3,003 $ 2,918
Prepaid pension cost 1,501 1,507
Property held for sale 3,920 3,935
Other 206 255
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$ 8,630 $ 8,615
======= =======
NOTE 8 -PLANT CLOSURE CHARGE:
As previously reported, in March 1996 Medite decided to close its New
Mexico medium density fiberboard (`MDF'') plant effective May 13, 1996. The
New Mexico facility had been operating without an environmental permit with
respect to certain air quality emission standards. In March 1996, Medite
received the report of its third-party environmental engineering consultants
which indicated that (i) Medite's planned technological solution would not
achieve an acceptable reduction in emissions and (ii) the estimated cost of
alternative control technology, both in terms of capital expenditures and
increased ongoing operating expenses, would not be economically feasible. The
plant closure decision was based upon the additional capital and operating costs
which would be required to seek and obtain long-term environmental operating
permits, which costs Medite considered prohibitive and not recoverable,
particularly in light of other economic factors (MDF market/pricing outlook and
cost structure) relative to this plant.
Medite recorded a pre-tax restructuring charge of $24 million based upon
the estimated costs of permanently closing this facility. Approximately $15
million of such charge represents non-cash costs, most of which relate to the
net carrying value of property and equipment in excess of estimated net
realizable value. These non-cash costs were deemed utilized upon adoption of
the closure plan. Approximately $9 million of the charge represents workforce,
environmental and other estimated cash costs associated with closure of this
facility, none of which had been paid at March 31, 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
OVERVIEW
The Company reported a net loss of $13.2 million for the first quarter of
1996, which includes a $15 million after-tax charge to close Medite's New Mexico
MDF operations, as discussed below. Net income was $6.7 million in the first
quarter of 1995.
The statements in this Quarterly Report on Form 10-Q relating to matters
that are not historical facts, including, but not limited to, statements found
in this `Management's Discussion and Analysis of Financial Condition and
Results of Operations', are forward looking statements that involve a number of
risks and uncertainties. Factors that could cause actual future results to
differ materially from those expressed in such forward looking statements
include, but are not limited to, future supply and demand for the Company's
products (including cyclicality thereof), general economic conditions,
competitive products and substitute products, customer and competitor
strategies, the impact of pricing and production decisions, environmental
matters, government regulations and possible changes therein, and the ultimate
resolution of pending litigation and possible future litigation as discussed in
this Quarterly Report and the 1995 Annual Report.
BUILDING PRODUCTS
THREE MONTHS ENDED
MARCH 31, %
------------------
1995 1996 CHANGE
---- ---- ------
(IN MILLIONS)
Net sales:
Medium density fiberboard $45.5 $ 36.9 -19%
Traditional timber products 13.6 9.8 -28%
Eliminations (.5) (.2)
----- ------
$58.6 $ 46.5 -21%
===== ======
Operating income:
Medium density fiberboard:
Before restructuring charge $ 9.6 $ 1.5
Plant closure cost - (24.0)
----- ------
9.6 (22.5)
Traditional timber products .7 -
----- ------
$10.3 $(22.5)
===== ======
In the first quarter of 1996, Medite recorded a $24 million pre-tax charge
($15 million net of income tax benefits) related to closure of its New Mexico
MDF plant. See Note 8 to the Consolidated Financial Statements. Cash costs,
net of income tax benefits, are not expected to be material. The New Mexico MDF
operations accounted for about 20% of MDF net sales in the first quarters of
both 1995 and 1996, and such operations generated nominal operating income in
the 1995 period and a $1 million operating loss in the 1996 period.
Excluding the plant closure charge, MDF sales and operating income declined
in the first quarter of 1996 compared to 1995 primarily due to a 17% reduction
in average selling prices. MDF selling prices generally peaked in the second
quarter of 1995 and declined during the last half of 1995 and first quarter of
1996. Increases in industry capacity, particularly in Europe, and slower
economic growth in North America and Europe contributed to the lower MDF prices
and are currently expected to continue MDF price and volume pressures for the
remainder of 1996. Fluctuations in foreign exchange rates, principally a
weakening of the U.K. Pound sterling, along with a lower mix of higher-margin
specialty MDF products also diluted 1996 operating margins.
Medite allocates timber harvested from its fee timberlands between log
sales and its traditional timber products conversion facilities depending upon
prevailing market conditions. While log sales volumes increased almost 40%
compared to the first quarter of 1995, lower average selling prices in all
traditional timber product lines resulted in a decline in sales and operating
income. Severe winter weather, curtailed pulp and paper production and the slow
recovery of housing starts in Medite's primary markets all contributed to soft
demand and a weak pricing environment.
HARDWARE PRODUCTS
THREE MONTHS ENDED
MARCH 31, %
------------------
1995 1996 CHANGE
---- ---- ------
(IN MILLIONS)
Net sales $20.1 $21.2 + 6%
Operating income 5.5 4.4 -20%
Operating income margins were impacted by certain changes in product mix,
including volume related to certain lower-margin Canadian operations acquired in
August 1995. Volumes continued to increase in 1996 in both the workstation and
drawer slide product lines while lock volume from a government contract
completed in early 1995 has only been partially replaced.
FAST FOOD
THREE MONTHS ENDED
MARCH 31, %
------------------
1995 1996 CHANGE
---- ---- ------
(IN MILLIONS)
Net sales $26.8 $27.6 + 3%
Operating income 1.1 1.6 +47%
Fast food results improved in the first quarter of 1996 compared to the
same period in 1995 due principally to a 3% increase in comparable store sales.
Operating income and margins were also favorably impacted by successful first
quarter promotions and reduced training costs associated with the slower rate of
opening new stores in 1996. Sybra closed six under-performing stores in the
first quarter of 1996, which also contributed to the increase in fast food
operating income and margins. Sybra may close one or two additional stores
later in the year.
A significant portion of Sybra's restaurant employees work on a part-time
basis and are paid at rates related to the minimum wage rate. Restaurant labor
costs currently approximate 29% of sales. Any increase in the minimum wage rate
would increase Sybra's labor costs. Although Sybra's competitors would likely
experience similar increases, there can be no assurance that Sybra will be able
to increase sales prices to offset future increases, if any, in these costs.
One new restaurant was opened in the second quarter and Sybra is
considering opening up to four additional new stores later in the year. The
Company is considering various strategic alternatives with respect to this
increasingly competitive business, including possible disposition of one or more
regions.
OTHER
At March 31, 1996, approximately $148 million of the Company's indebtedness
bears interest at fixed rates averaging 9.1%. The average interest rate on the
$60 million of variable rate borrowings outstanding at March 31, 1996, was 7.1%
(7.5% at December 31, 1995 and 7.8% at December 31, 1994).
Income tax rates vary by jurisdiction (country and/or state) and relative
changes in the geographic source of the Company's pre-tax earnings, and in the
related availability and usage of foreign tax credits, can result in
fluctuations in the effective income tax rate. See Note 6 to the Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES:
Cash flows from operating activities. Cash flow from operating activities
before changes in assets and liabilities in 1996 declined approximately $5
million from that of the same period in 1995, reflecting the decline in
earnings. Changes in working capital levels generated more cash in 1996 than in
the 1995 period in large part due to relative changes in MDF receivables related
to lower sales levels.
Cash flows from investing and financing activities. Capital expenditures
for calendar 1996 are expected to approximate the $26 million spent in 1995 and
are expected to be financed primarily from the respective unit's operations or
credit facilities.
Net repayments of indebtedness in 1995 relate principally to relative
changes in revolving credit facilities. At March 31, 1996, unused credit
available under existing subsidiary credit agreements aggregated $34 million.
Other. Valcor's operations are conducted through its subsidiaries (Medite,
National Cabinet Lock and Sybra). Accordingly, Valcor's long-term ability to
meet its parent company level obligations (principally debt service on the
Senior Notes) is largely dependent on the receipt of dividends or other
distributions from its subsidiaries. Various subsidiary credit agreements
contain customary limitations on the payment of dividends, typically a
percentage of net income or cash flow. Valcor has not guaranteed any
indebtedness of its subsidiaries. The Company believes that future
distributions from its subsidiaries will be sufficient to enable Valcor to meet
its obligations. Valcor dividends to Valhi are generally limited to 50% of
consolidated net income, as defined in the Senior Note Indenture. At March 31,
1996, no amounts were available for dividends.
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 may in the future seek to raise additional capital,
refinance or restructure indebtedness, modify its dividend policy, consider the
sale of interests in subsidiaries, business units or other assets, or take a
combination of such steps or other steps, to increase liquidity, reduce
indebtedness and fund future activities. The Company may also evaluate
acquisitions of interests in, or combinations with, companies related to its
current businesses. The Company intends to consider such activities in the
future and, in connection therewith, may consider issuing additional equity
securities and/or increasing indebtedness. In this regard, the Senior Note
Indenture contains limitations on the Company's ability to incur additional
indebtedness or hold noncontrolling interests in business units.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 - Financial Data Schedule for the three-month period ended March
31, 1996.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended March 31, 1996 and the month
of April 1996:
January 26, 1996 - Reported Items 5 and 7.
March 14, 1996 - Reported Items 5 and 7.
April 23, 1996 - Reported Items 5 and 7.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALCOR, INC.
---------------------------------
(Registrant)
Date May 7, 1996 By /s/ William C. Timm
--------------- ------------------------------
William C. Timm
Vice President - Finance and
Treasurer
(Chief Financial Officer)
Date May 7, 1996 By /s/ J. Thomas Montgomery, Jr.
--------------- -----------------------------
J. Thomas Montgomery, Jr.
Vice President and Controller