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 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: (214) 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, 1996: 114,089,814.
-----------
VALHI, INC. AND SUBSIDIARIES
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 Statement of Stockholders' Equity -
Three months ended March 31, 1996 6
Consolidated Statements of Cash Flows - Three
months ended March 31, 1995 and 1996 7-8
Notes to Consolidated Financial Statements 9-15
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations. 16-23
PART II. OTHER INFORMATION
Item 1.Legal Proceedings. 24-25
Item 6.Exhibits and Reports on Form 8-K. 25
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, MARCH 31,
1995 1996
------------ ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 170,908 $ 142,468
Accounts and notes receivable 223,962 244,645
Refundable income taxes 4,978 1,810
Receivable from affiliates 3,529 854
Inventories 518,304 467,842
Prepaid expenses 7,249 9,765
Deferred income taxes 2,636 4,994
---------- ----------
Total current assets 931,566 872,378
---------- ----------
Other assets:
Marketable securities 144,256 151,269
Investment in joint ventures 190,518 193,086
Natural resource properties 95,774 93,469
Prepaid pension cost 24,767 25,743
Goodwill 252,773 254,471
Deferred income taxes 788 910
Other 57,084 53,936
---------- ----------
Total other assets 765,960 772,884
---------- ----------
Property and equipment:
Land 43,313 42,622
Buildings 212,729 211,229
Equipment 913,763 916,687
Construction in progress 20,709 25,093
---------- ----------
1,190,514 1,195,631
Less accumulated depreciation 315,827 345,163
---------- ----------
Net property and equipment 874,687 850,468
---------- ----------
$2,572,213 $2,495,730
========== ==========
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY DECEMBER 31, MARCH 31,
1995 1996
------------ ----------
<S>
Current liabilities: <C> <C>
Notes payable $ 145,932 $ 198,825
Current long-term debt 63,752 64,380
Accounts payable 236,973 109,992
Accrued liabilities 156,146 167,374
Payable to affiliates 10,188 10,053
Income taxes 44,849 43,843
Deferred income taxes 4,496 3,569
---------- ----------
Total current liabilities 662,336 598,036
---------- ----------
Noncurrent liabilities:
Long-term debt 1,084,284 1,105,284
Accrued pension cost 70,040 63,469
Accrued OPEB cost 78,410 78,281
Accrued environmental costs 115,577 117,339
Deferred income taxes 239,444 225,922
Other 44,765 40,494
---------- ----------
Total noncurrent liabilities 1,632,520 1,630,789
---------- ----------
Minority interest 3,066 268
---------- ----------
Stockholders' equity:
Common stock 1,246 1,247
Additional paid-in capital 34,604 35,151
Retained earnings 263,777 252,325
Adjustments:
Currency translation (7,430) (7,778)
Marketable securities 55,629 59,328
Pension liabilities (2,881) (2,881)
Treasury stock (70,654) (70,755)
---------- ----------
Total stockholders' equity 274,291 266,637
---------- ----------
$2,572,213 $2,495,730
========== ==========
</TABLE>
[FN]
Commitments and contingencies (Note 1)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1996
---- ----
<S>
Revenues and other income: <C> <C>
Net sales $467,629 $462,795
Other, net 5,658 12,973
-------- --------
473,287 475,768
-------- --------
Costs and expenses:
Cost of sales 340,128 349,714
Plant closure charge - 24,000
Selling, general and administrative 76,352 77,223
Interest 32,842 30,216
-------- --------
449,322 481,153
-------- --------
23,965 (5,385)
Equity in Waste Control Specialists - (1,151)
-------- --------
Income (loss) before income taxes 23,965 (6,536)
Provision for income taxes (benefit) 11,205 (3,169)
Minority interest 345 2,321
-------- --------
Net income (loss) $ 12,415 $ (5,688)
======== ========
Net income (loss) per common share $.11 $(.05)
==== =====
Cash dividends per share $.03 $ .05
==== =====
Weighted average common shares outstanding 114,392 114,569
======= =======
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
------- ----------- --------
<S> <C> <C> <C>
Balance at December 31, 1995 $1,246 $34,604 $263,777
Net loss - - (5,688)
Dividends - - (5,764)
Adjustments, net - - -
Other, net 1 547 -
------ ------- --------
Balance at March 31, 1996 $1,247 $35,151 $252,325
====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
ADJUSTMENTS TOTAL
-----------------------------------------
CURRENCY MARKETABLE PENSION TREASURY STOCKHOLDERS'
TRANSLATION SECURITIES LIABILITIES STOCK EQUITY
----------- ---------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $(7,430) $55,629 $(2,881) $(70,654) $274,291
Net loss - - - - (5,688)
Dividends - - - - (5,764)
Adjustments, net (348) 3,699 - - 3,351
Other, net - - - (101) 447
------- ------- ------- -------- --------
Balance at March 31, 1996 $(7,778) $59,328 $(2,881) $(70,755) $266,637
======= ======= ======= ======== ========
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 12,415 $ (5,688)
Depreciation, depletion and
amortization 23,337 25,069
Plant closure charge - 24,000
Noncash interest expense 7,543 8,150
Deferred income taxes 4,530 (15,287)
Minority interest 345 2,321
Other, net (3,879) (1,526)
--------- --------
44,291 37,039
Change in assets and liabilities:
Accounts and notes receivable (45,210) (23,853)
Inventories 39,882 45,077
Accounts payable/accrued liabilities:
Sugarbeet purchases (123,143) (61,269)
Other, net 16,845 (60,311)
Other, net 272 (4,479)
Trading securities:
Sale proceeds 24,184 -
Purchases (762) -
--------- --------
Net cash used by operating activities (43,641) (67,796)
--------- --------
Cash flows from investing activities:
Capital expenditures (28,141) (19,665)
Purchases of minority interest (11,511) (9,049)
Investment in Waste Control Specialists - (5,000)
Loans to affiliates:
Loans (28,300) (5,400)
Collections 13,300 8,400
Other, net (3,293) 1,693
--------- --------
Net cash used by investing activities (57,945) (29,021)
--------- --------
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Cash flows from financing activities:
Indebtedness:
Borrowings $ 216,924 $ 269,885
Principal payments (152,443) (192,878)
Valhi dividends paid (3,450) (5,764)
Distributions to minority interest and other, net 66 (2,221)
--------- ---------
Net cash provided by financing activities 61,097 69,022
--------- ---------
Net decrease (40,489) (27,795)
Currency translation 3,868 (645)
Cash and equivalents at beginning of period 170,747 170,908
--------- ---------
Cash and equivalents at end of period $ 134,126 $ 142,468
========= =========
Supplemental disclosures - cash paid for:
Interest, net of amounts capitalized $ 10,094 $ 13,197
Income taxes 4,422 9,680
</TABLE>
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, 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 stockholders' 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 "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Legal Proceedings" and the 1995 Annual Report.
The Company's 54%-owned chemicals subsidiary, NL Industries, Inc.,
separately reported a stockholders' deficit of approximately $197 million at
March 31, 1996 and, accordingly, no minority interest in NL is reported in the
Company's consolidated balance sheet. Until such time as NL reports positive
stockholders' equity, all undistributed income or loss and other changes in NL's
reported stockholders' equity will accrue to the Company for financial reporting
purposes. NL resumed regular quarterly dividends of $.10 per NL share in the
first quarter of 1996 (approximately $5 million per quarter). Minority interest
in earnings in 1996 consists principally of NL dividends paid to stockholders
other than Valhi.
Contran Corporation holds, directly or through subsidiaries, approximately
91% of Valhi's outstanding common stock.
NOTE 2 -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.
NOTE 3 -BUSINESS SEGMENT INFORMATION:
OPERATIONS PRINCIPAL ENTITIES % OWNED
- ------------------- --------------------------------- --------------
Chemicals NL Industries, Inc. 54%
Refined sugar The Amalgamated Sugar Company 100%
Building products Medite Corporation 100%
Hardware products National Cabinet Lock, Inc. 100%
Fast food Sybra, 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 building products (Medite), hardware products (National Cabinet Lock)
and fast food (Sybra) subsidiaries are 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1995 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
Net sales:
Chemicals $250.9 $240.4
Refined sugar 111.2 127.1
Building products 58.6 46.5
Hardware products 20.1 21.2
Fast food 26.8 27.6
------ ------
$467.6 $462.8
====== ======
Operating income:
Chemicals $36.9 $ 36.6
Refined sugar 6.4 8.7
Building products * 10.3 (22.5)
Hardware products 5.5 4.4
Fast food 1.1 1.6
------ ------
60.2 28.8
Equity in losses of Waste Control - (1.1)
General corporate items:
Securities earnings 3.8 2.5
General expenses, net (7.3) (6.6)
Interest expense (32.8) (30.2)
------ ------
Income (loss) before income taxes $ 23.9 $ (6.6)
====== ======
</TABLE>
[FN]
* Building products operating income in 1996 includes a $24 million charge
related to the closure of one of Medite's medium density fiberboard (``MDF'')
plants.
As previously reported, in March 1996 Medite decided to close its New
Mexico MDF plant effective May 13, 1996. 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------
DEPRECIATION,
DEPLETION AND CAPITAL
AMORTIZATION EXPENDITURES
---------------- -----------------
1995 1996 1995 1996
---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Chemicals $14.3 $15.4 $12.4 $12.2
Refined sugar 4.0 4.4 7.1 2.3
Building products 2.9 2.9 3.4 2.9
Fast food and other 2.1 2.4 5.2 2.3
----- ----- ----- -----
$23.3 $25.1 $28.1 $19.7
===== ===== ===== =====
</TABLE>
NOTE 4 -MARKETABLE SECURITIES:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
Noncurrent assets (available-for-sale):
Dresser Industries common stock $130,366 $133,329
Other common stocks 13,890 17,940
-------- --------
$144,256 $151,269
======== ========
</TABLE>
Valhi holds 5.5 million shares of Dresser common stock with a quoted market
price of $30.50 at March 31, 1996, or an aggregate market value of approximately
$167 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. At March 31, 1996, the
aggregate cost of other available-for-sale securities was approximately $16
million.
NOTE 5 -INVENTORIES:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials:
Chemicals $ 35,075 $ 37,726
Sugarbeets 47,420 -
Other 15,710 12,553
-------- --------
98,205 50,279
-------- --------
In process products:
Chemicals 9,132 9,899
Refined sugar and by-products 57,967 44,305
Other 6,507 6,468
-------- --------
73,606 60,672
-------- --------
Finished products:
Chemicals 173,195 174,347
Refined sugar and by-products 90,492 103,910
Other 9,052 8,356
-------- --------
272,739 286,613
-------- --------
Supplies 73,754 70,278
-------- --------
$518,304 $467,842
======== ========
</TABLE>
NOTE 6 - OTHER NONCURRENT ASSETS:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
Joint ventures:
TiO2 manufacturing joint venture $183,129 $181,900
Waste Control Specialists LLC 4,625 8,474
Other 2,764 2,712
-------- --------
$190,518 $193,086
======== ========
Natural resource properties:
Timber and timberlands $ 53,099 $ 53,131
Mining properties 42,675 40,338
-------- --------
$ 95,774 $ 93,469
======== ========
Franchise fees and other intangible assets $ 24,786 $ 23,230
Deferred financing costs 19,537 18,341
Other 12,761 12,365
-------- --------
$ 57,084 $ 53,936
======== ========
</TABLE>
NOTE 7 -ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable:
Sugarbeet purchases $ 83,027 $ 21,758
Other 153,946 88,234
-------- --------
$236,973 $109,992
======== ========
Accrued liabilities:
Employee benefits $ 63,067 $ 52,418
Sugar processing costs 21,569 23,782
LIFO inventory replacement reserve - 3,636
Environmental costs 6,109 6,221
Plant closure costs - 5,759
Interest 13,208 22,060
Miscellaneous taxes 4,275 4,571
Other 47,918 48,927
-------- --------
$156,146 $167,374
======== ========
</TABLE>
NOTE 8 - OTHER NONCURRENT LIABILITIES:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
Employee benefits $16,626 $16,036
Insurance claims and expenses 15,354 14,656
Deferred technology fee income 8,456 5,720
Other 4,329 4,082
------- -------
$44,765 $40,494
======= =======
</TABLE>
NOTE 9 - NOTES PAYABLE AND LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
Notes payable:
Amalgamated:
United States Government loans $ 64,685 $ 99,857
Bank credit agreements 42,000 56,000
---------- ----------
106,685 155,857
Kronos - non-U.S. bank credit agreements
(DM 56,000 and DM 56,000) 39,247 37,968
Valhi - bank revolver - 5,000
---------- ----------
$ 145,932 $ 198,825
========== ==========
Long-term debt:
Valhi - LYONs $ 130,366 $ 133,329
Valcor Senior Notes 99,000 99,000
Amalgamated bank term loan 24,000 24,000
NL Industries:
Senior Secured Notes 250,000 250,000
Senior Secured Discount Notes 132,034 136,210
Deutsche mark bank credit facility
(DM 397,610 and DM 447,610) 276,895 303,479
Joint venture term loan 73,286 69,429
Rheox bank term loan 37,263 31,534
Other 14,225 13,958
---------- ----------
783,703 804,610
---------- ----------
Medite:
Bank term loans 73,770 72,128
Bank working capital facilities 10,830 10,782
Other 4,117 4,065
---------- ----------
88,717 86,975
---------- ----------
Other:
Sybra bank credit agreements 16,770 16,494
Sybra capital leases 5,382 5,170
Other 98 86
---------- ----------
22,250 21,750
---------- ----------
1,148,036 1,169,664
Less current maturities 63,752 64,380
---------- ----------
$1,084,284 $1,105,284
========== ==========
</TABLE>
Valcor Senior Notes are stated net of $1 million principal amount held by
Valhi.
NOTE 10 - OTHER INCOME:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1995 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Securities earnings:
Interest and dividends $ 3,227 $ 2,475
Securities transactions 639 -
------- -------
3,866 2,475
Pension curtailment gain - 4,791
Technology fee income 2,586 3,081
Currency transactions, net (2,241) 941
Other, net 1,447 1,685
------- -------
$ 5,658 $12,973
======= =======
</TABLE>
The 1996 pension curtailment gain resulted from NL's reduction of certain
U.S. employee pension benefits.
NOTE 11 - PROVISION FOR INCOME TAXES:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1995 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
Expected tax expense (benefit) $ 8.4 $(2.3)
Non-U.S. tax rates (2.7) (1.7)
Incremental tax and rate differences on equity in
earnings of non-tax group companies 6.1 .8
Change in NL's deferred income tax
valuation allowance (1.3) (.7)
Other, net .7 .7
----- -----
$11.2 $(3.2)
===== =====
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
Valhi reported a net loss of $5.7 million, or $.05 per share, for the first
quarter of 1996, which loss included a $15 million after-tax charge ($.13 per
share) related to closure of Medite's New Mexico MDF operations, as discussed
below. Net income was $12.4 million, or $.11 per share, 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.
CHEMICALS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, %
------------------
1995 1996 CHANGE
---- ---- ------
(IN MILLIONS)
<S> <C> <C> <C>
Net sales:
Kronos $217.4 $206.3 - 5%
Rheox 33.5 34.1 + 2%
------ ------
$250.9 $240.4 - 4%
====== ======
Operating income:
Kronos $ 27.8 $ 24.5 -12%
Rheox 9.1 12.1 +32%
------ ------
$ 36.9 $ 36.6 - 1%
====== ======
</TABLE>
Kronos' TiO2 sales and operating income in the first quarter of 1996
declined from the first quarter of 1995 as higher average selling prices were
more than offset by lower production and sales volumes. Kronos' first quarter
sales volumes declined 11% from the record sales volumes of the first quarter of
1995. Slow economic activity in markets in which Kronos sells TiO2 contributed
to continued soft demand for the first quarter of 1996. While average TiO2
selling prices in the first quarter of 1996 were 5% higher than the first
quarter of 1995, average prices for the quarter were 3% lower than the fourth
quarter of 1995. Kronos anticipates that TiO2 demand will remain soft at least
into the third quarter of 1996.
Rheox's operating results improved due to higher sales volumes and selling
prices, and included a $2.7 million gain in 1996 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 increased the dollar value of sales in the first quarter of
1996 by approximately $5 million compared to the same period in 1995.
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.
REFINED SUGAR
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, %
------------------
1995 1996 CHANGE
---- ---- ------
(IN MILLIONS)
<S> <C> <C> <C>
Net sales:
Refined sugar $ 95.7 $111.7 + 17%
By-products and other 15.5 15.4
------ ------
$111.2 $127.1 + 14%
====== ======
Operating income:
FIFO basis $ 5.0 $ 10.4 +106%
LIFO adjustment 1.4 (1.7)
------ ------
LIFO (reporting) basis $ 6.4 $ 8.7 + 35%
====== ======
</TABLE>
Refined sugar sales increased in the first quarter of 1996 due to a 15%
increase in sales volume and slightly higher average selling prices. Sales
volume was limited in the first quarter of 1995 by U.S. Government-imposed
marketing allotments, which expired in September 1995. Amalgamated currently
expects quarterly sales volume levels for the remainder of 1996 to generally
approximate first quarter levels, and full year sales volume is estimated to be
about 10% below the record 1995 volume. The generally smaller industry-wide
crop production levels for the current crop year are expected to continue to
result in stabilized/improved refined sugar selling prices. Amalgamated
currently expects contracted acreage for the crop to be planted in the spring of
1996 to approximate the prior crop.
The Federal Agriculture Improvement and Reform Act of 1996, enacted into
law in April 1996, extended the sugar price support loan program through
September 2003. Under the new legislation, among other things, government-
imposed marketing allotments are eliminated, loan advance rates from the federal
government secured by refined sugar inventories are frozen, such loans are
recourse unless the sugar import quota exceeds a specified level, and the
interest rate charged on outstanding loans will increase by 100 basis points.
BUILDING PRODUCTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, %
------------------
1995 1996 CHANGE
---- ---- ------
(IN MILLIONS)
<S> <C> <C> <C>
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)
===== ======
</TABLE>
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 3 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 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
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, %
------------------
1995 1996 CHANGE
---- ---- ------
(IN MILLIONS)
<S> <C> <C> <C>
Net sales $20.1 $21.2 + 6%
Operating income 5.5 4.4 -20%
</TABLE>
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
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, %
------------------
1995 1996 CHANGE
---- ---- ------
(IN MILLIONS)
<S> <C> <C> <C>
Net sales $26.8 $27.6 + 3%
Operating income 1.1 1.6 +47%
</TABLE>
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 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
increasing competitive business, including possible disposition of one or more
regions.
WASTE MANAGEMENT
Waste Control Specialists LLC was formed in November 1995 and is currently
constructing a facility in West Texas for the processing, treatment, storage and
disposal of certain hazardous and toxic wastes. Waste Control Specialists
reported a loss of $1 million in the first quarter of 1996 and expects to
continue to report losses during the development stage. The facility is planned
to be ready to accept wastes governed by The Resource Conservation and Recovery
Act (`RCRA'') and the Toxic Substances Control Act (``TSCA'') in 1997.
OTHER
Interest expense. Interest expense declined due primarily to lower average
variable interest rates. At March 31, 1996, approximately $667 million of
consolidated indebtedness, principally publicly-traded debt, bears interest at
fixed rates averaging 10.9%. The weighted average interest rate on $697 million
of outstanding variable rate borrowings at March 31, 1996 was 5.8%, down from
6.4% at December 31, 1995 and 7.4% at year-end 1994.
Minority interest. Minority interest in earnings in 1996 consists
principally of NL dividends paid to stockholders other than Valhi. See Note 1
to the Consolidated Financial Statements.
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. In
addition, because certain subsidiaries, including NL, are not members of the
consolidated U.S. tax group, Valhi's incremental income taxes on its after-tax
earnings or losses attributable to such subsidiaries can also increase the
Company's overall effective tax rate. See Note 11 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 $7
million from the same period in 1995, generally reflecting the decline in
earnings. Changes in assets and liabilities include the impact of significant
seasonal fluctuations related to Amalgamated's seasonal purchase and processing
of sugarbeets, as discussed below. Cash costs related to the 1996 closure of
Medite's New Mexico MDF production facility, net of related income tax benefits,
are not expected to be material.
Cash flows from investing and financing activities. Capital expenditures
for all of 1996 are estimated to approximate $97 million, down from $115 million
in 1995 in large part due to completion of certain productivity projects at
Amalgamated during 1995.
During the first quarter of 1996, Valhi purchased an additional $4 million
of NL common stock, Rheox acquired the minority interest in its non-U.S.
subsidiaries for $5 million and, as scheduled, Valhi contributed $5 million to
Waste Control Specialists.
Net first quarter borrowings include seasonal increases at Amalgamated ($66
million in 1995 and $49 million in 1996) and DM 50 million ($35 million when
borrowed) under NL's DM credit facility in 1996.
Credit facilities. At March 31, 1996, unused revolving credit facilities
aggregated $270 million, including $167 million attributable to NL. Of such
amount, $85 million is available only for (i) permanently reducing NL's DM term
loan or (ii) paying future NL German income tax assessments, as discussed below.
Valhi has not guaranteed any subsidiary indebtedness.
NL Industries. The TiO2 industry is cyclical, with a peak in selling
prices in early 1990 and a trough in the third quarter of 1993. Although TiO2
selling prices are significantly above the 1993 trough, as discussed above,
prices began declining during the last half of 1995. Relative changes in NL's
inventories, receivables and payables (excluding the effect of foreign currency
translation) used $52 million of cash in the first quarter of 1996 compared to
using $32 million in the first quarter of 1995.
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 reached an agreement in principle with the German tax authorities regarding
such examinations which will resolve certain significant tax contingencies for
years through 1990. NL expects to finalize assessments and pay tax deficiencies
of approximately DM 50 million ($34 million at March 31, 1996), including
interest, in settlement of these issues during 1996.
Certain other German tax contingencies remain outstanding and will continue
to be litigated. Although NL believes that it will ultimately prevail in the
litigation, NL has granted a DM 100 million ($68 million at March 31, 1996) 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 rulings. 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 currently or formerly owned, operated or used by NL, many of which
disposal sites or facilities 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 ($100 million at March 31, 1996
with respect to domestic sites) for reasonably estimable costs of such matters,
and has estimated that the upper end of the range of reasonably possible costs
to NL for sites for which it is possible to estimate costs is approximately $165
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. Although no
assurance can be given that NL will not incur future liability in respect of
this litigation, based on, among other things, the results of such litigation to
date, NL believes that the pending lead pigment and paint litigation is without
merit. NL has not accrued any amounts for the pending lead pigment and paint
litigation. 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 at the state, local and federal levels that
seek to impose various obligations on present and former manufacturers of lead
pigment and lead-based paint with respect to asserted health concerns associated
with the use of such products and to effectively overturn court decisions in
which NL and other pigment manufacturers have been successful. NL currently
believes the disposition of all claims and disputes, individually or in the
aggregate, should not have a material adverse effect on its consolidated
financial position, results of operations or liquidity. There can be no
assurance that additional matters of these types will not arise in the future.
NL periodically evaluates its liquidity requirements, alternative uses of
capital, capital needs and availability of resources in view of, among other
things, its debt service and capital expenditure requirements and estimated
future operating cash flows. As a result of this process, NL has in the past
and may in the future seek to reduce, refinance, repurchase or restructure
indebtedness, raise additional capital, 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 also review
opportunities for the acquisition of businesses and assets 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.
Amalgamated. Amalgamated's cash requirements are seasonal in that a major
portion of the total payments for sugarbeets is made, and the cost of processing
the sugarbeets is incurred, in the fall and winter of each year. Accordingly,
Amalgamated's operating activities typically use significant amounts of cash in
the first and fourth calendar quarters and provide significant cash flow in the
second and third quarters of each year. Amalgamated's seasonal cash
requirements are financed with short-term borrowings under the government sugar
price support loan program and bank credit agreements. Amalgamated expects to
complete a one-year extension of its bank revolver, to September 1998, during
the second quarter.
Waste Control Specialists. Waste Control Specialists' estimated capital
expenditures for projects in process, substantially all of which relate to the
construction of its new facility in West Texas, are approximately $16 million
and are expected to be incurred principally in 1996. Such capital expenditures,
along with its expected development stage operating losses, will be funded
primarily from Valhi's $25 million of capital contributions ($10 million funded
through first quarter 1996). Waste Control Specialists does not expect to begin
to generate revenues from existing RCRA and TSCA permits until 1997.
Valhi general corporate. Valhi's operations are conducted principally
through subsidiaries and affiliates (NL Industries, Amalgamated, Valcor and
Waste Control Specialists). Valcor is an intermediate parent company with
operations conducted through its subsidiaries (Medite, National Cabinet Lock and
Sybra). Accordingly, the Company's long-term ability to meet its corporate
level obligations is dependent in large measure on the receipt of dividends or
other distributions from subsidiaries. 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 the Company's ability to service
parent company obligations. Neither Valhi nor Valcor has guaranteed any
indebtedness of their respective subsidiaries.
Valhi's remaining $15 million commitment to invest in Waste Control
Specialists ($10 million in 1996 and $5 million in early 1997) will be provided
primarily by cash on hand or available credit facilities. At March 31, 1996,
Valhi has two bank credit facilities aggregating $65 million, of which $60
million was available for borrowing. Of such available amount, $15 million can
only be used to purchase shares of NL common stock.
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, repurchase or restructure indebtedness, 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 1995 Annual Report for descriptions of certain
legal proceedings.
In March 1996, the Court in Alan Russell Kahn v. Tremont Corporation, et
al. (Court of Chancery of the State of Delaware, No. 12339) issued its opinion
ruling in favor of the defendants, including Valhi, and concluding that
Tremont's 1991 purchase of 7.8 million shares of NL common stock from Valhi did
not constitute an overreaching of Tremont by the controlling shareholder
(Valhi), that Tremont's purchase price for the NL shares was fair and that in
all other respects the transaction was fair to Tremont. Plaintiff's time for
appeal has not yet expired.
Gates v. American Cyanamid Co., et al. (I1996-2114). In April 1996, NL was
served with a complaint filed in New York state court which seeks compensatory
and punitive damages for personal injury purportedly caused by lead paint and
alleges causes of action against NL and other former lead pigment manufactures
and the Lead Industries Association for negligence, strict products liability,
fraud, concert of action, civil conspiracy, enterprise liability, market share
liability and alternative liability. The complaint also asserts causes of
action against the landlords of the apartments in which plaintiff has lived
since 1977. NL intends to file an answer denying plaintiff's allegations.
Hines v. Gates, et al. (96-616161). In May 1996, NL was served with a
complaint filed in Michigan state court seeking recovery for personal injury
purportedly caused by lead paint and alleging causes of action on behalf of
plaintiff against NL, other former lead pigment manufacturers and others for
negligence, negligent failure to warn, breach of warranty, alternative liability
and concert of action. The complaint also asserts causes of action against
plaintiff's landlord. NL intends to file an answer denying plaintiff's
allegations.
Skipworth v. Sherwin-Williams Co., et al. In April 1996, the Pennsylvania
Supreme Court granted a petition to hear plaintiffs' appeal from the appellate
court decision in defendants' favor.
City of New York, et al. v. Lead Industries Association, et al. In
February 1996, defendants' motion for summary judgment on the basis that the
fraud claim is time-barred was denied. Defendants have appealed.
NL Industries, Inc. v. Commercial Union Insurance Cos., et al. On remand
from the Court of Appeals, the trial court in April 1996 granted NL's motion for
summary judgment, finding that Commercial Union had a duty to defend NL in the
four lead paint cases which were the subject of NL's second amended complaint.
The court also issued a partial ruling on Commercial Union's motion for summary
judgment in which it sought allocation of defense costs and contribution from NL
and two other insurance carriers in connection with the three lead paint actions
on which the court had granted NL summary judgment in 1991. The court ruled
that Commercial Union is entitled to receive such contribution from NL and the
two carriers, but reserved ruling with respect to the relative contributions to
be made by each of the parties, including contributions by NL that may be
required with respect to periods in which it was self-insured and contributions
from one carrier which were reinsured by a former subsidiary of NL, the
reinsurance costs of which NL may ultimately be required to bear.
Portland, Oregon smelter site. The U.S. EPA has issued a proposed Record
of Decision Amendment changing portions of the cleanup remedy selected for the
site. The U.S. EPA estimates the cost of the proposed remedy to be from $10
million to $13 million.
People of the State of Illinois v. NL Industries, Inc., et al. The Appeals
Court has granted the State's motion to reconsider the Court's affirmance of the
dismissal of this case. In addition, the U.S. EPA has issued an order to NL to
perform a removal action at NL's former facility involved in the State of
Illinois case. NL has notified the U.S. EPA that it intends to comply with the
order.
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 29, 1996 - Reported Items 5 and 7.
March 12, 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.
VALHI, 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
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VALHI, INC.'S
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1996, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 142,468
<SECURITIES> 0
<RECEIVABLES> 249,645
<ALLOWANCES> 5,199
<INVENTORY> 467,842
<CURRENT-ASSETS> 872,378
<PP&E> 1,195,631
<DEPRECIATION> 345,163
<TOTAL-ASSETS> 2,495,730
<CURRENT-LIABILITIES> 598,036
<BONDS> 1,105,284
0
0
<COMMON> 1,247
<OTHER-SE> 265,390
<TOTAL-LIABILITY-AND-EQUITY> 2,495,730
<SALES> 462,795
<TOTAL-REVENUES> 462,795
<CGS> 349,714
<TOTAL-COSTS> 349,714
<OTHER-EXPENSES> 24,000
<LOSS-PROVISION> 160
<INTEREST-EXPENSE> 30,316
<INCOME-PRETAX> (6,536)
<INCOME-TAX> (3,169)
<INCOME-CONTINUING> (5,688)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,688)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> 0
</TABLE>
