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, 1997 COMMISSION FILE NUMBER 1-5467
VALHI, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 87-0110150
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ FREEWAY, SUITE 1700, DALLAS, TEXAS 75240-2697
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 233-1700
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS.
YES X NO
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ON APRIL 30, 1997: 114,423,814.
VALHI, INC. AND SUBSIDIARIES
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1996
and March 31, 1997 3-4
Consolidated Statements of Operations -
Three months ended March 31, 1996 and 1997 5
Consolidated Statement of Stockholders' Equity -
Three months ended March 31, 1997 6
Consolidated Statements of Cash Flows -
Three months ended March 31, 1996 and 1997 7-8
Notes to Consolidated Financial Statements 9-23
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 24-32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 33
Item 6. Exhibits and Reports on Form 8-K. 33-34
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS DECEMBER MARCH 31,
31, 1997
1996
Current assets:
Cash and cash equivalents $ 255,679 $ 262,482
Marketable securities 142,478 145,510
Accounts and other receivables 155,430 193,096
Refundable income taxes 9,414 3,770
Receivable from affiliates 13,931 9,103
Inventories 251,597 209,164
Prepaid expenses 7,537 7,269
Deferred income taxes 1,597 1,234
Total current assets 837,663 831,628
Other assets:
Marketable securities 51,328 79,110
Investment in and advances to
joint ventures 196,697 199,807
Loans and notes receivable 3,240 181,519
Mining properties 36,441 31,970
Prepaid pension cost 25,313 25,345
Goodwill 258,359 255,797
Deferred income taxes 223 223
Other 45,479 46,468
Total other assets 617,080 820,239
Property and equipment:
Land 37,538 34,977
Buildings 189,875 179,359
Equipment 610,545 564,793
Construction in progress 15,723 14,880
853,681 794,009
Less accumulated depreciation 163,442 153,041
Net property and equipment 690,239 640,968
$2,144,982 $2,292,835
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY DECEMBER MARCH 31,
31, 1997
1996
Current liabilities:
Notes payable $ 38,732 $ 23,776
Current long-term debt 235,648 204,585
Accounts payable 75,307 61,149
Accrued liabilities 127,935 129,230
Payable to affiliates 47,387 14,954
Income taxes 8,148 7,783
Deferred income taxes 30,523 33,422
Total current liabilities 563,680 474,899
Noncurrent liabilities:
Long-term debt 844,468 1,070,178
Accrued pension cost 59,215 55,365
Accrued OPEB cost 56,257 55,144
Accrued environmental costs 109,908 133,977
Deferred income taxes 178,049 163,297
Other 29,237 31,419
Total noncurrent liabilities 1,277,134 1,509,380
Minority interest 249 237
Stockholders' equity:
Common stock 1,248 1,251
Additional paid-in capital 35,258 36,807
Retained earnings 282,766 269,519
Adjustments:
Marketable securities 65,105 84,545
Currency translation (6,210) (9,555)
Pension liabilities (3,160) (3,160)
Treasury stock (71,088) (71,088)
Total stockholders' equity 303,919 308,319
$2,144,982 $2,292,835
Commitments and contingencies (Note 1)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996* 1997
Revenues and other income:
Net sales $261,651 $265,305
Other, net 12,542 16,701
274,193 282,006
Costs and expenses:
Cost of sales 187,291 204,767
Selling, general and administrative 49,778 77,652
Interest 24,808 30,659
261,877 313,078
12,316 (31,072)
Equity in earnings (losses) of:
Amalgamated Sugar Company 3,597 -
Waste Control Specialists (1,151) (2,758)
Income (loss) before income taxes 14,762 (33,830)
Provision for income taxes (benefit) 3,831 (10,698)
Minority interest 2,321 8
Income (loss) from continuing operations 8,610 (23,140)
Discontinued operations (14,298) 15,671
Net loss $ (5,688) $ (7,469)
Earnings (loss) per common share:
Continuing operations $ .07 $ (.20)
Discontinued operations (.12) .13
Net loss $ (.05) $ (.07)
Cash dividends per share $ .05 $ .05
Weighted average common shares outstanding 114,569 114,792
*Reclassified
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS)
ADDITIONAL ADJUSTMENTS
COMMON PAID-IN RETAINEDMARKETABLE CURRENCY PENSION
STOCK CAPITALEARNINGSSECURITIESTRANSLATI LIABILITIES
ON
Balance at December 31,$1,248 $35,258 $282,766$65,105 $(6,210) $(3,160)
1996
Net loss - - (7,469) - - -
Dividends - - (5,778) - - -
Adjustments, net - - - 19,440 (3,345) -
Other, net 3 1,549 - - - -
Balance at March 31, $1,251 $36,807 $269,519$84,545 $(9,555) $(3,160)
1997
TOTAL
TREASURY STOCKHOLDERS'
STOCK EQUITY
Balance at December 31, $(71,088)$303,919
1996
Net loss - (7,469)
Dividends - (5,778)
Adjustments, net - 16,095
Other, net - 1,552
Balance at March 31, $(71,088)$308,319
1997
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(IN THOUSANDS)
1996* 1997
Cash flows from operating activities:
Net loss $ (5,688) $ (7,469)
Depreciation, depletion and amortization 16,301 15,937
Noncash interest expense 8,114 8,929
Change in accounting principle - 30,000
Deferred income taxes (5,034) (12,226)
Minority interest 2,321 8
Other, net (2,888) (2,794)
Equity in:
Discontinued operations 14,298 (15,671)
Amalgamated Sugar Company (3,597) -
Waste Control Specialists 1,151 2,758
24,978 19,472
Medite, net 5,065 (36,456)
Sybra, net 2,518 (78)
Amalgamated Sugar Company, net (45,782) -
Change in assets and liabilities:
Accounts and notes receivable (23,620) (33,211)
Inventories (10,631) 28,464
Accounts payable and accrued liabilities (13,490) (292)
Other, net (6,834) 11,347
Net cash used by operating activities (67,796) (10,754)
Cash flows from investing activities:
Capital expenditures (13,083) (9,646)
Purchases of minority interest (9,049) -
Investment in Waste Control Specialists (5,000) (3,000)
Loans to affiliates:
Loans (5,400) (28,250)
Collections 8,400 14,250
Other loans and notes receivable:
Loans - (200,600)
Collections - 12,586
Pre-close dividend from Amalgamated Sugar - 11,518
Company
Medite, net (2,851) 34,686
Sybra, net (1,351) (688)
Amalgamated Sugar Company, net (2,333) -
Other, net 1,646 2,443
Net cash used by investing activities (29,021) (166,701)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(IN THOUSANDS)
1996* 1997
Cash flows from financing activities:
Indebtedness:
Borrowings $ 46,079 $ 390,000
Principal payments (16,014) (189,414)
Deferred financing costs paid - (3,434)
Repayment of loan from affiliate - (7,244)
Valhi dividends paid (5,764) (5,778)
Distributions to minority interest (2,814) -
Medite, net (1,742) (9)
Sybra, net (488) 4
Amalgamated Sugar Company, net 49,172 -
Other, net 593 1,755
Net cash provided by financing 69,022 185,880
activities
Net change (27,795) 8,425
Currency translation (645) (1,622)
Cash and equivalents at beginning of period 170,908 255,679
Cash and equivalents at end of period $142,468 $ 262,482
Supplemental disclosures - cash paid
(received) for:
Interest, net of amounts capitalized:
Continuing operations - consolidated $ 6,712 $ 11,215
companies
Amalgamated 3,965 -
Discontinued operations 2,723 459
Eliminations (203) (225)
$ 13,197 $ 11,449
Income taxes, net:
Continuing operations - consolidated $ 8,432 $ (3,760)
companies
Amalgamated 756 -
Discontinued operations 492 30,622
$ 9,680 $ 26,862
*Reclassified.
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION:
The consolidated balance sheet of Valhi, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 1996 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at March 31, 1997 and the consolidated statements of
operations, cash flows and stockholders' equity for the interim periods ended
March 31, 1996 and 1997 have been prepared by the Company, without audit. In
the opinion of management, all adjustments necessary to present fairly the
consolidated financial position, results of operations and cash flows have been
made. The results of operations for the interim periods are not necessarily
indicative of the operating results for a full year or of future operations.
Certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted. The accompanying consolidated financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 (the "1996 Annual Report"). Certain 1996 amounts have been
reclassified to conform to the 1997 presentation. See Notes 14 and 15.
The Company adopted the recognition requirements of Statement of Position
("SOP") No. 96-1, "Environmental Remediation Liabilities" in the first quarter
of 1997. The new rule, among other things, expands the types of costs that must
be considered in determining environmental remediation accruals. As a result of
adopting the new SOP, the Company recognized a noncash cumulative pre-tax charge
of $30 million ($19.5 million, or $.17 per share, net-of-tax) related to
environmental matters at 56%-owned NL Industries, Inc., which is comprised
primarily of estimated future undiscounted expenditures (principally legal and
professional fees) associated with managing and monitoring existing
environmental remediation sites. Previously, such expenditures were expensed as
incurred.
Commitments and contingencies are discussed in Notes 14 and 15,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Legal Proceedings" and the 1996 Annual Report.
Contran Corporation holds, directly or through subsidiaries, approximately
91% of Valhi's outstanding common stock.
NOTE 2 - BUSINESS SEGMENT INFORMATION:
OPERATIONS PRINCIPAL ENTITIES % OWNED
Chemicals NL Industries, Inc. 56%
Component products CompX International Inc. 100%
Waste management Waste Control Specialists 50%
NL's chemicals operations are conducted through Kronos, Inc. (titanium
dioxide pigments or "TiO2") and Rheox, Inc. (specialty chemicals). The
Company's component products (CompX) subsidiary is owned by Valcor, Inc., a
wholly-owned subsidiary of Valhi. Each of NL (NYSE: NL) and Valcor are subject
to the periodic reporting requirements of the Securities Exchange Act of 1934,
as amended. The refined sugar operations conducted by The Amalgamated Sugar
Company in 1996 are presented on the equity method. See Note 15. The results
of operations of Valcor's wholly-owned building products subsidiary, conducted
by Medite Corporation, and Valcor's wholly-owned fast food subsidiary, conducted
by Sybra, Inc., are presented as discontinued operations. See Note 14.
THREE MONTHS ENDED
MARCH 31,
1996 1997
(IN MILLIONS)
Net sales:
Chemicals $240.4 $239.5
Component products 21.2 25.8
$261.6 $265.3
Operating income:
Chemicals $ 36.6 $ 13.5
Component products 4.4 6.3
41.0 19.8
General corporate items:
Securities earnings 2.7 14.7
Expenses, net (6.7) (34.9)
Interest expense (24.8) (30.7)
12.2 (31.1)
Equity in earnings (losses) of:
Waste Control Specialists (1.1) (2.7)
Amalagamated Sugar Company 3.6 -
Income (loss) before income taxes $ 14.7 $(33.8)
THREE MONTHS ENDED MARCH
31,
DEPRECIATION, CAPITAL
DEPLETION EXPENDITURES
AND
AMORTIZATION
1996 1997 1996 1997
(IN MILLIONS)
Chemicals $15.4 $15.0 $12.2 $8.9
Component products .7 .8 .7 .5
Other .2 .1 .2 .2
$16.3 $15.9 $13.1 $9.6
NOTE 3 - EARNINGS PER COMMON SHARE:
Earnings per share is based on the weighted average number of common shares
outstanding. Common stock equivalents are excluded from the computation because
they are either antidilutive or the dilutive effect is not material. The Company
will retroactively adopt Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share," effective December 31, 1997. Basic earnings per
share pursuant to SFAS No. 128 will be equivalent to earnings per share
presented herein, and diluted earnings per share pursuant to SFAS No. 128 is not
expected to be materially different from basic earnings per share.
NOTE 4 - MARKETABLE SECURITIES:
DECEMBER MARCH 31,
31, 1997
1996
(IN THOUSANDS)
Current asset (available-for-sale) -
Dresser Industries common stock $142,478 $145,510
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC $ 34,070 $ 62,387
Common stocks 17,258 16,723
$ 51,328 $ 79,110
Valhi holds 5.5 million shares of Dresser common stock with a quoted market
price of $31 at March 31, 1997, or an aggregate market value of approximately
$169 million (cost - $44 million). Such Dresser stock is exchangeable for
Valhi's LYONs, at the option of the LYONs holder, and the carrying value of the
Dresser stock is limited to the accreted LYONs obligation. See Note 11.
The Company's investment in The Amalgamated Sugar Company LLC (cost - $34
million) is discussed in Note 15. The aggregate cost of other available-for-
sale common stocks is approximately $16 million.
NOTE 5 - INVENTORIES:
DECEMBER MARCH 31,
31, 1997
1996
(IN THOUSANDS)
Raw materials:
Chemicals $ 43,284 $ 28,529
Component products 2,556 2,499
Building products 4,306 1,813
Fast food 1,406 1,323
51,552 34,164
In process products:
Chemicals 10,356 10,088
Component products 4,974 4,935
Building products 83 -
15,413 15,023
Finished products:
Chemicals 142,956 122,014
Component products 3,300 3,309
Building products 1,096 215
147,352 125,538
Supplies 37,280 34,439
$251,597 $209,164
NOTE 6 - ACCRUED LIABILITIES:
DECEMBER MARCH 31,
31, 1997
1996
(IN THOUSANDS)
Employee benefits $ 47,331 $ 37,626
Environmental costs 6,126 9,118
Plant closure costs 7,669 6,881
Interest 11,157 20,799
Miscellaneous taxes 5,262 5,147
Other 50,390 49,659
$127,935 $129,230
NOTE 7 - ACCOUNTS WITH AFFILIATES:
DECEMBER MARCH 31,
31, 1997
1996
(IN THOUSANDS)
Receivable from affiliates:
Demand loan to Contran $ - $ 9,000
Net dividend receivable from Amalgamated 11,518 -
Other 2,413 103
$13,931 $ 9,103
Payable to affiliates:
Demand loan from Contran $ 7,244 $ -
Income taxes payable to Contran 29,633 5,029
Tremont Corporation 3,529 3,471
Louisiana Pigment Company 6,677 6,205
Other 304 249
$47,387 $14,954
NOTE 8 - LOANS AND NOTES RECEIVABLE:
DECEMBER MARCH 31,
31, 1997
1996
(IN THOUSANDS)
Snake River Sugar Company:
Tranche A $ - $ 97,514
Tranche B - 81,099
Snake River Farms II - 9,000
Other 4,740 5,988
4,740 193,601
Less current portion 1,500 12,082
Noncurrent portion $ 3,240 $181,519
Loans to Snake River Sugar Company and Snake River Farms II are discussed in
Note 15. At March 31, 1997, other loans and notes receivable include a $1.5
million loan to the other 50%-owner of Waste Control Specialists which is
collateralized by such owner's interest in Waste Control Specialists.
NOTE 9 - OTHER NONCURRENT ASSETS:
DECEMBER MARCH 31,
31, 1997
1996
(IN THOUSANDS)
Investment in joint ventures:
TiO2 manufacturing joint venture $179,195 $176,816
Waste Control Specialists LLC 15,218 15,460
Other 2,284 2,531
196,697 194,807
Loan to Waste Control Specialists LLC - 5,000
$196,697 $199,807
Franchise fees and other intangible assets$ 19,215 $ 17,512
Deferred financing costs 15,273 17,406
Other 10,991 11,550
$ 45,479 $ 46,468
In March 1997, the Company entered into an unsecured $10 million revolving
credit facility with Waste Control Specialists. Borrowings by Waste Control
Specialists bear interest at prime plus 1% and are due no later than December
31, 1998. Also in March 1997, Waste Control Specialists granted Valhi the
option to acquire an additional 5% ownership interest in Waste Control
Specialists for $2.5 million.
NOTE 10 - OTHER NONCURRENT LIABILITIES:
DECEMBER MARCH 31,
31, 1997
1996
(IN THOUSANDS)
Insurance claims and expenses $ 13,380 $ 13,317
Employee benefits 12,050 11,175
Deferred income - 3,600
Other 3,807 3,327
$ 29,237 $ 31,419
NOTE 11 - NOTES PAYABLE AND LONG-TERM DEBT:
DECEMBER MARCH 31,
31, 1997
1996
(IN THOUSANDS)
Notes payable:
Valhi - bank revolver $ 13,000 $ -
Kronos - non-U.S. bank credit agreements
(DM 40,000 and DM 40,000) 25,732 23,776
$ 38,732 $ 23,776
Long-term debt:
Valhi: LYONs $ 142,478 145,510
Snake River Sugar Company - 250,000
Valcor Senior Notes 98,910 95,110
NL Industries:
Senior Secured Notes 250,000 250,000
Senior Secured Discount Notes 149,756 154,493
Deutsche mark bank credit facility
(DM 539,971 and DM 288,322) 347,362 171,379
Joint venture term loan 57,858 54,000
Rheox bank term loan 14,659 140,000
Other 9,411 8,359
Total NL Industries 829,046 778,231
Other:
Medite term loan 3,727 -
Sybra bank credit agreements 1,081 1,315
Sybra capital leases 4,540 4,314
Other 334 283
9,682 5,912
1,080,116 1,274,763
Less current maturities 235,648 204,585
$ 844,468 $1,070,178
Valcor Senior Notes are stated net of approximately $1.1 million principal
amount held by Valhi. Valhi's loans from Snake River Sugar Company are
discussed in Note 15.
In January 1997, NL refinanced the Rheox bank term loan and used the net
cash proceeds, along with other available funds, to prepay a portion of the DM
bank credit facility. Medite's term loan was assumed by the purchaser of its
Oregon medium density fiberboard facility in February 1997. Sybra's bank
indebtedness was repaid and terminated in April 1997 immediately prior to
Valcor's sale of Sybra's common stock, and the purchaser of Sybra's common stock
assumed Sybra's capital lease obligations. See Note 14. In April 1997, the
Company completed a tender offer whereby Valcor purchased $27.6 million
principal amount of Valcor Senior Notes at par value, including the $1.1 million
held by Valhi. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
NOTE 12 - OTHER INCOME:
THREE MONTHS ENDED
MARCH 31,
1996 1997
(IN THOUSANDS)
Securities earnings:
Interest and dividends $ 2,667 $14,605
Securities transactions - 133
2,667 14,738
Currency transactions, net 1,087 496
Pension curtailment gain 4,791 -
Technology fee income 3,081 -
Other, net 916 1,467
$12,542 $16,701
NOTE 13 - PROVISION FOR INCOME TAXES ATTRIBUTABLE TO CONTINUING OPERATIONS:
THREE MONTHS ENDED
MARCH 31,
1996 1997
(IN MILLIONS)
Expected tax expense (benefit) $ 5.2 $(11.8)
Non-U.S. tax rates (1.5) (.2)
Incremental tax and rate differences on
equity in (.7) (12.7)
earnings of non-tax group companies
Change in NL's deferred income tax
valuation allowance (.7) 12.9
Other, net 1.5 1.1
$ 3.8 $(10.7)
NOTE 14 - DISCONTINUED OPERATIONS:
The components of discontinued operations are presented in the following
table.
THREE MONTHS ENDED
MARCH 31,
1996 1997
(IN THOUSANDS)
Medite Corporation $(14,884)$15,148
Sybra, Inc. 586 523
$(14,298)$15,671
Medite. In September 1996, Medite Corporation signed three separate
letters of intent involving the sale of substantially all of its assets. The
first transaction, involving the sale of Medite's timber and timberlands, closed
in October 1996. The second transaction, involving the sale of Medite's Irish
medium density fiberboard ("MDF") subsidiary, closed in November 1996. The
third transaction, involving the sale of Medite's Oregon MDF facility, closed in
February 1997 for approximately $36 million cash consideration (before fees and
expenses) plus the assumption of approximately $3.7 million of Medite
indebtedness. Medite's stud lumber facility was closed in December 1996, and the
building and equipment were sold at an auction in March 1997 and are currently
being dismantled by the purchasers. Medite continues to operate the veneer
facility on a short-term basis and expects to either sell or close this facility
in 1997. Accordingly, the accompanying financial statements present the results
of operations of Medite's building products business segment as discontinued
operations for all periods presented.
Medite's first quarter 1996 results include a pre-tax charge of $24 million
for the estimated costs of permanently closing its New Mexico MDF plant. Medite
also recognized a $13 million pre-tax charge in the fourth quarter of 1996 for
the estimated costs of permanently closing the stud lumber and veneer
facilities. Approximately $26 million of such charges represent non-cash costs,
most of which related to the net carrying value of property and equipment in
excess of estimated net realizable value. These non-cash costs were deemed
utilized upon adoption of the respective closure plans. Approximately $11
million of such charges represent workforce, environmental and other estimated
cash costs associated with the closure of the facilities, of which approximately
$3 million had been paid at both March 31, 1997 and December 31, 1996.
Condensed income statement data for Medite is presented below. The $24
million pre-tax New Mexico MDF plant closure charge is included in Medite's
operating income for 1996 because the decision to close the New Mexico MDF
facility occurred prior to the decision to permanently dispose of the entire
business segment. The gain on disposal in 1997 relates to the sale of the
Oregon MDF facility. Interest expense represents interest on indebtedness of
Medite and its subsidiaries.
THREE MONTHS ENDED
MARCH 31,
1996 1997
(IN MILLIONS)
Operations of Medite:
Net sales $ 46.5 $12.9
Operating income (loss) $(22.5) 1.7
Interest expense and other, net (1.9) (.1)
Pre-tax income (loss) (24.4) 1.6
Income tax expense (benefit) (9.5) .6
(14.9) 1.0
Net gain on disposal:
Pre-tax gain - 22.5
Income tax expense - 8.4
- 14.1
$(14.9) $15.1
Condensed balance sheets for Medite, included in the Company's consolidated
balance sheets, are presented below.
DECEMBER MARCH 31,
31,
1996 1997
(IN MILLIONS)
Current assets $21.2 $14.0
Property and equipment, net 18.2 3.7
Other assets 4.8 3.5
$44.2 $21.2
Current liabilities $17.6 $10.4
Long-term debt 3.7 .1
Deferred income taxes 1.6 3.6
Other liabilities 3.0 3.1
Stockholder's equity (*) 18.3 4.0
$44.2 $21.2
* Eliminated in consolidation.
Condensed cash flow data for Medite (excluding dividends paid to and
intercompany loans with Valcor) is presented below.
THREE MONTHS ENDED
MARCH 31,
1996 1997
(IN MILLIONS)
Cash flows from operating activities $ 5.1 $(36.5)
Cash flows from investing activities:
Capital expenditures (2.9) (.4)
Proceeds from disposal of assets - 35.1
(2.9) 34.7
Cash flows from financing activities -
Indebtedness, net (1.7) -
$ .5 $ (1.8)
Sybra. On April 30, 1997, the Company completed the disposition of its
fast food operations conducted by Sybra. The disposition was accomplished in
two separate, simultaneous transactions. The first transaction involved the
sale of certain restaurant real estate owned by Sybra for $45 million cash
consideration. Substantially all of the net-of-tax proceeds from this
transaction were distributed to Valcor. The second transaction involved
Valcor's sale of 100% of the common stock of Sybra for $14 million cash
consideration plus the repayment by the purchaser of approximately $23.8 million
of Sybra's intercompany indebtedness owed to Valcor. Under certain conditions,
the purchaser of Sybra's common stock is obligated to pay additional contingent
consideration of approximately $2 million to Valcor in the future. Accordingly,
the accompanying financial statements present the results of operations of
Sybra's fast food operations as discontinued operations for all periods
presented.
Condensed income statement data for Sybra is presented below. Interest
expense represents interest on indebtedness of Sybra. The Company will report a
pre-tax gain on disposal of its fast food operations in excess of $24 million in
the second quarter of 1997.
THREE MONTHS ENDED
MARCH
31,
1996 1997
(IN MILLIONS)
Net sales $27.6 $27.8
Operating income $ 1.6 $ 1.4
Interest expense and other, net (.7) (.6)
Pre-tax income .9 .8
Income tax expense .3 .3
Net income $ .6 $ .5
Condensed balance sheets for Sybra, included in the Company's consolidated
balance sheets, are presented below.
DECEMBER MARCH 31,
31, 1997
1996
(IN MILLIONS)
Current assets $ 6.0 $ 4.9
Intangible assets 16.0 15.5
Property and equipment, net 53.6 52.2
Other assets - .2
$75.6 $72.8
Current liabilities $14.4 $11.9
Long-term debt 4.7 4.7
Loan payable to Valcor (*) 20.0 20.0
Other liabilities 1.4 1.4
Stockholder's equity (*) 35.1 34.8
$75.6 $72.8
(*) Eliminated in consolidation
Condensed cash flow data for Sybra (excluding dividends paid to and
intercompany loans with Valcor) is presented below.
THREE MONTHS ENDED
MARCH 31,
1996 1997
(IN MILLIONS)
Cash flows from operating activities $ 2.5 $ (.1)
Cash flows from investing activities:
Capital expenditures (1.4) (1.1)
Other, net - .4
(1.4) (.7)
Cash flows from financing activities -
Indebtedness, net
(.5) -
$ .6 $ (.8)
NOTE 15 - TRANSFER OF CONTROL OF THE AMALGAMATED SUGAR COMPANY:
On January 3, 1997, the Company completed the transfer of control of the
refined sugar operations previously conducted by the Company's wholly-owned
subsidiary, The Amalgamated Sugar Company, to Snake River Sugar Company, an
Oregon agricultural cooperative formed by certain sugarbeet growers in
Amalgamated's areas of operations. Pursuant to the transaction, which by its
terms was to be effective December 31, 1996 for both financial reporting and
income tax purposes, Amalgamated contributed substantially all of its net assets
to the Amalgamated Sugar Company LLC, a limited liability company controlled by
Snake River, on a tax-deferred basis in exchange for a non-voting ownership
interest in the LLC.
Also as part of the transaction, Snake River made certain loans to Valhi
aggregating $250 million in January 1997. These loans bear interest at a
weighted average fixed interest rate of 9.4%, are collateralized by the
Company's interest in the LLC and are due in January 2027. Currently, these
loans are nonrecourse to Valhi. See Note 11. Under certain conditions, up to
$37.5 million of such loans may become recourse to Valhi.
In connection with the transaction, Valhi provided $180 million of loans to
Snake River, of which (i) $100 million (tranche A) bears interest at a fixed
rate of 9.99% with monthly payments of principal and interest through December
2003 and (ii) $80 million (tranche B) bears interest at a fixed rate of 10.99%
in 1997 and 1998 and 12.99% for 1999 through December 2003, with all principal
due in December 2003. The Company understands that Snake River intends to
refinance at least $100 million of such loans with a third-party lender during
1997, but there is no assurance that any such refinancing will occur. Valhi also
provided a $12 million loan to Snake River Farms II, a member of Snake River, in
connection with the transaction. This loan bears interest at a fixed rate of
10%, is due no later than December 1998, is guaranteed by Snake River and is
collateralized by the member's interest in Snake River. See Note 8.
The Company and Snake River share in distributions from the LLC up to an
aggregated $26.7 million per year, with a preferential 95% going to the Company.
In addition, the Company may, at its option, require the LLC to redeem the
Company's interest in the LLC beginning in January 2002, and the LLC has the
right to redeem the Company's interest in the LLC beginning in January 2027.
The redemption price is generally $250 million plus the amount of certain
undistributed income allocable to the Company. In the event the Company
requires the LLC to redeem the Company's interest in the LLC, Snake River has
the right to accelerate the maturity of and call the $250 million of Valhi
loans, and Snake River is required, under the terms of the LLC Company
Agreement, to contribute to the LLC the cash received from calling such loans,
which in turn would be paid to the Company to satisfy all or a substantial
portion of the redemption price.
The LLC Company Agreement contains certain restrictive covenants intended
to protect the Company's interest in the LLC, such as limits on capital
expenditures and additional indebtedness of the LLC. In addition, the Company
has the ability to temporarily take control of the LLC, via election of a
majority of the members of the Management Committee, if its cumulative "base
distributions", as defined, become $10 million in arrears. Once any such
arrearages have been paid, the Company ceases to have any representation on the
Management Committee.
Because the Company no longer controls the operations contributed to the
LLC, the Company ceased consolidating the net assets, results of operations and
cash flows of such business effective December 31, 1996. At December 31, 1996,
the Company reported the net assets contributed to the LLC at cost. Beginning
in 1997, the Company commenced reporting the cash distributions received from
the LLC (approximately $5 million in the first three months of 1997) as dividend
income. The amount of such future distributions is dependent upon, among other
things, the future performance of the LLC's operations. For comparative
purposes, Amalgamated's 1996 results of operations and cash flows are reported
by the equity method. Because the Company receives preferential distributions
from the LLC and has the right to require the LLC to redeem its interest in the
LLC for a fixed and determinable amount beginning at a fixed and determinable
date, the Company's interest in the LLC is deemed equivalent to a mandatory
redeemable preferred stock which, under generally accepted accounting
principles, is carried at estimated fair value. Accordingly, at March 31, 1997,
the Company has classified its investment in the LLC as an available-for-sale
marketable security carried at estimated fair value. See Note 4. In
determining the estimated fair value of the Company's interest in the LLC, the
Company considers, among other things, the outstanding balance of the Company's
loans to Snake River and the outstanding balance of the Company's loans from
Snake River.
Condensed income statement data for Amalgamated for the three months ended
March 31, 1996 is presented below.
AMOUNT
(IN MILLIONS)
Net sales:
Refined sugar $111.7
By-products and other 15.4
$127.1
Operating income:
FIFO basis $ 10.4
LIFO adjustment (1.6)
LIFO basis 8.8
Interest expense (3.0)
Pre-tax income 5.8
Income tax expense 2.2
Net income $ 3.6
Condensed cash flow data for Amalgamated for the three months ended March
31, 1996 (excluding dividends paid to Valhi) is presented below.
AMOUNT
(IN MILLIONS)
Cash flows from operating activities:
Before changes in assets and liabilities $ 7.7
Changes in assets and liabilities (53.5)
(45.8)
Cash flows from investing activities -
Capital expenditures (2.3)
Cash flows from financing activities -
Indebtedness, net 49.2
$ 1.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
The Company reported a loss from continuing operations of $23.1 million, or
$.20 per share, in the first quarter of 1997 compared to income of $8.6 million,
or $.07 per share, in the first quarter of 1996. The 1997 loss includes a $30
million pre-tax charge ($19.5 million, or $.17 per share, net-of-tax) related to
adoption of a new accounting standard regarding accounting for NL Industries's
environmental remediation liabilities. See Note 1 to the Consolidated Financial
Statements. Also contributing to the loss in 1997 was lower average selling
prices for TiO2 at NL. Discontinued operations include both the results of
operations of Medite Corporation and Sybra, Inc., and in 1997 includes an after-
tax gain on disposal of $14.2 million ($22.5 million pre-tax) related to the
sale of Medite's Oregon MDF facility. The Company completed the disposition of
its fast food operations conducted by Sybra in April 1997, and will report a
pre-tax gain on disposal of such operations in excess of $24 million in the
second quarter of 1997. See Note 14 to the Consolidated Financial Statements.
The statements in this Quarterly Report on Form 10-Q relating to matters
that are not historical facts, including, but not limited to, statements found
in this "Management's Discussion and Analysis of Financial Condition and Results
of Operations", are forward-looking statements that involve a number of risks
and uncertainties. Factors that could cause actual future results to differ
materially from those expressed in such forward-looking statements include, but
are not limited to, future supply and demand for the Company's products
(including cyclicality thereof), general economic conditions, competitive
products and substitute products, customer and competitor strategies, the impact
of pricing and production decisions, environmental matters, government
regulations and possible changes therein, the ultimate resolution of pending
litigation and possible future litigation, completion of pending asset/business
unit dispositions and other risks and uncertainties as discussed in this
Quarterly Report and the 1996 Annual Report.
CHEMICALS
THREE MONTHS
ENDED %
MARCH 31,
1996 1997 CHANGE
(IN MILLIONS)
Net sales:
Kronos $206.3 $204.4 -1%
Rheox 34.1 35.1 +3%
$240.4 $239.5 -0%
Operating income:
Kronos $ 24.5 $ 3.8 -84%
Rheox 12.1 9.7 -20%
$ 36.6 $ 13.5 -63%
Kronos' TiO2 sales and operating income in the first quarter of 1997
declined from the first quarter of 1996 as lower average selling prices more
than offset the impact of higher sales and production volumes. In billing
currency terms, average TiO2 selling prices in the first quarter of 1997 were
16% lower than the first quarter of 1996 and were 2% lower than the fourth
quarter. Kronos' record first quarter 1997 sales volume was 22% higher than the
first quarter of 1996, reflecting improved demand for Ti02 in each of Kronos'
major markets.
NL expects its average TiO2 selling prices will begin to increase during
the second quarter of 1997 as the impact of previously-announced price increases
begin to take effect. However, NL expects its calendar 1997 TiO2 operating
income to be below that of 1996, primarily because of anticipated lower average
selling prices for TiO2. While NL expects TiO2 prices will begin to increase
during the second quarter of 1997, the average for 1997 is expected to be lower
than the 1996 average price. NL currently expects it full-year 1997 Ti02 sales
volumes will be slightly higher than full-year 1996 volumes, with year-to-date
volumes exceeding year-earlier levels through the second quarter of 1997.
Rheox's 1996 operating results included a $2.7 million gain related to the
reduction of certain U.S. employee pension benefits.
A significant amount of NL's sales are denominated in currencies other than
the U.S. dollar, and fluctuations in the value of the U.S. dollar relative to
other currencies decreased the dollar value of sales in the first quarter of
1997 by approximately $8 million compared to the same period in 1996.
The Company's purchase accounting adjustments made in conjunction with the
acquisitions of its interest in NL result in additional depreciation, depletion
and amortization expense beyond amounts separately reported by NL. Such
additional non-cash expenses reduce chemicals operating income, as reported by
Valhi, by approximately $20 million annually as compared to amounts separately
reported by NL.
COMPONENT PRODUCTS
THREE MONTHS
ENDED %
MARCH 31,
1996 1997 CHANGE
(IN MILLIONS)
Net sales $21.2 $25.8 +22%
Operating income 4.4 6.3 +43%
Sales, operating income and margins increased in the first quarter of 1997
due primarily to increased volumes in all three major product lines (ergonomic
workstations, drawer slides and locks). Relative changes in product mix also
favorably impacted comparisons, as first quarter 1996 sales included a
relatively higher volume of lower-margin products, including those resulting
from an August 1995 business acquisition. Lock sales were also aided by certain
price increases instituted at the beginning of 1997, which helped to partially
offset increases in certain raw material costs (primarily zinc and copper). The
Company's component products operating income margins were higher in the second,
third and fourth quarters of 1996 as compared to the 1996 first quarter, due in
part to relative changes in product mix, and the Company does not expect year-
to-date operating income comparisons for calendar 1997 to be as favorable as
first quarter 1997 comparisons.
WASTE MANAGEMENT
Waste Control Specialists LLC, formed in November 1995, was constructing
its West Texas facility during 1995 and 1996. Waste Control Specialists
reported a loss of $1.1 million during the first quarter of 1996 compared to a
loss of $2.7 million in the same period in 1997. The Company received its first
wastes for disposal in February 1997, and net sales in the first quarter of 1997
were $78,000. Waste Control's loss was higher in the first quarter of 1997 as
compared to the first quarter of 1996 due principally to start-up expenses
associated with the West Texas facility, as well as larger expenditures in
conjunction with the pursuit of permits for the treatment, storage and disposal
of low-level and mixed radioactive wastes.
OTHER
EQUITY IN EARNINGS OF AMALGAMATED. See Note 15 to the Consolidated
Financial Statements.
General corporate items. Securities earnings increased in 1997 due to
distributions received from The Amalgamated Sugar Company LLC, which are
reported as dividend income, as well as a higher level of funds available for
investment, including interest income earned on approximately $192 million in
debt financing Valhi provided to Snake River Sugar Company and Snake River Farms
II in early 1997 and funds generated from Medite's asset dispositions. See
Notes 14 and 15 to the Consolidated Financial Statements. General corporate
expenses in 1997 include NL's $30 million pre-tax charge related to adoption of
a new accounting standard regarding environmental remediation liabilities. See
Note 1 to the Consolidated Financial Statements.
Interest expense. Interest expense increased due primarily to Valhi's $250
million in loans from Snake River Sugar Company. See Note 15 to the
Consolidated Financial Statements. At March 31, 1997, approximately $900
million of consolidated indebtedness, principally publicly-traded debt and
Valhi's loans from Snake River Sugar Company, bears interest at fixed rates
averaging 10.7%. The weighted average interest rate on about $400 million of
outstanding variable rate borrowings at March 31, 1997 was 6.5%, compared to
5.3% at December 31, 1996 and 6.4% at year-end 1995. The weighted average
interest rate on outstanding variable rate borrowings increased from December
31, 1996 to March 31, 1997 due primarily to NL's January 1997 refinancing of
certain indebtedness discussed below, in which NL refinanced Rheox's term loan
and used the net cash proceeds, along with other available funds, to prepay a
portion of Kronos' DM credit facility. The overall interest rate on the Rheox
term loan is higher than the overall interest rate on the DM credit facility,
and the DM LIBOR interest rate margin on outstanding borrowings under the DM
credit facility was increased in conjunction with the January 1997 prepayment.
Minority interest. Minority interest in earnings in 1996 consisted
principally of NL dividends paid to stockholders other than Valhi. NL's Board of
Directors suspended quarterly dividends in the fourth quarter of 1996.
Provision for income taxes. Income tax rates vary by jurisdiction (country
and/or state), and relative changes in the geographic mix of the Company's pre-
tax earnings can result in fluctuations in the effective income tax rate. As
discussed in Note 15 to the Consolidated Financial Statements, The Amalgamated
Sugar Company's results of operations in 1996 are presented on the equity
method. Amalgamated is a member of the consolidated U.S. tax group of which
Valhi and Contran are members, and consequently the Company did not provide any
incremental income taxes related to such earnings. Certain subsidiaries,
including NL, are not members of the consolidated U.S. tax group and the Company
does provide incremental income taxes on such earnings. Both of these factors
impact the Company's overall effective tax rate. See Note 13 to the
Consolidated Financial Statements.
Extraordinary item. The Company will report a pre-tax extraordinary loss
of $.6 million in the second quarter of 1997 ($.4 million net-of-tax) resulting
from the pro-rata write-off of deferred financing costs related to the Valcor
Senior Notes purchased in April 1997 pursuant to the Company's tender offer.
DISCONTINUED OPERATIONS
See Note 14 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES:
Cash flows from operating activities. Cash flow from operating activities
attributable to continuing operations before changes in assets and liabilities
declined from $25 million in the first quarter of 1996 to $19 million in the
first quarter of 1997. Changes in assets and liabilities generally result from
the timing of production, sales, purchases and income tax payments.
Cash flows from investing and financing activities. Capital expenditures
attributable to continuing operations in 1997 are expected to decline to
approximately $42 million from $70 million in 1996 due to lower planned spending
by NL.
During the first quarter of 1997, Valhi (i) loaned $180 million to Snake
River Sugar Company and $12.1 million to Snake River Farms II, (ii) collected
$5.6 million principal amount on such loans, (iii) contributed the remaining $3
million capital contribution to Waste Control Specialists, (iv) loaned $5
million to Waste Control Specialists pursuant to a $10 million revolving
facility due December 1998 and (v) received an $11.5 million pre-closing
dividend from Amalgamated.
Net borrowings in 1997 include $250 million borrowed from Snake River Sugar
Company and the impact of NL's refinancing of its Rheox term loan and prepayment
of a portion of the DM credit facility as discussed below. At March 31, 1997,
unused credit available under existing credit facilities approximated $123
million.
Cash flows from discontinued operations. Condensed cash flow data for
Medite and Sybra are included in Note 14 to the Consolidated Financial
Statements. Under the terms of Internal Revenue Code and similar state
regulations regarding the timing of estimated tax payments, Valcor was not
required to pay income taxes related to Medite's 1996 sales of its timber and
timberlands and Irish MDF subsidiary until the first quarter of 1997, at which
time such payment (approximately $39 million) was shown as a reduction in cash
flows from operating activities even though the pre-tax proceeds from
disposition of such assets were shown as part of cash flows from investing
activities in 1996. Similarly, cash income taxes related to Medite's February
1997 sale of the Oregon MDF facility are not required to be paid until later in
1997.
Other. At March 31, 1997, assets held for sale, recorded at estimated net
realizable value, consist principally of land from Medite's stud lumber facility
and another former Medite facility closed before 1996. The salvageable property
and equipment from the stud facility, included in assets held for sale at
December 31, 1996, were sold during the first quarter of 1997 for an amount
approximating previously-estimated net realizable value.
NL Industries. Demand, supply and pricing within the TiO2 industry is
cyclical, and changes in industry economic conditions can significantly impact
NL's earnings and operating cash flows. Declining TiO2 prices unfavorably
impacted NL's operating income and cash flows from operations comparisons in
1997 with 1996. NL generated $7 million in cash flows from operating activities
before changes in assets and liabilities in the first quarter of 1997 compared
to $20 million in the first quarter of 1996. Relative changes in NL's
inventories, receivables and payables, excluding the effect of foreign currency
translation, used $52 million of net cash in the first quarter of 1996 compared
to a nominal use of net cash in the first quarter of 1997.
Average TiO2 selling prices began a downward trend in the last half of
1995, which trend continued throughout 1996 and the first quarter of 1997. NL
expects its TiO2 prices will begin to increase during the second quarter of
1997, although NL's average TiO2 selling price in 1997 is expected to be lower
than the 1996 average. No assurance can be given that price trends will conform
to NL's expectations and future cash flows will be adversely affected should
price trends be lower than NL's expectations. In order to improve its near-term
liquidity, NL refinanced Rheox's term loan in January 1997, obtaining a net $125
million of new long-term financing, and used the net cash proceeds, along with
other available funds, to prepay a portion of the DM credit facility. In
addition, NL and its lenders modified certain financial covenants of the DM
credit facility, and NL guaranteed the facility. As a result of the refinancing
and prepayment, NL's aggregate scheduled debt payments for 1997 and 1998
decreased by $103 million ($64 million in 1997 and $39 million in 1998).
Certain of NL's U.S. and non-U.S. income tax returns, including Germany,
are being examined and tax authorities have or may propose tax deficiencies. NL
has previously reached an agreement with the German tax authorities, and paid
certain tax deficiencies of approximately DM 44 million ($28 million when paid),
including interest, which resolved certain significant tax contingencies for
years through 1990. Certain other significant German tax contingencies remain
outstanding and will continue to be litigated. NL has received certain tax
assessments aggregating DM 130 million ($77 million), including interest, for
the years through 1996 and expects to receive tax assessments for an additional
DM 20 million ($12 million) related to these remaining tax contingencies. No
payments of income tax or interest deficiencies related to these assessments
will be required until the litigation is resolved, which NL anticipates may take
approximately two to five years. Although NL believes that it will ultimately
prevail in the litigation, NL has granted a DM 100 million ($59 million at March
31, 1997) lien on its Nordenham, Germany TiO2 plant in favor of the German tax
authorities until the litigation is resolved. No assurance can be given that
this litigation will be resolved in NL's favor in view of the inherent
uncertainties involved in court proceedings. NL believes that it has adequately
provided accruals for additional income taxes and related interest expense which
may ultimately result from all such examinations and believes that the ultimate
disposition of such examinations should not have a material adverse effect on
its consolidated financial position, results of operations or liquidity.
NL has been named as a defendant, PRP, or both, in a number of legal
proceedings associated with environmental matters, including waste disposal
sites, mining locations and facilities currently or previously owned, operated
or used by NL, certain of which are on the U.S. EPA's Superfund National
Priorities List or similar state lists. On a quarterly basis, NL evaluates the
potential range of its liability at sites where it has been named as a PRP or
defendant. NL believes it has provided adequate accruals ($140 million at March
31, 1997) for reasonably estimable costs of such matters, but NL's ultimate
liability may be affected by a number of factors, including changes in remedial
alternatives and costs and the allocation of such costs among PRPs. See Note 1
to the Consolidated Financial Statements. It is not possible to estimate the
range of costs for certain sites. The upper end of the range of reasonably
possible costs to NL for sites for which it is possible to estimate costs is
approximately $185 million. NL's estimates of such liabilities have not been
discounted to present value, and NL has not recognized any potential insurance
recoveries. No assurance can be given that actual costs will not exceed accrued
amounts or the upper end of the range for sites for which estimates have been
made and no assurance can be given that costs will not be incurred with respect
to sites as to which no estimate presently can be made. NL is also a defendant
in a number of legal proceedings seeking damages for personal injury and
property damage arising out of the sale of lead pigments and lead-based paints.
NL has not accrued any amounts for the pending lead pigment and lead-based paint
litigation. There is no assurance that NL will not incur future liability in
respect of this pending litigation in view of the inherent uncertainties
involved in court and jury rulings and proceedings in pending and possible
future cases. However, based on, among other things, the results of such
litigation to date, NL believes that the pending lead pigment and lead-based
paint litigation is without merit. Liability that may result, if any, cannot
reasonably be estimated. NL currently believes the disposition of all claims
and disputes, individually or in the aggregate, should not have a material
adverse effect on its consolidated financial position, results of operations or
liquidity. There can be no assurance that additional matters of these types
will not arise in the future.
NL periodically evaluates its liquidity requirements, alternative uses of
capital, capital needs and availability of resources in view of, among other
things, its debt service and capital expenditure requirements and estimated
future operating cash flows. As a result of this process, NL has in the past
and may in the future seek to reduce, refinance, repurchase or restructure
indebtedness, raise additional capital, issue additional securities, modify its
dividend policy, restructure ownership interests, sell interests in subsidiaries
or other assets, or take a combination of such steps or other steps to manage
its liquidity and capital resources. In the normal course of its business, NL
may review opportunities for the acquisition, divestiture, joint venture or
other business combinations in the chemicals industry. In the event of any
future acquisition, NL may consider using its available cash, issuing its equity
securities or increasing its indebtedness to the extent permitted by the
agreements governing NL's existing debt. In this regard, the Indentures
governing NL's publicly-traded debt contain provisions which limit the ability
of NL and its subsidiaries to incur additional indebtedness or hold
noncontrolling interests in business units.
Other. Condensed cash flow data for Medite and Sybra is presented in
Note 14 to the Consolidated Financial Statements. Condensed cash flow data for
Amalgamated in 1996 is presented in Note 15 to the Consolidated Financial
Statements.
General corporate. Valhi's operations are conducted principally through
subsidiaries and affiliates (NL Industries, Valcor and Waste Control
Specialists). Valcor is an intermediate parent company with continuing
operations conducted through CompX. Accordingly, Valhi's and Valcor's long-term
ability to meet their respective parent company level corporate obligations are
dependent in large measure on the receipt of dividends or other distributions
from their respective subsidiaries. NL, which paid dividends in the first three
quarters of 1996, suspended its dividend in the fourth quarter. Suspension of
NL's dividend is not expected to materially adversely impact Valhi's financial
position or liquidity. Various credit agreements to which subsidiaries are
parties contain customary limitations on the payment of dividends, typically a
percentage of net income or cash flow; however, such restrictions have not
significantly impacted Valhi's or Valcor's ability to service their respective
parent company level obligations. Neither Valhi nor Valcor has guaranteed any
indebtedness of their respective subsidiaries.
Valhi's LYONs do not require current cash debt service. Valhi owns 5.5
million shares of Dresser common stock, which shares are held in escrow for the
benefit of holders of the LYONs. The LYONs are exchangeable at any time, at the
option of the holder, for the Dresser shares owned by Valhi. Exchanges of LYONs
for Dresser stock would result in the Company reporting income related to the
disposition of the Dresser stock for both financial reporting and income tax
purposes, although no cash proceeds would be generated by such exchanges. Cash
income taxes that would have been triggered at March 31, 1997 by exchanges of
all of the outstanding LYONs for Dresser stock at such date were approximately
$38 million. Valhi continues to receive regular quarterly Dresser dividends
(presently $.17 per quarter) on the escrowed shares. In addition, the Company
is required, at the option of the holder, to purchase the LYONs in October 1997
at the accreted value of approximately $405 per $1,000 principal amount at
maturity (approximately $153 million in October 1997). Such redemption price
may be paid, at the option of Valhi, in cash, Dresser common stock, or a
combination thereof. At March 31, 1997, the LYONs had an accreted value
equivalent to $26.64 per Dresser share, and the market price of the Dresser
common stock was $31 per share. As long as the value of the underlying Dresser
shares exceeds the accreted value of the LYONS, the Company does not expect a
significant number of LYON holders to seek redemption. Because the LYONS are
redeemable at the option of the LYON holder in October 1997, the LYONS are
classified as a current liability and the Dresser shares are classified as a
current asset at both December 31, 1996 and March 31, 1997.
The after-tax proceeds from the disposition of Medite, net of repayments of
Medite's U.S. bank debt, are available for Valcor's general corporate purposes,
subject to compliance with certain covenants contained in the Valcor Senior Note
Indenture. Also under the terms of the Indenture, Valcor is required to tender
for a portion of the Valcor Notes, at par, to the extent that a specified amount
of these proceeds is not used to either permanently paydown senior indebtedness
of Valcor or its subsidiaries or invest in related businesses, both as defined
in the Indenture, within one year of disposition. While Valcor was not yet
required to execute a tender offer related to Medite's asset dispositions, on
March 20, 1997, Valcor initiated a tender offer whereby Valcor would purchase up
to $86.7 million principal amount of Valcor Notes on a pro-rata basis, at par
value, in satisfaction of the covenant contained in the Indenture. Pursuant to
its terms, the tender offer expired on April 24, 1997, and Valcor purchased
$27.6 million principal amount of Senior Notes which had been properly tendered,
including $1.1 million of Senior Notes held by Valhi. Accordingly, $26.5
million of the Senior Notes are classified as a current liability at March 31,
1997. In addition, during the first quarter of 1997, Valcor also purchased $3.8
million of Senior Notes in open market transactions prior to the tender offer.
Subsequent to the tender offer, $68.6 million of Senior Notes are outstanding.
The net proceeds from the disposition of the Company's fast food operations, net
of repayment of Sybra's bank indebtedness, will similarly be available for
Valcor's general corporate purposes. If none of those net proceeds are so used
as provided by the Indenture, a portion of the Notes will be subject to a future
tender offer.
Valhi received approximately $73 million cash in early 1997 at the transfer
of control of its refined sugar business to Snake River Sugar Company, including
a net $11.5 million pre-closing dividend received from Amalgamated. As part of
the transaction, Snake River made certain loans to Valhi aggregating $250
million in January 1997. Snake River's sources of funds for its loans to Valhi,
as well as for the $14 million it contributed to The Amalgamated Sugar Company
LLC for its voting interest in the LLC, included cash capital contributions by
the grower members of Snake River and $192 million in debt financing provided by
Valhi in January 1997. See Note 15 to the Consolidated Financial Statements.
Valhi currently expects that distributions received from the LLC, which are
dependent in part upon the future operations of the LLC, will exceed its debt
service requirements under its $250 million loans from Snake River. The cash
proceeds to Valhi upon the transfer of control of Amalgamated's operations to
Snake River, including amounts to be collected in the future from Valhi's $192
million loans to Snake River, are and will be available for Valhi's general
corporate purposes. The Company understands that Snake River intends to
refinance at least $100 million of such loans with a third party lender during
1997; however there can be no assurance that any such refinancing will occur.
Redemption of the Company's interest in the LLC, as discussed in Note 15 to
the Consolidated Financial Statements, would result in the Company reporting
income related to the disposition of its LLC interest for both financial
reporting and income tax purposes, although the net cash proceeds that would be
generated from such a disposition would likely be less than the specified
redemption price due to Snake River's ability to call its $250 million loans to
Valhi. In addition, such net cash proceeds could be less than the income taxes
that would become payable as a result of the disposition.
In March 1997, the Company entered into a $10 million revolving credit
facility with Waste Control Specialists. Borrowings by Waste Control
Specialists ($5 million outstanding at March 31, 1997) bear interest at prime
plus 1% and are due no later than December 31, 1998.
The Company routinely compares its liquidity requirements and alternative
uses of capital against the estimated future cash flows to be received from its
subsidiaries, and the estimated sales value of those units. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify its dividend policy, consider
the sale of interests in subsidiaries, affiliates, business units, marketable
securities or other assets, or take a combination of such steps or other steps,
to increase liquidity, reduce indebtedness and fund future activities. Such
activities have in the past and may in the future involve related companies.
The Company routinely evaluates acquisitions of interests in, or
combinations with, companies, including related companies, perceived by
management to be undervalued in the marketplace. These companies may or may not
be engaged in businesses related to the Company's current businesses. The
Company intends to consider such acquisition activities in the future and, in
connection with this activity, may consider issuing additional equity securities
and increasing the indebtedness of the Company, its subsidiaries and related
companies. From time to time, the Company and related entities also evaluate
the restructuring of ownership interests among their respective subsidiaries and
related companies. In this regard, the Indentures governing the publicly-traded
debt of NL and Valcor contain provisions which limit the ability of NL, Valcor
and their respective subsidiaries to incur additional indebtedness or hold
noncontrolling interests in business units.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Reference is made to the 1996 Annual Report for descriptions of certain
legal proceedings.
In April 1997 the Quebec Court of Appeals dismissed the Canadian Fisheries
Act case against one of the individual defendants. In May 1997 the Crown's
counsel filed an order of nolle prosequi effectively terminating the matter as
against NL's Canadian subsidiary and the remaining individual defendant. In May
1998 the matter will be expunged from the records as if it had never been
brought. NL's Canadian subsidiary and the individual defendant have agreed not
to seek damages for malicious or improper prosecution.
Ritchie v. NL Industries, et al. (No. 5:96-CV-166). The case was remanded
to state court in April 1997.
In April 1997, NL was served with a complaint in Parker v. NL Industries,
et al. (Circuit Court, Baltimore City, Maryland, No. 97085060 CC915).
Plaintiff, now an adult, and his wife seek compensatory and punitive damages
from NL, another former manufacturer of lead paint and a local paint retailer,
based on claims of negligence, strict liability and fraud for plaintiff's
alleged ingestion of lead paint as a child. In May 1997 NL removed the case to
federal court.
In March 1997, NL was served with a complaint filed in the Fifth Judicial
District Court of Cass County, Texas (Ernest Hughes, et al. v. Owens-Corning
Fiberglass Corporation, et al., No. 97-C-051) on behalf of approximately 4,000
plaintiffs and their spouses alleging injury due to exposure to asbestos, and
seeking compensatory and punitive damages. NL has filed an answer denying the
material allegations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 -First Amendment to the Stock Purchase Agreement by and between
Valcor, Inc. and I.C.H. Corporation dated April 18, 1997 -
incorporated by reference to Exhibit 10.1 of Valcor's Quarterly
Report on Form 10-Q (File No. 33-63044) for the quarter ended
March 31, 1997.
10.2 -First Amendment to the Asset Purchase Agreement by and between
Sybra, Inc., Valcor, Inc. and U.S. Restaurant Properties Master
L.P. dated April 18, 1997 - incorporated by reference to Exhibit
10.2 of Valcor's Quarterly Report on Form 10-Q (File No. 33-
63044) for the quarter ended March 31, 1997.
27.1 -Financial Data Schedule for the three-month period ended March
31, 1997.
27.2 - Reclassified Financial Data Schedule for the (i) three-month
period ended March 31, 1996, (ii) six-month period ended June 30,
1996, (iii) nine-month period ended September 30, 1996 and (iv)
year ended December 31, 1996.
27.3 - Reclassified Financial Data Schedule for the (i) three-month
period ended March 31, 1995, (ii) six-month period ended June 30,
1995, (iii) nine-month period ended September 30, 1995 and (iv)
year ended December 31, 1995.
27.4 Reclassified Financial Data Schedule for the year ended December
31, 1994.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended March 31, 1997.
January 3, 1997 - Reported Items 5 and 7.
February 3, 1997 - Reported Items 5 and 7.
February 13, 1997 - Reported Items 5 and 7.
February 13, 1997 - Reported Items 5 and 7.
February 28, 1997 - Reported Items 5 and 7.
March 20, 1997 - Reported Items 5 and 7.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALHI, INC.
(Registrant)
Date May 12, 1997 By /s/ Bobby D. O'Brien
Bobby D. O'Brien
(Vice President,
Principal Financial Officer)
Date May 12, 1997 By /s/ Gregory M. Swalwell
Gregory M. Swalwell
(Controller,
Principal Accounting Officer)
5
1,000
3-MOS
DEC-31-1997
JAN-01-1997
MAR-31-1997
262,482
145,510
193,668
3,012
209,164
831,628
794,009
153,041
2,292,835
474,899
1,070,178
0
0
1,251
307,068
2,292,835
265,305
265,305
204,767
204,767
30,000
62
30,659
(33,830)
(10,698)
(23,140)
15,671
0
0
(7,469)
(.07)
0
5
1,000
3-MOS 6-MOS 9-MOS 12-MOS
DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996
MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996
142,468 144,669 160,613 255,679
0 0 0 142,478
249,645 258,206 243,427 158,589
5,199 4,698 5,509 4,087
467,842 373,642 318,257 251,597
872,378 788,665 439,861 837,663
1,195,631 1,210,003 1,206,277 853,681
345,163 359,429 348,725 163,442
2,495,730 2,417,988 2,368,890 2,144,982
598,036 561,657 570,532 563,680
1,105,284 1,078,667 1,038,682 844,468
0 0 0 0
0 0 0 0
1,247 1,248 1,248 1,248
265,390 268,359 259,822 302,671
2,495,730 2,417,988 2,368,890 2,144,982
261,651 546,541 816,757 1,074,818
261,651 546,541 816,757 1,074,818
187,291 399,538 610,008 808,248
187,291 399,538 610,008 808,248
0 0 0 0
103 (499) (717) 1,860
24,808 49,105 73,574 98,497
14,762 26,166 16,924 8,093
3,831 7,433 3,780 1,113
8,610 14,113 6,225 65
(14,298) (11,051) (8,073) 41,981
0 0 0 0
0 0 0 0
(5,688) 3,062 (1,848) 42,046
(.05) .03 (.02) .37
0 0 0 0
5
1,000
3-MOS 6-MOS 9-MOS 12-MOS
DEC-31-1995 DEC-31-1995 DEC-31-1995 DEC-31-1995
JAN-01-1995 JAN-01-1995 JAN-01-1995 JAN-01-1995
MAR-31-1995 JUN-30-1995 SEP-30-1995 DEC-31-1995
134,126 165,953 171,337 170,908
26,516 2,387 0 0
261,266 271,760 269,539 228,785
4,710 5,054 5,116 4,972
470,460 384,647 324,099 518,304
922,189 857,368 807,572 931,566
1,124,388 1,151,261 1,168,215 1,190,514
260,905 278,953 294,178 315,827
2,549,715 2,493,593 2,447,112 2,572,213
622,790 548,419 506,660 662,336
1,123,698 1,102,119 1,083,383 1,084,284
0 0 0 0
0 0 0 0
1,245 1,245 1,246 1,246
216,995 237,775 255,775 273,045
2,549,715 2,493,593 2,447,112 2,572,213
270,974 573,737 848,475 1,104,177
270,974 573,737 848,475 1,104,177
185,320 388,411 573,545 740,492
185,320 388,411 573,545 740,492
0 0 0 0
(19) 277 430 557
26,202 52,639 78,343 103,426
14,891 40,624 61,427 83,495
7,311 20,540 30,061 27,980
7,235 19,598 31,020 54,893
5,180 10,174 12,480 13,622
0 0 0 0
0 0 0 0
12,415 29,772 43,500 68,515
.11 .26 .38 .60
0 0 0 0
5
1,000
12-MOS
DEC-31-1994
JAN-01-1994
DEC-31-1994
170,747
49,233
204,828
4,434
498,097
936,134
1,050,427
242,696
2,480,703
656,222
1,086,654
0
0
1,245
197,179
2,480,703
70,029
70,029
42,651
42,651
0
18
20,328
(15,542)
(12,514)
(3,028)
14,628
0
0
11,600
.10
.10
