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 JUNE 30, 1998 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 JULY 31, 1998: 114,457,014.
VALHI, INC. AND SUBSIDIARIES
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1997
and June 30, 1998 3-4
Consolidated Statements of Operations -
Three months and six months ended June 30, 1997
and 1998 5-6
Consolidated Statements of Comprehensive Income -
Six months ended June 30, 1997 and 1998 7
Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 1998 8
Consolidated Statements of Cash Flows -
Six months ended June 30, 1997 and 1998 9-10
Notes to Consolidated Financial Statements 11-20
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 21-32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 33
Item 4. Submission of Matters to a Vote of Security Holders. 34
Item 6. Exhibits and Reports on Form 8-K. 34
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, JUNE 30,
1997 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 360,369 $ 432,950
Accounts and other receivables 172,378 196,998
Refundable income taxes 1,941 6,382
Receivable from affiliates 104 9,258
Inventories 204,718 185,841
Prepaid expenses 3,607 5,973
Deferred income taxes 7,541 5,031
Total current assets 750,658 842,433
Other assets:
Marketable securities 273,616 271,333
Investment in and advances to affiliates 192,239 365,461
Loans and notes receivable 82,556 82,432
Mining properties 30,363 14,612
Prepaid pension cost 24,111 24,072
Goodwill 256,539 253,768
Deferred income taxes 110 -
Other 26,267 24,670
Total other assets 885,801 1,036,348
Property and equipment:
Land 17,100 15,380
Buildings 145,599 141,081
Equipment 506,402 474,768
Construction in progress 3,284 8,431
672,385 639,660
Less accumulated depreciation 130,731 136,271
Net property and equipment 541,654 503,389
$2,178,113 $2,382,170
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY DECEMBER 31, JUNE 30,
1997 1998
<S>
Current liabilities: <C> <C>
Notes payable $ 13,968 $ 33,680
Current long-term debt 76,854 192,119
Accounts payable 71,559 61,475
Accrued liabilities 114,721 132,101
Payable to affiliates 30,996 10,985
Income taxes 15,103 28,848
Deferred income taxes 891 607
Total current liabilities 324,092 459,815
Noncurrent liabilities:
Long-term debt 1,008,087 672,948
Accrued pension cost 45,641 41,491
Accrued OPEB cost 51,273 45,079
Accrued environmental costs 128,246 112,998
Deferred income taxes 207,403 342,420
Other 28,180 43,491
Total noncurrent liabilities 1,468,830 1,258,427
Minority interest 257 92,116
Stockholders' equity:
Common stock 1,253 1,254
Additional paid-in capital 38,355 42,268
Retained earnings 315,977 505,713
Accumulated other comprehensive income:
Marketable securities 127,731 125,843
Currency translation (24,440) (26,487)
Pension liabilities (2,533) (1,520)
Treasury stock (71,409) (75,259)
Total stockholders' equity 384,934 571,812
$2,178,113 $2,382,170
</TABLE>
Commitments and contingencies (Note 1)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Revenues and other income:
Net sales $280,221 $281,333 $545,526 $548,721
Gain on:
Disposal of business unit - - - 330,217
Reduction in interest in - - - 67,902
CompX
Other, net 23,276 29,570 39,977 50,198
303,497 310,903 585,503 997,038
Costs and expenses:
Cost of sales 212,264 196,131 417,031 383,710
Selling, general and 52,034 74,745 129,686 123,922
administrative
Interest 30,614 23,434 61,273 48,884
294,912 294,310 607,990 556,516
8,585 16,593 (22,487) 440,522
Equity in losses of Waste Contro
Specialists (2,724) (3,675) (5,482) (6,846)
Income (loss) before income 5,861 12,918 (27,969) 433,676
taxes
Provision for income taxes 3,205 2,736 (7,493) 184,377
(benefit)
Minority interest in after-tax 20 12,225 28 46,675
earnings
Income (loss) from continuin
operations 2,636 (2,043) (20,504) 202,624
Discontinued operations 19,742 - 35,413 -
Extraordinary item (394) (54) (394) (1,323)
Net income (loss) $ 21,984 $ (2,097) $ 14,515 $201,301
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Basic earnings per share:
Continuing operations $ .02 $ .02 $ (.18) $ 1.76
Discontinued operations .17 - .31 -
Extraordinary item - - - (.01)
Net income (loss) $ .19 $ (.02) $ .13 $ 1.75
Diluted earnings per share:
Continuing operations $ .02 $ (.02) $ (.18) $ 1.75
Discontinued operations .17 - .31 -
Extraordinary item - - - (.01)
Net income (loss) $ .19 $ (.02) $ .13 $ 1.74
Cash dividends per share $ .05 $ .05 $ .10 $ .10
Shares used in the calculation of
earnings per share:
Basic earnings per share 115,012 114,951 114,902 115,043
Dilutive impact of stock options 858 - - 967
Diluted earnings per share 115,870 114,951 114,902 116,010
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998
<S>
<C> <C>
Net income $14,515 $201,301
Other comprehensive income, net of tax:
Marketable securities adjustment:
Unrealized gains arising during the period 84,417 3,249
Less reclassification for gains included
in net income
(108) (5,137)
84,309 (1,888)
Currency translation adjustment (10,824) (2,047)
Pension liabilities adjustment - 1,013
Total other comprehensive income, net 73,485 (2,922)
Comprehensive income $88,000 $198,379
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
<S> <C> <C> <C>
Balance at December 31, 1997 $1,253 $38,355 $315,977
Net income - - 201,301
Other comprehensive income, net - - -
Dividends - - (11,565)
Common stock reacquired - - -
Other, net 1 3,913 -
Balance at June 30, 1998 $1,254 $42,268 $505,713
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED OTHER COMPREHENSIVE INCOME TOTAL
MARKETABLE CURRENCY PENSION TREASURY STOCKHOLDERS'
SECURITIES TRANSLATION LIABILITIES STOCK EQUITY
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $127,731 $(24,440) $(2,533) $(71,409) $384,934
Net income - - - - 201,301
Other comprehensive income, (1,888) (2,047) 1,013 - (2,922)
net
Dividends - - - - (11,565)
Common stock reacquired - - - (3,692) (3,692)
Other, net - - - (158) 3,756
Balance at June 30, 1998 $125,843 $(26,487) $(1,520) $(75,259) $571,812
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,515 $ 201,301
Depreciation, depletion and amortization 31,482 29,027
Noncash interest expense 18,245 15,873
Gain on:
Disposal of business unit - (330,217)
Reduction in interest in CompX - (67,902)
Change in accounting principle 30,000 -
Deferred income taxes (13,403) 138,212
Minority interest 28 46,675
Other, net (7,391) (8,790)
Equity in:
Waste Control Specialists 5,482 6,846
Discontinued operations (35,413) -
43,545 31,025
Discontinued operations, net (40,078) -
Change in assets and liabilities:
Accounts and notes receivable (41,392) (46,332)
Inventories 30,055 12
Accounts payable and accrued liabilities (1,971) 3,521
Accounts with affiliates 9,879 (28,577)
Income taxes 8,189 16,563
Other, net (4,500) 9,531
Net cash provided (used) by operating
activities (14,257)
3,727
Cash flows from investing activities:
Capital expenditures (18,750) (12,130)
Purchases of:
Tremont common stock - (172,587)
NL common stock - (7,955)
Marketable securities (6,000) (3,766)
Business unit - (33,234)
Investment in Waste Control Specialists (3,000) (10,000)
Proceeds from disposal of:
Business unit - 435,080
Marketable securities - 6,875
Loans to affiliates:
Loans (42,100) (119,250)
Collections 18,100 120,250
Other loans and notes receivable:
Loans (200,600) -
Collections 112,411 -
Pre-close dividend from Amalgamated Sugar Company 11,518 -
Discontinued operations, net 88,662 -
Other, net 6,417 261
Net cash provided (used) by investing
activities
(33,342) 203,544
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Cash flows from financing activities:
Indebtedness:
Borrowings $ 390,000 $ 30,728
Principal payments (221,682) (234,249)
Deferred financing costs paid (3,931) (220)
Proceeds from issuance of CompX common stock - 110,378
Repayment of loan from affiliate (7,244) -
Valhi dividends paid (11,564) (11,565)
Common stock reacquired - (3,692)
Discontinued operations, net 22,372 -
Other, net 2,580 814
Net cash provided (used) by financing
activities
170,531 (107,806)
Cash and cash equivalents - net change from:
Operating, investing and financing activities 140,916 81,481
Currency translation (1,979) (1,270)
Business unit sold - (7,630)
Cash and equivalents at beginning of period 255,679 360,369
Cash and equivalents at end of period $ 394,616 $ 432,950
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 43,860 $ 33,469
Income taxes, net 33,098 64,944
Business unit acquired - net assets
consolidated:
Cash and cash equivalents $ - $ -
Goodwill - 20,113
Other intangible assets - 3,148
Other non-cash assets - 17,782
Liabilities - (7,809)
Cash paid $ - $ 33,234
</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, 1997 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 1998 and the consolidated statements of
operations, comprehensive income, stockholders' equity and cash flows for the
interim periods ended June 30, 1997 and 1998 have been prepared by the Company,
without audit. In the opinion of management, all adjustments, consisting only
of normal recurring adjustments, necessary to present fairly the consolidated
financial position, results of operations and cash flows have been made. The
results of operations for the interim periods are not necessarily indicative of
the operating results for a full year or of future operations. Certain
information normally included in financial statements prepared in accordance
with generally accepted accounting principles has been condensed or omitted.
The accompanying consolidated financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended December 31,
1997 (the "1997 Annual Report").
The results of the Company's former building products and fast food
operations are presented as discontinued operations. See Note 14. The
extraordinary item, stated net of allocable income tax benefit and minority
interest, relates to the prepayment of certain indebtedness at 58%-owned NL
Industries.
Basic earnings per share of common stock is based upon the weighted average
number of common shares actually outstanding during each period. Diluted
earnings per share of common stock includes the impact of outstanding dilutive
stock options.
In January 1998, the Company's board of directors authorized the Company to
purchase up to 2 million shares of its common stock in open market or privately-
negotiated transactions over an unspecified period of time. As of June 30,
1998, the Company had purchased approximately 383,000 shares for an aggregate of
$3.7 million pursuant to such authorization. Other commitments and
contingencies are discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Legal Proceedings" and the 1997
Annual Report.
Contran Corporation holds, directly or through subsidiaries, approximately
92% of Valhi's outstanding common stock. Substantially all of Contran's
outstanding voting stock is held by trusts established for the benefit of
certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons is
sole trustee. Mr. Simmons, the Chairman of the Board and Chief Executive
Officer of Valhi and Contran, may be deemed to control such companies.
The Company will adopt Statement of Financial Accounting Standards ("SFAS")
No. 133, Accounting for Derivative Instruments and Hedging Activities, no later
than the first quarter of 2000. SFAS No. 133 establishes accounting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Under SFAS No. 133, all
derivatives will be recognized as either assets or liabilities and measured at
fair value. The accounting for changes in fair value of derivatives will depend
upon the intended use of the derivative. The Company is currently studying this
newly-issued accounting rule, and the impact of adopting SFAS No. 133, if any,
has not yet been determined but will be dependent upon the extent to which the
Company is a party to derivative contracts or hedging activities at the time of
adoption.
NOTE 2 - BUSINESS SEGMENT INFORMATION:
% OWNED
OPERATIONS PRINCIPAL ENTITIES AT JUNE 30, 1998
Chemicals NL Industries, Inc. 58%
Component products CompX International Inc. 62%
Waste management Waste Control Specialists 64%
Titanium metals Tremont Corporation 48%
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1998 1997 1998
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net sales:
Chemicals $252.7 $241.6 $492.2 $476.9
Component products 27.5 39.7 53.3 71.8
$280.2 $281.3 $545.5 $548.7
Operating income:
Chemicals $ 23.9 $ 42.0 $ 37.4 $ 79.4
Component products 6.9 9.1 13.2 13.4
30.8 51.1 50.6 92.8
Gain on:
Disposal of business unit - - - 330.2
Reduction in interest in CompX - - - 67.9
General corporate items:
Securities transactions .1 7.8 .2 7.9
Interest and dividend income 16.5 17.5
Expenses, net (8.2) (36.3) (43.1) (44.1)
Interest expense (30.6) (23.5) (61.3) (48.9)
8.6 16.6 (22.5) 440.5
Equity in losses of Waste Control
Specialists (2.8) (3.6) (5.5) (6.8)
Income (loss) before income taxes $ 5.8 $ 13.0 $(28.0) $433.7
</TABLE>
NL Industries. In January 1998, NL sold its specialty chemicals business
unit conducted by its subsidiary Rheox, Inc. See Note 12. NL's remaining
chemicals operations are conducted through its subsidiary Kronos, Inc. (titanium
dioxide pigments or "TiO2"). In July 1998, NL reached an agreement to acquire
certain operations of a TiO2 competitor, including the other 50% interest in
NL's TiO2 manufacturing joint venture. Completion of the transaction is subject
to certain conditions. See Note 5 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
CompX. The Company's component products subsidiary (CompX) is owned by
Valcor, Inc., a wholly-owned subsidiary of Valhi. In March 1998, CompX
completed an initial public offering of shares of its common stock which, along
with the award of certain shares of its common stock in connection with the
offering, reduced the Company's ownership interest in CompX to 62%. See Note
13. In March 1998, CompX completed the acquisition of a lock competitor for
approximately $33 million cash consideration. Such acquisition was accounted
for by the purchase method.
Waste Control Specialists. The Company has not consolidated its majority-
owned subsidiary, Waste Control Specialists, because the Company is not deemed
to control Waste Control Specialists. See the 1997 Annual Report. In April
1998, Valhi contributed $10 million to Waste Control Specialists' equity,
thereby increasing its membership interest to 64%. Approximately $7 million of
such contribution was used by Waste Control Specialists to reduce the
outstanding balance of its revolving borrowings from the Company. The Company
also holds an option to make an additional $10 million equity contribution to
Waste Control Specialists which, if contributed, would increase its membership
interest to approximately 69%. See Note 5.
Tremont. On June 19, 1998, Valhi purchased 2.9 million shares of Tremont
Corporation common stock from Contran and certain of Contran's subsidiaries at a
cash price of $56 per share, or an aggregate of $165.1 million (before fees and
expenses). Valhi also purchased, on open market transactions during the first
six months of 1998, an additional 129,000 shares of Tremont at an aggregate cost
of approximately $7 million. At June 30, 1998, the 3.1 million Tremont shares
held by Valhi represent approximately 48% of Tremont's outstanding common shares
at that date. Valhi accounts for its interest in Tremont by the equity method,
and will commence recognizing equity in Tremont's earnings beginning in the
third quarter of 1998. See Note 5. Tremont is primarily a holding company
which owns approximately 30% of the outstanding common stock of Titanium Metals
Corporation ("TIMET") and 18% of NL's common stock.
General. Each of NL (NYSE: NL), CompX (NYSE: CIX), Tremont (NYSE: TRE) and
TIMET (NYSE: TIE) file periodic reports pursuant to the Securities Exchange Act
of 1934, as amended. The aggregate pro forma impact of CompX's acquisition of a
lock competitor and Valhi's acquisition of Tremont common stock, assuming such
acquisitions occurred at the beginning of 1997, is not material.
NOTE 3 - MARKETABLE SECURITIES:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
(IN THOUSANDS)
<S> <C> <C>
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC $170,000 $170,000
Dresser Industries common stock 87,823 80,527
Other securities 15,793 20,806
$273,616 $271,333
</TABLE>
At June 30, 1998, Valhi held 2.7 million shares of Dresser common stock
(aggregate cost of $22 million) with a quoted market price of $44.06 per share,
or an aggregate market value of $119 million. Valhi's LYONs are exchangeable at
any time, at the option of the LYON holder, for such Dresser shares, and the
carrying value of the Dresser stock is limited to the accreted LYONs obligation.
See Note 8. See the 1997 Annual Report for a discussion of the Company's
investment in The Amalgamated Sugar Company LLC. The aggregate cost of other
available-for-sale securities (primarily common stocks) is approximately $14
million at June 30, 1998.
NOTE 4 - INVENTORIES:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
(IN THOUSANDS)
<S> <C> <C>
Raw materials:
Chemicals $ 45,844 $ 38,919
Component products 2,057 4,899
47,901 43,818
In process products:
Chemicals 8,018 7,233
Component products 5,193 6,276
13,211 13,509
Finished products:
Chemicals 108,292 91,208
Component products 3,775 4,464
112,067 95,672
Supplies 31,539 32,842
$204,718 $185,841
</TABLE>
NOTE 5 - OTHER NONCURRENT ASSETS:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
(IN THOUSANDS)
<S> <C> <C>
Investment in affiliates:
TiO2 manufacturing joint venture $170,830 $171,202
Tremont Corporation - 172,587
Waste Control Specialists LLC 15,518 18,672
Other 1,891 -
188,239 362,461
Loan to Waste Control Specialists LLC 4,000 3,000
$192,239 $365,461
Loans and notes receivable:
Snake River Sugar Company $ 80,000 $ 80,000
Other 12,183 5,522
92,183 85,522
Less current portion 9,627 3,090
Noncurrent portion $ 82,556 $ 82,432
Other noncurrent assets:
Deferred financing costs $ 11,646 $ 8,536
Intangible assets 4,487 6,082
Other 10,134 10,052
$ 26,267 $ 24,670
</TABLE>
At June 30, 1998, Valhi held 3.1 million shares of Tremont Corporation
common stock with a quoted market price of $56.19 per share, or an aggregate of
$173 million. In April 1998, the maturity of the Company's $10 million
revolving loan facility to Waste Control Specialists was extended one year to
December 31, 1999.
NOTE 6 - ACCOUNTS WITH AFFILIATES:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
(IN THOUSANDS)
<S> <C> <C>
Current receivable from affiliates:
Income taxes receivable from Contran $ - $ 9,100
Other, net 104 158
$ 104 $ 9,258
Current payable to affiliates:
Income taxes payable to Contran $19,472 $ -
Tremont Corporation 3,354 3,379
Louisiana Pigment Company 8,513 7,719
Other, net (343) (113)
$30,996 $10,985
</TABLE>
NOTE 7 - ACCRUED LIABILITIES:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
(IN THOUSANDS)
<S> <C> <C>
Current:
Employee benefits $ 44,457 $ 37,443
Environmental costs 11,118 24,499
Interest 7,019 6,776
Plant closure costs 3,289 1,861
Deferred income 915 4,240
Other 47,923 57,282
$114,721 $132,101
Noncurrent:
Insurance claims and expenses $ 13,674 $ 13,978
Employee benefits 11,490 10,435
Deferred income 1,480 15,753
Other 1,536 3,325
$ 28,180 $ 43,491
</TABLE>
NOTE 8 - NOTES PAYABLE AND LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
(IN THOUSANDS)
<S> <C> <C>
Notes payable -
Kronos - non-U.S. bank credit agreements
(DM 25,000 and DM 60,500)
$ 13,968 $ 33,680
Long-term debt:
Valhi: LYONs $ 87,823 $ 80,527
Snake River Sugar Company 250,000 250,000
Valcor Senior Notes 2,431 2,431
NL Industries:
Senior Secured Notes 250,000 244,000
Senior Secured Discount Notes 169,857 168,995
Deutsche mark bank credit facility
(DM 288,322 and DM 207,322) 161,085 115,416
Rheox bank credit facility 117,500 -
Joint venture term loan 42,429 -
Other 3,282 2,067
Total NL Industries 744,153 530,478
Other 534 1,631
1,084,941 865,067
Less current maturities 76,854 192,119
$1,008,087 $672,948
</TABLE>
NL currently intends to call its Senior Secured Discount Notes for
redemption in October 1998, and accordingly such indebtedness has been
classified as a current liability at June 30, 1998. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
NOTE 9 - PROVISION FOR INCOME TAXES (BENEFIT):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1997 1998
(IN MILLIONS)
<S> <C> <C>
Continuing operations:
Expected tax expense (benefit) $ (9.8) $151.8
Incremental tax and rate differences on equity in
earnings of non-tax group companies (12.2) 72.4
Change in NL's deferred income tax
valuation allowance 12.8 (45.1)
State income taxes, net 1.4 7.9
Excess of tax basis over book basis of the
common stock of foreign subsidiaries sold - (12.1)
No tax benefit on goodwill amortization 1.6 10.7
Non-U.S. tax rates (.5) (.1)
Other, net (.8) (1.1)
$ (7.5) $184.4
Comprehensive provision (benefit) for income taxes:
Continuing operations $ (7.5) $184.4
Discontinued operations 13.9 -
Extraordinary item (.2) (1.4)
Other comprehensive income:
Marketable securities 53.4 (.8)
Currency translation (5.8) (1.2)
Pension liabilities - .6
$ 53.8 $181.6
</TABLE>
NOTE 10 - OTHER INCOME:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1997 1998
(IN THOUSANDS)
<S> <C> <C>
Securities earnings:
Interest and dividends $31,133 $34,722
Securities transactions 166 7,905
31,299 42,627
Currency transactions, net 2,785 1,901
Noncompete agreement income - 1,667
Other, net 5,893 4,003
$39,977 $50,198
</TABLE>
NOTE 11 - MINORITY INTEREST:
The components of minority interest in net assets and net earnings are
presented in the following tables.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
(IN THOUSANDS)
<S> <C> <C>
Minority interest in net assets:
NL Industries $ - $46,314
CompX - 45,126
Subsidiaries of NL 257 589
Subsidiaries of CompX - 87
$ 257 $92,116
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1997 1998
(IN THOUSANDS)
<S> <C> <C>
Minority interest in net earnings (losses) -
continuing operations:
NL Industries $ - $43,891
CompX - 2,843
Subsidiaries of NL 28 19
Subsidiaries of CompX - (78)
$ 28 $46,675
</TABLE>
NL Industries. At December 31, 1997, NL's separate financial statements
reflected a stockholders' deficit of approximately $222 million and,
accordingly, no minority interest in NL was reported in the Company's
consolidated balance sheet at that date. Until such time as NL reported
positive stockholders' equity, all undistributed income or loss and other
undistributed changes in NL's reported stockholders' equity accrued to the
Company for financial reporting purposes. Beginning in the first quarter of
1998, NL resumed reporting positive stockholders' equity, and consequently the
Company resumed reporting minority interest in NL's net earnings and net assets
in 1998.
CompX. In March 1998, CompX completed an initial public offering of shares
of its common stock which, along with the award of certain shares of its common
stock in connection with the offering, reduced the Company's ownership interest
in CompX from 100% to 62%. See Note 13. Following CompX's public offering, the
Company commenced reporting minority interest in CompX's net earnings and net
assets.
NOTE 12 - DISPOSAL OF BUSINESS UNIT:
In January 1998, NL sold its specialty chemicals business unit conducted by
Rheox for $465 million cash consideration (before fees and expenses), including
$20 million attributable to a five-year agreement by NL not to compete in the
rheological products business. The Company reported a $330.2 million pre-tax
gain on the disposal of this business unit in the first quarter of 1998. The
Company's results and operations for the first six months of 1997 include net
sales of $73.5 million and operating income of $21.5 million related to this
business unit (1998 prior to the sale - $12.7 million and $2.7 million,
respectively).
NOTE 13 - REDUCTION IN INTEREST IN COMPX:
In March 1998, CompX completed an initial public offering of shares of its
common stock for net proceeds to CompX of approximately $110.4 million. Such
net proceeds are available for CompX's general corporate purposes. CompX used
$75 million of such net proceeds to repay outstanding borrowings under its new
bank credit facility, of which $50 million was incurred in connection with the
repayment of certain intercompany indebtedness owed by CompX to Valcor and $25
million which was incurred in connection with CompX's acquisition of a lock
competitor. As a result of the public offering of shares of CompX common stock
and CompX's award of certain shares of its common stock in connection with the
offering, the Company's ownership interest in CompX was reduced to 62%. The
Company reported a $67.9 million pre-tax gain on the Company's reduction in
interest in CompX in the first quarter of 1998. Deferred income taxes were
provided on this gain on reduction in interest in CompX.
NOTE 14 - DISCONTINUED OPERATIONS:
The components of discontinued operations for the first six months of 1997
are presented in the following table.
<TABLE>
<CAPTION>
AMOUNT
(IN THOUSANDS)
<S> <C>
Medite Corporation (building products) $15,667
Sybra, Inc. (fast food) 19,746
$35,413
</TABLE>
Condensed income statement and cash flow data for Medite and Sybra for the
first six months of 1997 is presented below.
<TABLE>
<CAPTION>
MEDITE SYBRA
(IN MILLIONS)
<S> <C> <C>
Income statement data:
Operations:
Net sales $ 20.5 $37.9
Operating income $ 2.8 $ 1.7
Interest expense and other, net (.2) (.6)
Pre-tax income 2.6 1.1
Income tax expense 1.0 .5
1.6 .6
Net gain on disposal:
Pre-tax gain 22.3 23.2
Income tax expense 8.2 4.1
14.1 19.1
$ 15.7 $19.7
Cash flow data:
Cash flows from operating activities $(39.0) $(1.1)
Cash flows from investing activities:
Capital expenditures (.4) (1.8)
Proceeds from disposal of assets 35.1 55.3
Other, net - .4
34.7 53.9
Cash flows from financing activities:
Indebtedness, net - 22.4
$ (4.3) $75.2
</TABLE>
NOTE 15 - RELATED PARTY TRANSACTIONS:
In June 1998, Contran used a portion of the proceeds from the sale of the
shares of Tremont common stock to Valhi discussed in Note 2 to repay in full
approximately $105 million of principal and accrued interest that it owed to
Valhi under the previously-reported $120 million revolving line of credit
between Valhi and Contran, and the facility was canceled.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
The Company reported income from continuing operations in the first
six months of 1998 of $202.6 million, or $1.75 per diluted share, compared to a
loss from continuing operations of $20.5 million, or $.18 per diluted share, in
the first six months of 1997. Valhi reported a loss from continuing operations
of $2.1 million, or $.02 per diluted share, in the second quarter of 1998
compared to income of $2.6 million, or $.02 per diluted share, in the second
quarter of 1997. The loss in the second quarter of 1998 includes an aggregate
charge of $32 million ($21 million, or $.18 per diluted share, net of income
taxes) related to the June 1998 cash payments made by Valhi as part of the
settlement of two shareholder derivative lawsuits in which Valhi was a
defendant.
The 1998 first six months results also include (i) a first quarter $330
million pre-tax gain ($152 million, or $1.31 per diluted share, net of income
taxes and minority interest) related to the sale of NL's specialty chemicals
business unit, (ii) a first quarter $68 million pre-tax gain ($44 million, or
$.38 per diluted share, net of income taxes) related to the Company's reduction
in interest in CompX and (iii) pre-tax securities transactions gains,
principally in the second quarter, of approximately $8 million ($5 million, or
$.04 per diluted share, net of income taxes). See Notes 12 and 13. The 1997
first six months results include a first quarter $30 million pre-tax charge
($19.5 million, or $.17 per diluted share, net of income taxes) related to
adoption of a new accounting standard regarding accounting for environmental
remediation liabilities at NL.
The statements in this Quarterly Report on Form 10-Q relating to matters
that are not historical facts, including, but not limited to, statements found
in this "Management's Discussion and Analysis of Financial Condition and Results
of Operations," are forward-looking statements that 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, potential difficulties in integrating
completed acquisitions, successful completion of pending acquisitions,
environmental matters, government regulations and possible changes therein, the
ultimate resolution of pending litigation and possible future litigation,
possible disruptions of normal business activity from Year 2000 issues and other
risks and uncertainties as discussed in this Quarterly Report and the 1997
Annual Report.
CHEMICALS
As discussed above, in January 1998 NL sold its specialty chemicals
business unit conducted by Rheox.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, % JUNE 30, %
1997 1998 CHANGE 1997 1998 CHANGE
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net sales:
Kronos $214.3 $241.6 +13% $418.7 $464.2 +11%
Rheox 38.4 - 73.5 12.7
$252.7 $241.6 -4% $492.2 $476.9 -3%
Operating income:
Kronos $ 12.1 $ 42.0 +246% $ 15.9 $ 76.7 +381%
Rheox 11.8 - 21.5 2.7
$ 23.9 $ 42.0 +76% $ 37.4 $ 79.4 +112%
</TABLE>
Kronos' TiO2 sales and operating income increased in 1998 compared to 1997
due primarily to higher average TiO2 selling prices and improved production
volumes. Kronos' average TiO2 selling prices have generally been increasing
since early 1997, and Kronos' average TiO2 selling prices in the second quarter
of 1998 were 18% higher than the second quarter of 1997 and 3% higher than the
first quarter of 1998. TiO2 selling prices at the end of the second quarter were
1% higher than the average for the quarter. TiO2 sales volumes in the second
quarter of 1998 approximated the record second quarter of 1997 levels, with
higher volumes in Europe offsetting lower volumes in Asia. Year-to-date TiO2
sales volumes in 1998 were 1% higher than the first six months of 1997. NL
believes demand for TiO2 will remain healthy in the near-term and expects
industry conditions will continue to improve. NL expects its TiO2 operating
income and margins in the last half of 1998 will continue to exceed prior-year
levels due primarily to expected higher average TiO2 selling prices. Calendar
1998 TiO2 sales volumes are expected to approximate calendar 1997 volumes.
A significant amount of NL's sales generated from its non-U.S. operations
are denominated in currencies other than the U.S. dollar, primarily major
European currencies and the Canadian dollar. Consequently, the translated U.S.
dollar value of NL's foreign sales and operating results are subject to currency
exchange rate fluctuations which may favorably or adversely impact reported
earnings and affect the comparability of period to period operating results. In
addition, a portion of NL's sales generated from its non-U.S. operations are
denominated in the U.S. dollar, and exchange rate fluctuations do not impact the
reported amount of such net sales. Certain raw materials, primarily titanium-
containing feedstocks, are purchased in U.S. dollars, while labor and other
production costs are denominated primarily in the local currencies.
Fluctuations in the value of the U.S. dollar relative to other currencies
decreased NL's sales in the first six months of 1998 by $22 million compared to
the first six months of 1997. Fluctuations in the value of the U.S. dollar
relative to other currencies similarly impacted NL's foreign currency-
denominated operating expenses, and the net impact of currency exchange rate
fluctuations on NL's operating income comparisons was not significant.
Amortization of 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 $21 million annually as compared
to amounts separately reported by NL (approximately $19 million related to TiO2
and approximately $2 million related to the disposed specialty chemicals
business unit).
In July 1998, NL reached an agreement to acquire certain TiO2 operations of
Tioxide Group Limited, a subsidiary of Imperial Chemical Industries PLC ("ICI").
Under the agreement, NL would acquire Tioxide's North American TiO2 operations
and one of its European TiO2 facilities for an aggregate of $335 million cash.
The operations to be acquired from Tioxide include (i) the other 50% interest in
the Louisiana TiO2 manufacturing joint venture (see Note 5), which has aggregate
production capacity of approximately 120,000 metric tons per year, (ii) a 75,000
metric ton sulfate-process TiO2 facility in the United Kingdom, (iii) a 52,000
metric ton TiO2 finishing facility in Canada, (iv) Tioxide's North American
marketing and distribution business and (v) approximately $50 million in working
capital. NL will also pay an additional $30 million fee in return for the
cancellation of certain chloride-process TiO2 technology rights which NL had
previously licensed to Tioxide in 1993 in connection with the formation of the
Louisiana TiO2 manufacturing joint venture. The transaction is subject to,
among other things, obtaining certain regulatory clearances and completion of
ICI's sale of Tioxide's other TiO2 businesses to E.I. du Pont de Nemours & Co.
Funds for the purchase will be provided by NL's cash on hand and aggregate
borrowings of $250 million in new bank financing which NL expects to obtain. NL
currently expects to complete the transaction by the end of 1998. Following
completion of the acquisition and DuPont's purchase of Tioxide's other TiO2
businesses, NL expects to become the world's third largest producer of TiO2,
increasing its annual TiO2 production capacity by approximately 135,000 metric
tons.
COMPONENT PRODUCTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, % JUNE 30, %
1997 1998 CHANGE 1997 1998 CHANGE
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net sales $27.5 $39.7 +45% $53.3 $71.8 +35%
Operating income 6.9 9.1 +32% 13.2 13.4 +2%
</TABLE>
Component products net sales increased in 1998 compared to 1997 due
primarily to higher sales volumes in all three major product lines (ergonomic
computer support systems, precision ball bearing slides and locking systems).
The higher sales volumes of locks resulted primarily from the March 1998
acquisition of a lock competitor. Component products operating income for the
first six months of 1998 includes a first quarter $3.3 million non-cash charge
related to the award of certain shares of CompX's common stock in connection
with the completion of its initial public offering in March 1998. Excluding
such charge, operating income increased in 1998 due primarily to the higher
volumes, offset in part by lower margins attributable to sales from the business
unit acquired in March 1998. Fluctuations in the value of the U.S. dollar
relative to the Canadian dollar accounted for about 10% of the increase in
components products operations income in each of the 1998 periods.
EQUITY AFFILIATES
Waste Control Specialists. Waste Control Specialists reported a loss of
$6.8 million during the first six months of 1998 compared to a loss of $5.5
million during the first six months of 1997. Waste Control Specialists reported
net sales of $3.4 million in the first six months of 1998 compared to $1.2
million in the first six months of 1997. Operating losses in both periods
include expenditures in connection with the pursuit of permits covering the
processing, treatment, storage and disposal of low-level and mixed radioactive
waste.
Tremont Corporation. In late June 1998 the Company acquired 2.9 million
shares of Tremont Corporation common stock held by Contran and certain of
Contran's subsidiaries. See Notes 2 and 5. Such shares, along with an
additional 129,000 Tremont common shares purchased by Valhi through open market
transactions during the first six months of 1998, represents approximately 48%
of Tremont's outstanding common stock at June 30, 1998. Valhi accounts for its
interest in Tremont by the equity method, and will commence reporting equity in
Tremont's earnings beginning in the third quarter of 1998. Equity in Tremont's
earnings will differ from the amount that would be expected by applying the
Company's 48%-ownership percentage to Tremont's separately-reported earnings
because of amortization of purchase accounting adjustments made in conjunction
with the Company's acquisitions of its interest in Tremont. At the Company's
current 48% interest in Tremont, such non-cash amortization reduces earnings
attributable to Tremont as reported by the Company by approximately $3 million
per year.
OTHER
Gains on disposal of business unit and reduction in interest in CompX. See
Notes 12 and 13, respectively. The pre-tax gain on disposal of NL's specialty
chemicals business unit differs from the amount separately-reported by NL due to
the write-off of a portion of the Company's purchase accounting adjustments
related to the net assets sold, including an allocated portion of goodwill
associated with the Company's investment in NL.
General corporate items. General corporate interest and dividend income
increased in 1998 compared to 1997 due primarily to a higher level of funds
available for investment. Securities transactions in both 1997 and 1998 relate
to the disposition of a portion of the shares of Dresser Industries common stock
held by the Company when certain holders of the Company's LYONs debt obligations
exercised their right to exchange their LYONs for such Dresser shares. Any
additional exchanges in 1998 or beyond would similarly result in additional
securities transaction gains. General corporate interest and dividend income in
the last six months of 1998 is expected to be lower than the first six months of
1998 due principally to the interest-generating funds used by the Company to
acquire its interest in Tremont in June 1998 as well as a lower level of
distributions expected to be received from The Amalgamated Sugar Company LLC.
Net general corporate expenses in the first quarter of 1997 include NL's
$30 million pre-tax charge related to adoption of a new accounting standard
regarding environmental remediation liabilities, and in the second quarter of
1998 include an aggregate $32 million pre-tax charge related to the June 1998
settlements of two shareholder derivative lawsuits in which Valhi was the
defendant. Such charges are included in selling, general and administrative
expenses. NL's $20 million of proceeds from the disposal of its specialty
chemicals business unit related to its agreement not to compete in the
rheological products business will be recognized as a component of general
corporate income (expense) ratably over the five-year non-compete period,
including $1.7 million recognized in the first six months of 1998. See Note 10.
Under the terms of NL's proposed purchase of certain TiO2 operations from ICI,
NL expects to pay a $30 million fee in return for the cancellation of certain
chloride-process TiO2 technology rights that NL had previously licensed to
Tioxide in 1993. Such fee will be recorded as a general corporate expense upon
the successful completion of the transaction.
Interest expense. Interest expense decreased in 1998 compared to 1997 due
primarily to a lower average level of outstanding indebtedness (primarily
Valhi's LYONs, Valcor Senior Notes and indebtedness related to NL's specialty
chemicals business unit which was prepaid in January 1998).
Provision for income taxes. The principal reasons for the difference
between the Company's effective income tax rates and the U.S. federal statutory
income tax rates are explained in Note 9. 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. Also, certain subsidiaries, including NL and, beginning in March
1998, CompX, are not members of the consolidated U.S. tax group, and the Company
provides incremental income taxes on such earnings. In addition, in the first
six months of 1998 NL reduced its deferred income tax valuation allowance by
approximately $45 million primarily as a result of utilization of certain tax
attributes for which the benefit had not been previously recognized under the
"more-likely-than-not" recognition criteria.
Minority interest, discontinued operations and extraordinary item. See
Notes 11, 14 and 1, respectively. The Company expects to report an
extraordinary loss in the fourth quarter of 1998 upon NL's redemption of its
Senior Secured Discount Notes at a price of 106% of their principal amount.
LIQUIDITY AND CAPITAL RESOURCES:
Cash flows from operating activities. Trends in cash flows from operating
annual activities (excluding the impact of significant asset dispositions and
relative changes in assets and liabilities) are generally similar to trends in
the Company's earnings. Changes in assets and liabilities generally result from
the timing of production, sales, purchases and income tax payments.
Cash flows from investing and financing activities. NL's and CompX's
aggregate annual capital expenditures for 1998 are expected to approximate the
$37 million spent in 1997. Capital expenditures in 1998 are expected to be
financed primarily from operations or existing cash resources and credit
facilities.
During the first six months of 1998, (i) Valhi purchased 3.1 million shares
of Tremont Corporation for an aggregate cost of $173 million, (ii) Valhi
contributed an additional $10 million to Waste Control Specialists' equity,
(iii) Valhi purchased $8 million of additional shares of NL common stock and $4
million of certain marketable securities and (iv) CompX purchased a lock
competitor for $33 million. In addition, in January 1998 NL sold its specialty
chemicals business unit conducted by Rheox for $465 million cash consideration
(before fees and expenses), including $20 million attributable to a five-year
agreement by NL not to compete in the rheological products business.
Net repayments of indebtedness in the first six months of 1998 include the
prepayment and termination of the Rheox bank credit facility and the joint
venture term loan and NL's purchase of approximately $11 million accreted value
of its Senior Secured Discount Notes in market transactions and approximately $6
million principal amount of its Senior Secured Notes pursuant to the tender
offer discussed below. In accordance with the terms of the DM credit facility,
NL also prepaid DM 81 million ($44 million when paid) of the DM term loan, of
which DM 49 million fully satisfied the September 1998 scheduled term loan
payment and DM 32 million reduced the March 1999 scheduled term loan payment. A
portion of the funds for such prepayment of the DM credit facility was provided
by a DM 35 million ($19 million when borrowed) increase in outstanding
borrowings under NL's short-term non-U.S. credit facilities. In the second
quarter of 1998, NL repaid DM 20 million ($11 million when paid) of the
outstanding balance of the DM revolving credit facility. In July 1998, NL
purchased an additional $4 million accreted value of its Senior Secured Discount
Notes in market transactions.
At June 30, 1998, unused credit available under existing credit facilities
approximated $190 million, which was comprised of $100 million available to
CompX under its new revolving senior credit facility discussed below, $75
million available to NL under non-U.S. credit facilities and $15 million
available to Valhi.
In March 1998, CompX completed an initial public offering of shares of its
common stock for net proceeds to CompX of approximately $110.4 million. Such
net proceeds are available for CompX's general corporate purposes. CompX used
$75 million of such net proceeds to repay outstanding borrowings under its new
bank credit facility, $50 million of which were incurred to repay certain
intercompany indebtedness owed by CompX to Valcor and $25 million of which was
used to fund the acquisition of the lock competitor.
In January 1998, the Company's board of directors authorized the Company to
purchase up to 2 million shares of its common stock in open market or privately-
negotiated transactions over an unspecified period of time. As of June 30,
1998, the Company had purchased approximately 383,000 shares for an aggregate of
$3.7 million pursuant to such authorization.
CHEMICALS - NL INDUSTRIES
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions can significantly impact NL's earnings and operating cash
flows. Average TiO2 selling prices began a downward trend in the last half of
1995, and continued to decline through the first quarter of 1997. NL's average
TiO2 prices began to increase during the second quarter of 1997 and continued to
increase throughout the remainder of 1997 and the first six months of 1998.
In January 1998, NL sold its specialty chemicals business unit conducted by
Rheox for $465 million cash consideration (before fees and expenses), including
$20 million attributable to a five-year agreement by NL not to compete in the
rheological products business. A portion of the $380 million net-of-tax
proceeds have been used by NL to prepay certain indebtedness. The remaining net
proceeds are available for NL's general corporate purposes, subject to
compliance with the terms of the indentures governing its publicly-traded debt.
Under the terms of the indentures governing NL's publicly-traded debt, NL
is required to make an offer to purchase a pro rata portion of such notes, at
par value for the 11.75% Senior Secured Notes and at accreted value for the 13%
Senior Secured Discount Notes, to the extent that a specified amount of the net
proceeds from the disposal of its specialty chemicals business unit are not used
to either permanently paydown certain indebtedness of NL or its subsidiaries or
invest in additional productive assets (including additional TiO2 production
capacity), both as defined in the indentures, within nine months of the
disposition. While NL was not yet required to execute a tender offer related to
the disposal of its specialty chemicals business unit, in May 1998 NL initiated
a tender offer to purchase on a pro-rata basis up to $181.6 million aggregate
principal amount of Senior Secured Notes and accreted value of Senior Secured
Discount Notes, at par or accreted value, respectively, in satisfaction of the
covenant contained in the indentures. Pursuant to its terms, the tender offer
expired in June 1998, and NL purchased approximately $6 million principal amount
of Senior Secured Notes, and a nominal amount of Senior Secured Discount Notes,
which had been properly tendered.
NL's Senior Secured Discount Notes can first be redeemed, at the option of
NL, in October 1998 at a price of 106% of their principal amount. NL currently
intends to redeem such indebtedness in October 1998. NL expects to obtain an
aggregate of $250 million in new bank financing to complete its purchase of
certain of Tioxide's TiO2 operations discussed above.
Certain of NL's U.S. and non-U.S. tax returns are being examined and tax
authorities have or may propose tax deficiencies. NL has previously reached an
agreement with the German tax authorities, and paid certain tax deficiencies of
approximately DM 44 million ($28 million when paid), including interest, which
resolved certain significant tax contingencies for years through 1990. During
1997, NL reached a tentative agreement with the German tax authorities regarding
the years 1991 through 1994, and NL expects to pay DM 9 million ($5 million at
June 30, 1998) during the second half of 1998 in settlement of certain tax
issues. Certain other significant German tax contingencies remain outstanding
for the years 1990 through 1996 and will continue to be litigated. With respect
to these contingencies, NL has received certain tax assessments aggregating DM
119 million ($66 million), including non-income tax related items and interest,
for the years through 1996. NL expects to receive tax assessments for an
additional DM 20 million ($11 million), including non-income tax related items
and interest, for 1991 through 1994. No payments of tax or interest deficiencies
related to these assessments are expected to be required until the litigation is
resolved.
A 1997 German tax court proceeding involving a tax issue substantially the
same as that involved in NL's primary remaining German tax contingency was
decided in favor of the taxpayer. The German tax authorities have appealed the
decision to the German Supreme Court; NL believes that the decision by the
German Supreme Court will be rendered within two years and will become a legal
precedent which will likely determine the outcome of NL's primary dispute with
the German tax authorities which aggregates DM 121 million ($67 million).
Although NL believes that it will ultimately prevail in the litigation, NL has
granted a DM 94 million ($52 million) lien on its Nordenham, Germany TiO2 plant
in favor of the City of Leverkusen, and a DM 5 million lien in favor of the
German tax authorities.
During 1997, NL received a tax assessment from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($7 million at June 30,
1998) relating to 1994. NL has appealed this assessment and expects to litigate
this issue. Although NL believes it will ultimately prevail, NL has granted a
NOK 51 million lien on its Norwegian TiO2 plant in favor of the Norwegian tax
authorities.
No assurance can be given that these tax matters will be resolved in NL's
favor in view of the inherent uncertainties involved in court proceedings. NL
believes that it has adequately provided accruals for additional taxes and
related interest expense which may ultimately result from all such examinations
and believes that the ultimate disposition of such examinations should not have
a material adverse effect on its consolidated financial position, results of
operations or liquidity.
NL has been named as a defendant, potentially responsible party, 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
($133 million at June 30, 1998) for reasonably estimable costs of such matters,
but NL's ultimate liability may be affected by a number of factors, including
changes in remedial alternatives and costs and the allocation of such costs
among PRPs. It is not possible to estimate the range of costs for certain
sites. The upper end of the range of reasonably possible costs to NL for sites
for which it is possible to estimate costs is approximately $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 from the sale of
lead pigments and lead-based paints. NL has not accrued any amounts for the
pending lead pigment and lead-based paint litigation. There is no assurance
that NL will not incur future liability in respect of this pending litigation in
view of the inherent uncertainties involved in court and jury rulings in pending
and possible future cases. However, based on, among other things, the results
of such litigation to date, NL believes that the pending lead pigment and lead-
based paint litigation is without merit. Liability that may result, if any,
cannot reasonably be estimated. In addition, various legislation and
administrative regulations have, from time to time, been enacted or proposed
that seek to impose various obligations on present and former manufacturers of
lead pigment and lead-based paint with respect to asserted health concerns
associated with the use of such products and to effectively overturn court
decisions in which NL and other pigment manufacturers have been successful.
Examples of such proposed legislation include bills which would permit civil
liability for damages on the basis of market share, rather than requiring
plaintiffs to prove that the defendant's product caused the alleged damage. NL
currently believes the disposition of all claims and disputes, individually or
in the aggregate, should not have a material adverse effect on its consolidated
financial position, results of operations or liquidity. There can be no
assurance that additional matters of these types will not arise in the future.
NL periodically evaluates its liquidity requirements, alternative uses of
capital, capital needs and availability of resources in view of, among other
things, its capital resources, debt service and capital expenditure requirements
and estimated future operating cash flows. As a result of this process, NL has
in the past and may in the future seek to reduce, refinance, repurchase or
restructure indebtedness, raise additional capital, issue additional securities,
modify its dividend policy, restructure ownership interests, sell interests in
subsidiaries or other assets, or take a combination of such steps or other steps
to manage its liquidity and capital resources. In the normal course of its
business, NL may review opportunities for the acquisition, divestiture, joint
venture or other business combinations in the chemicals industry. In the event
of any such transaction, NL may consider using its available cash, issuing its
equity securities or refinancing or increasing its indebtedness to the extent
permitted by the agreements governing NL's existing debt. In this regard, the
Indentures governing NL's publicly-traded debt contain provisions which limit
the ability of NL and its subsidiaries to incur additional indebtedness or hold
noncontrolling interests in business units.
COMPONENT PRODUCTS - COMPX INTERNATIONAL
In February 1998, CompX entered into a new $100 million revolving senior
credit facility (nil outstanding at June 30, 1998) and used a portion of the net
proceeds to repay a $50 million demand note to Valcor which CompX had
distributed to Valcor in December 1997. The new credit facility is unsecured
and is due in 2003. Borrowings are available for CompX's general corporate
purposes, including potential acquisitions. The new credit facility contains
provisions which, among other things, require the maintenance of minimum levels
of net worth, require the maintenance of certain financial ratios, limit
dividends and additional indebtedness and contain other provisions and
restrictive covenants customary in lending transactions of this type. In March
1998, CompX completed the acquisition of a lock competitor for approximately $33
million cash consideration, using available cash on hand and $25 million of
borrowings under the new credit facility.
Also, in March 1998, CompX completed an initial public offering of shares
of its common stock. The net proceeds to CompX were approximately $110.4
million. Of such net proceeds, $75 million was used to completely repay the
outstanding balance of CompX's new $100 million credit facility discussed above.
CompX believes that the net proceeds to CompX from the offering, after repayment
of borrowings under the new credit facility, together with cash generated from
operations and borrowing availability under the new credit facility will be
sufficient to meet CompX's liquidity needs for working capital, capital
expenditures, debt service and future acquisitions for the foreseeable future.
TREMONT CORPORATION
Tremont is primarily a holding company which owns approximately 30% of
TIMET and 18% of NL. At June 30, 1998, Tremont reported total assets and
stockholders' equity of approximately $271 million and $190 million,
respectively. Tremont's total assets at such date consist principally of its
investments in TIMET ($133 million) and NL ($67 million), which Tremont accounts
for by the equity method, and $27 million in cash and cash equivalents. At June
30, 1998, the market value of the 9.5 million shares of TIMET and the 9.1
million shares of NL held by Tremont was approximately $210 million and $181
million, respectively. Tremont also owns the right to acquire 1.5 million
additional TIMET shares from a third-party for $12 million, and such TIMET
shares have a June 30, 1998 market value of $33 million.
In 1997, Tremont's board of directors authorized Tremont to purchase up to
2 million shares of its common stock in open market or privately-negotiated
transactions over an unspecified period of time. As of June 30, 1998, Tremont
had acquired 1.2 million shares under such authorization. To the extent Tremont
acquires additional shares of its common stock, the Company's ownership interest
in Tremont would increase as a result of the fewer number of Tremont shares
outstanding.
Based upon certain technical provisions of the Investment Company Act of
1940 (the "1940 Act"), Tremont might arguably be deemed to be an "investment
company" under the 1940 Act, despite the fact that Tremont does not now engage,
nor has it engaged or intended to engage, in the business of investing,
reinvesting, owning, holding or trading of securities. Tremont has sought an
order from the Securities and Exchange Commission that Tremont is primarily
engaged, through TIMET and NL, in a non-investment company business and, in the
interim, has taken the steps necessary to give itself the benefits of a
temporary exemption under the 1940 Act.
Tremont periodically evaluates its liquidity requirements, capital needs
and availability of resources in view of, among other things, its alternative
uses of capital, its debt service requirements, the cost of debt and equity
capital and estimated future operating cash flows. As a result of this process,
Tremont has in the past and may in the future seek to raise additional capital,
modify its dividend policy, restructure ownership interests of subsidiaries and
affiliates, incur indebtedness, purchase shares of its common stock, consider
the sale of interests in subsidiaries, affiliates, marketable securities or
other assets, or take a combination of such steps or other steps to increase or
manage liquidity and capital resources. In the normal course of business,
Tremont may investigate, evaluate, discuss and engage in acquisition, joint
venture and other business combination opportunities. In the event of any
future acquisition or joint venture opportunities, Tremont may consider using
available cash, issuing equity securities or incurring indebtedness.
GENERAL CORPORATE - VALHI
Valhi's operations are conducted primarily through subsidiaries and
affiliates (NL Industries, CompX, Tremont and Waste Control Specialists).
Accordingly, Valhi's long-term ability to meet its parent company level
corporate obligations is dependent in large measure on the receipt of dividends
or other distributions from its subsidiaries. NL, which paid dividends in the
first three quarters of 1996, suspended its dividend in the fourth quarter of
1996. Suspension of NL's dividend did not materially adversely impact Valhi's
financial position or liquidity. In May 1998, NL resumed regular quarterly
dividends at a rate of $.03 per NL share starting in the second quarter of 1998.
At that rate, and based on the 29.8 million NL shares held by Valhi at June 30,
1998, Valhi would receive aggregate annual dividends from NL of approximately
$3.6 million. Tremont currently pays a quarterly dividend of $.07 per share, and
Valhi will begin to receive quarterly dividends from Tremont in the third
quarter of 1998. At that rate, and based upon the 3.1 million Tremont shares
owned by Valhi at June 30, 1998, Valhi would receive aggregate annual dividends
from Tremont of approximately $862,000. Various credit agreements to which
certain subsidiaries or affiliates are parties contain customary limitations on
the payment of dividends, typically a percentage of net income or cash flow;
however, such restrictions have not significantly impacted Valhi's ability to
service its parent company level obligations. Valhi has not guaranteed any
indebtedness of its subsidiaries or affiliates. At June 30, 1998, Valhi had $29
million of parent level cash and cash equivalents, including $6 million held by
Valcor which could be distributed to Valhi.
Valhi's LYONs do not require current cash debt service. At June 30, 1998,
Valhi held 2.7 million shares of Dresser common stock, which shares are held in
escrow for the benefit of holders of the LYONs. The LYONs are exchangeable at
any time, at the option of the holder, for the Dresser shares owned by Valhi.
Exchanges of LYONs for Dresser stock result in the Company reporting income
related to the disposition of the Dresser stock for both financial reporting and
income tax purposes, although no cash proceeds are generated by such exchanges.
Valhi's potential cash income tax liability that would have been triggered at
June 30, 1998, assuming exchanges of all of the outstanding LYONs for Dresser
stock at such date, was approximately $23 million. Valhi continues to receive
regular quarterly Dresser dividends (currently $.19 per share) on the escrowed
shares. At June 30, 1998, the LYONs had an accreted value equivalent to
approximately $29.90 per Dresser share, and the market price of the Dresser
common stock was $44.06 per share (Dresser's August 7, 1998 market price -
$32.88 per share).
In April 1998, Valhi contributed $10 million to Waste Control Specialists'
equity, thereby increasing its membership interest to 64%. Approximately $7
million of such equity contribution was used by Waste Control Specialists to
reduce the outstanding balance of its revolving borrowings from the Company.
Also in April 1998, the maturity of the Company's $10 million revolving loan to
Waste Control Specialists was extended one year to December 31, 1999.
Valhi currently expects that the aggregate distributions it will receive
from The Amalgamated Sugar Company LLC in calendar 1998, which are dependent in
part upon the future operations of the LLC, will be less than Valhi's 1998 debt
service requirements under its $250 million loans from Snake River. Certain
covenants contained in Snake River's third-party senior debt limit the amount of
debt service payments (principal and interest) which Snake River can remit to
Valhi under Valhi's $80 million loan to Snake River, and such loan is
subordinated to Snake River's third-party senior debt. Due primarily to these
covenants, Snake River has not made any principal or interest payments on the
$80 million loan in the first six months of 1998, and the Company does not
currently expect that Snake River will be able to remit any principal or
interest payments during the remainder of the year. However, such noncollection
is not expected to have a material adverse effect on the Company's liquidity,
and the Company believes both the accrued and unpaid interest as well as the $80
million principal amount outstanding at June 30, 1998 will ultimately be
collected.
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 and related entities routinely evaluate acquisitions of
interests in, or combinations with, companies, including related companies,
perceived by management to be undervalued in the marketplace. These companies
may or may not be engaged in businesses related to the Company's current
businesses. The Company intends to consider such acquisition activities in the
future and, in connection with this activity, may consider issuing additional
equity securities and increasing the indebtedness of the Company, its
subsidiaries and related companies. From time to time, the Company and related
entities also evaluate the restructuring of ownership interests among their
respective subsidiaries and related companies. In this regard, the Indentures
governing the publicly-traded debt of NL contain provisions which limit the
ability of NL and its subsidiaries to incur additional indebtedness or hold
noncontrolling interests in business units.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Reference is made to the 1997 Annual Report and prior 1998 periodic reports
for descriptions of certain legal proceedings.
In June 1998, Valhi transferred $24.3 million cash to Tremont Corporation
upon the effectiveness of the previously-reported settlement agreement with
respect to Kahn v. Tremont Corporation, et al., as approved by the Delaware
Court of Chancery. Pursuant to the settlement agreement, Tremont paid $5.5
million to reimburse plaintiffs' attorneys for fees and expenses.
In June 1998, Valhi transferred $14.4 million cash to NL upon the
effectiveness of the previously-reported settlement agreement with respect to
Seinfeld v. Simmons, et al., as approved by the Chancery Division of the New
Jersey Superior Court. Pursuant to the settlement agreement, NL will pay $3.2
million to reimburse plaintiffs' attorneys for fees and expenses.
Upon appeal by the U.S. Department of Energy, in May 1998 the U.S. Court of
Appeals for the Fifth Circuit ordered the U.S. District Court for the Northern
District of Texas to dismiss the previously-reported Waste Control Specialists
LLC v. United States Department of Energy, et al. Waste Control Specialists
requested an en banc rehearing before the full Court of Appeals, the request was
denied in June 1998 and the case has been dismissed.
Brenner, et al. v. American Cyanamid, et al. (No. 12596-93). In June 1998,
defendants moved for partial summary judgment dismissing plaintiffs' market
share and alternative liability claims.
Parker v. NL Industries, et al. (No. 97085060 CC915). In July 1998, the
court granted NL's motion for summary judgment on all remaining claims.
Plaintiffs have appealed.
Granite City site. NL has been informed that the U.S. EPA has reached an
agreement in principle with the other PRPs settling their liabilities with
respect to the site for approximately 50% of the site costs. NL is negotiating
with the U.S. EPA to settle its liability.
Pedricktown site. In June 1998, NL entered into a consent decree with the
U.S. EPA and other PRPs to perform the remedial action phase at operable unit
one. In addition, NL reached an agreement in principal with certain PRPs with
respect to liability at the site to settle this matter within previously-accrued
amounts.
State of Illinois v. NL Industries, et al. (No. 88-CH-11618). In June
1998, the Illinois appellate court affirmed the ruling of the trial court
dismissing the case. The State has petitioned the Supreme Court of Illinois to
review the case.
United States v. Peter Gull and NL Industries, Inc. (No. 91-4098). In June
1998, NL concluded the previously-reported agreement settling this matter within
previously-accrued amounts.
DeLeon v. Exide Corp. and NL Industries, Inc. (No. DV98-02669-B). In May
1998, NL answered the complaint, denying liability.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Valhi's 1998 Annual Meeting of Stockholders was held on May 7, 1998.
Norman S. Edelcup, Kenneth R. Ferris, Glenn R. Simmons, Harold C. Simmons and J.
Walter Tucker, Jr. were elected as directors, each receiving votes "For" their
election from over 96% of the 114.5 million common shares eligible to vote at
the Annual Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 -Stock Purchase Agreement dated June 19, 1998 by and between
Contran Corporation, Valhi Group, Inc. and National City Lines,
Inc., as the Sellers, and Valhi, Inc., as the Purchaser -
incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K dated June 19, 1998.
27.1 -Financial Data Schedule for the six-month period ended June 30,
1998.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended June 30, 1998.
April 23, 1998 - Reported Items 5 and 7.
May 7, 1998 - Reported Items 5 and 7.
June 9, 1998 - Reported Items 5 and 7.
June 19, 1998 - Reported Items 5 and 7.
June 19, 1998 - Reported Items 2 and 7.
June 30, 1998 - 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 August 12, 1998 By /s/ Bobby D. O'Brien
Bobby D. O'Brien
(Vice President,
Principal Financial Officer)
Date August 12, 1998 By /s/ Gregory M. Swalwell
Gregory M. Swalwell
(Controller,
Principal Accounting Officer)
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 August 12, 1998 By
Bobby D. O'Brien
(Vice President,
Principal Financial Officer)
Date August 12, 1998 By
Gregory M. Swalwell
(Controller,
Principal Accounting Officer)
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THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
VALHI, INC.'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH CONSOLIDATED FINANCIAL STATEMENTS.
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<FISCAL-YEAR-END> DEC-31-1998
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<RECEIVABLES> 192,069
<ALLOWANCES> 3,179
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<BONDS> 672,948
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<CGS> 383,710
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<INCOME-PRETAX> 433,676
<INCOME-TAX> 184,377
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