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, 1999 COMMISSION FILE NUMBER 1-5467
VALHI, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 87-0110150
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ FREEWAY, SUITE 1700, DALLAS, TEXAS 75240-2697
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 233-1700
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS.
YES X NO
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ON JULY 31, 1999: 114,568,514.
VALHI, INC. AND SUBSIDIARIES
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1998
and June 30, 1999 3-4
Consolidated Statements of Operations -
Three months and six months ended June 30, 1998 and 1999 5-6
Consolidated Statements of Comprehensive Income -
Six months ended June 30, 1998 and 1999 7
Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 1999 8
Consolidated Statements of Cash Flows -
Six months ended June 30, 1998 and 1999 9-10
Notes to Consolidated Financial Statements 11-18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 19-40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 41
Item 4. Submission of Matters to a Vote of
Security Holders 41
Item 6. Exhibits and Reports on Form 8-K. 41
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, JUNE 30,
1998 1999
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 224,572 $ 168,882
Accounts and other receivables 167,660 214,381
Refundable income taxes 16,443 7,503
Receivable from affiliates 11,890 12,920
Inventories 246,338 232,406
Prepaid expenses 3,723 6,376
Deferred income taxes 4,836 13,283
Total current assets 675,462 655,751
Other assets:
Marketable securities 265,567 263,863
Investment in and advances to 370,654 342,566
affiliates
Loans and notes receivable 82,290 81,662
Mining properties 15,581 13,795
Prepaid pension cost 24,190 24,088
Goodwill 259,336 267,189
Deferred income taxes - 2,619
Other 21,737 23,359
Total other assets 1,039,355 1,019,141
Property and equipment:
Land 16,364 19,668
Buildings 150,879 153,568
Equipment 511,042 513,754
Construction in progress 7,918 20,620
686,203 707,610
Less accumulated depreciation 158,867 166,492
Net property and equipment 527,336 541,118
$2,242,153 $2,216,010
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY DECEMBER 31, JUNE 30,
1998 1999
<S>
Current liabilities: <C> <C>
Notes payable $ 36,391 $ 32,132
Current maturities of long-term debt 65,448 35,741
Accounts payable 67,592 65,171
Accrued liabilities 148,838 149,856
Payable to affiliates 20,137 24,860
Income taxes 12,943 7,360
Deferred income taxes 1,237 1,731
Total current liabilities 352,586 316,851
Noncurrent liabilities:
Long-term debt 630,554 661,210
Accrued pension costs 44,929 46,362
Accrued OPEB costs 41,981 39,423
Accrued environmental costs 83,922 69,988
Deferred income taxes 353,717 261,996
Other 44,220 43,179
Total noncurrent liabilities 1,199,323 1,122,158
Minority interest 111,722 158,253
Stockholders' equity:
Common stock 1,255 1,256
Additional paid-in capital 42,789 43,280
Retained earnings 512,468 567,132
Accumulated other comprehensive income
Marketable securities 122,826 126,053
Currency translation (22,712) (37,301)
Pension liabilities (2,845) (6,413)
Treasury stock (75,259) (75,259)
Total stockholders' equity 578,522 618,748
$2,242,153 $2,216,010
</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,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Revenues and other income:
Net sales $281,333 $287,536 $548,721 $544,310
Gain on:
Disposal of business unit - - 330,217 -
Reduction in interest in CompX - - 67,902 -
Other, net 29,570 20,890 50,198 36,977
310,903 308,426 997,038 581,287
Costs and expenses:
Cost of sales 196,131 208,961 383,710 397,476
Selling, general and 74,745 44,663 123,922 89,275
administrative
Interest 23,434 17,952 48,884 36,363
294,310 271,576 556,516 523,114
16,593 36,850 440,522 58,173
Equity in earnings of:
Tremont Corporation - 5,192 - 4,491
Waste Control Specialists (3,675) (3,272) (6,846) (8,496)
Income before income taxes 12,918 38,770 433,676 54,168
Provision for income taxes
(benefit) 2,736 (74,290) 184,377 (69,179)
Minority interest in after-tax
earnings
12,225 51,188 46,675 59,112
Income (loss) from continuing
operations (2,043) 61,872 202,624 64,235
Discontinued operations - 2,000 - 2,000
Extraordinary item (54) - (1,323) -
Net income (loss) $ (2,097) $ 63,872 $201,301 $ 66,235
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Basic earnings per share:
Continuing operations $ (.02) $ .54 $ 1.76 $ .56
Discontinued operations - .02 - .02
Extraordinary item - - (.01) -
Net income (loss) $ (.02) $ .56 $ 1.75 $ .58
Diluted earnings per share:
Continuing operations $ (.02) $ .53 $ 1.75 $ .55
Discontinued operations - .02 - .02
Extraordinary item - - (.01) -
Net income (loss) $ (.02) $ .55 $ 1.74 $ .57
Cash dividends per share $ .05 $ .05 $ .10 $ .10
Shares used in the calculation of
per share amounts:
Basic earnings per common share 114,951 115,011 115,043 114,997
Dilutive impact of outstanding
stock options - 1,182 967 1,192
Diluted earnings per share 114,951 116,193 116,010 116,189
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
` 1998 1999
<S>
<C> <C>
Net income $201,301 $ 66,235
Other comprehensive income, net of tax:
Marketable securities adjustment:
Unrealized gains arising during the period 3,249 3,652
Less reclassification for gains included
in net income
(5,137) (425)
(1,888) 3,227
Currency translation adjustment (2,047) (14,589)
Pension liabilities adjustment 1,013 (3,568)
Total other comprehensive income, net (2,922) (14,930)
Comprehensive income $198,379 $ 51,305
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED OTHER COMPREHENSIVE INCOME
COMMON PAID-IN RETAINED MARKETABLE CURRENCY PENSION
STOCK CAPITAL EARNINGS SECURITIES TRANSLATION LIABILITIES
<S> <C> <C> <C> <C> <C> <C>
Balance at December $1,255 $42,789 $512,468 $122,826 $(22,712) $(2,845)
31, 1998
Net income - - 66,235 - - -
Dividends - - (11,571) - - -
Other comprehensive - - - 3,227 (14,589) (3,568)
income, net
Other, net 1 491 - - - -
Balance at June 30, $1,256 $43,280 $567,132 $126,053 $(37,301) $(6,413)
1999
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
TREASURY STOCKHOLDERS'
STOCK EQUITY
<S> <C> <C>
Balance at December 31, 1998 $(75,259) $578,522
Net income - 66,235
Dividends - (11,571)
Other comprehensive income, net - (14,930)
Other, net - 492
Balance at June 30, 1999 $(75,259) $618,748
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Cash flows from operating activities:
Net income $ 201,301 $ 66,235
Depreciation, depletion and amortization 29,027 31,747
Gain on:
Disposal of business unit (330,217) -
Reduction in interest in CompX (67,902) -
Noncash interest expense 15,873 4,857
Deferred income taxes 138,212 (77,243)
Minority interest 46,675 59,112
Other, net (8,790) (5,158)
Equity in:
Tremont Corporation - (4,491)
Waste Control Specialists 6,846 8,496
Discontinued operations - (2,000)
Distributions from:
Manufacturing joint venture - 11,150
Tremont Corporation - 432
31,025 93,137
Change in assets and liabilities:
Accounts and other receivables (46,332) (45,830)
Inventories 12 8,489
Accounts payable and accrued liabilities 3,521 (16,592)
Accounts with affiliates (28,577) (7,852)
Income taxes 16,563 3,813
Other, net 9,531 (9,724)
Net cash provided (used) by operating activities (14,257) 25,441
Cash flows from investing activities:
Capital expenditures (12,130) (26,364)
Purchases of:
Business units (33,234) (53,084)
Tremont common stock (172,587) (1,945)
NL common stock (7,955) -
CompX common stock - (624)
Marketable securities (3,766) -
Investment in Waste Control Specialists (10,000) (10,000)
Proceeds from disposal of:
Business unit 435,080 -
Marketable securities 6,875 6,588
Discontinued operations - 2,000
Loans to affiliates:
Loans (119,250) (6,000)
Collections 120,250 6,000
Other, net 261 2,131
Net cash provided (used) by investing activities 203,544 (81,298)
</TABLE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Cash flows from financing activities:
Indebtedness:
Borrowings $ 30,728 $ 76,271
Principal payments (234,249) (72,043)
Deferred financing costs paid (220) -
Loans from affiliate:
Loans - 29,000
Repayments - (22,100)
Valhi dividends paid (11,565) (11,571)
Distributions to minority interest (646) (1,524)
Proceeds from issuance of CompX common stoc 110,378 -
Common stock reacquired (3,692) -
Other, net 1,460 609
Net cash used by financing activities (107,806) (1,358)
Cash and cash equivalents - net change from:
Operating, investing and financing 81,481 (57,215)
activities
Currency translation (1,270) (3,366)
Business units acquired - 4,157
Consolidation of Waste Control Specialists - 734
Business unit sold (7,630) -
Cash and equivalents at beginning of period 360,369 224,572
Cash and equivalents at end of period $ 432,950 $168,882
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 33,469 $ 31,704
Income taxes, net 64,944 4,869
Business units acquired - net assets
consolidated:
Cash and cash equivalents $ - $ 4,157
Goodwill and other intangible assets 23,261 15,800
Other non-cash assets 17,782 52,799
Liabilities (7,809) (19,672)
Cash paid $ 33,234 $ 53,084
Waste Control Specialists - net assets
consolidated:
Cash and cash equivalents $ - $ 734
Property and equipment - 23,128
Other non-cash assets - 9,843
Liabilities - (22,201)
Net investment at date of consolidation $ - $ 11,504
</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, 1998 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 1999 and the consolidated statements of
operations, comprehensive income, stockholders' equity and cash flows for the
interim periods ended June 30, 1998 and 1999 have been prepared by the Company,
without audit. In the opinion of management, all adjustments, consisting only
of normal recurring adjustments, necessary to present fairly the consolidated
financial position, results of operations and cash flows have been made. The
results of operations for the interim periods are not necessarily indicative of
the operating results for a full year or of future operations. Certain
information normally included in financial statements prepared in accordance
with generally accepted accounting principles has been condensed or omitted.
The accompanying consolidated financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended December 31,
1998 (the "1998 Annual Report").
Basic earnings per share of common stock is based upon the weighted average
number of common shares actually outstanding during each period. Diluted
earnings per share of common stock includes the impact of outstanding dilutive
stock options.
Commitments and contingencies are discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Legal Proceedings"
and the 1998 Annual Report.
Discontinued operations in 1999 represents $2 million of additional
consideration received by the Company related to the 1997 disposal of the
Company's former fast food operations. No income tax provision is required with
respect to such additional consideration.
Contran Corporation holds, directly or through subsidiaries, approximately
92% of Valhi's outstanding common stock. Substantially all of Contran's
outstanding voting stock is held either by trusts established for the benefit of
certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons is
sole trustee, or by Mr. Simmons directly. Mr. Simmons, the Chairman of the
Board and Chief Executive Officer of Valhi and Contran, may be deemed to control
such companies.
The Company will adopt Statement of Financial Accounting Standards ("SFAS")
No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended, no later than the first quarter of 2001. Under SFAS No. 133, all
derivatives will be recognized as either assets or liabilities and measured at
fair value. The accounting for changes in fair value of derivatives will depend
upon the intended use of the derivative. The impact on the Company of adopting
SFAS No. 133, if any, has not yet been determined but will be dependent upon the
extent to which the Company is a party to derivative contracts or hedging
activities covered by SFAS No. 133 at the time of adoption.
NOTE 2 - BUSINESS SEGMENT INFORMATION:
% OWNED
OPERATIONS PRINCIPAL ENTITIES AT JUNE 30, 1999
Chemicals NL Industries, Inc. 58.2%*
Component products CompX International Inc. 64.2%
Waste management Waste Control Specialists 68.8%
Titanium metals Tremont Corporation 49.8%*
* Tremont owns an additional 19.7% of NL.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1999 1998 1999
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net sales:
Chemicals $241.6 $232.5 $476.9 $434.1
Component products 39.7 55.0 71.8 110.2
$281.3 $287.5 $548.7 $544.3
Operating income:
Chemicals $ 42.0 $ 39.2 $ 79.4 $ 65.2
Component products 9.1 9.7 13.4 19.2
51.1 48.9 92.8 84.4
Gain on:
Disposal of business unit - - 330.2 -
Reduction in interest in CompX - - 67.9 -
General corporate items:
Interest and dividend income 17.5 10.9 34.7 21.5
Securities transactions 7.8 .6 7.9 .6
Expenses, net (36.3) (5.6) (44.1) (12.0)
Interest expense (23.5) (18.0) (48.9) (36.4)
16.6 36.8 440.5 58.1
Equity in:
Tremont Corporation - 5.2 - 4.5
Waste Control Specialists (3.6) (3.3) (6.8) (8.5)
Income before income taxes $ 13.0 $ 38.7 $433.7 $ 54.1
</TABLE>
In January 1999, CompX acquired Thomas Regout Holding N.V., a producer of
precision ball bearing slides, for $53 million cash consideration. During the
first quarter of 1999, Valhi purchased 30,000 shares of CompX common stock for
an aggregate of $624,000. In June 1999, Valhi purchased 88,400 shares of Tremont
common stock for an aggregate of $1.9 million.
In February 1999, Valhi contributed $10 million to Waste Control
Specialists' equity, thereby increasing its membership interest from 64.3% to
68.8%. The Company also holds an option, as amended in July 1999, to make an
additional $20 million equity contribution to Waste Control Specialists which,
if contributed, would increase its membership interest to 90%. Prior to June
30, 1999, the Company did not consolidate Waste Control Specialists. The
Company was not deemed to control Waste Control Specialists because the
controlling general partner of the other owner of Waste Control Specialists had
been granted the duties of chief executive officer of Waste Control Specialists
under an employment agreement. As of June 1999, that individual resigned as CEO
and a new CEO unrelated to the other owner was appointed. Accordingly, the
Company is now deemed to control Waste Control Specialists. The Company
commenced consolidating Waste Control Specialists' balance sheet at June 30,
1999, and will commence consolidating its results of operations and cash flows
beginning in the third quarter of 1999.
Each of NL (NYSE: NL), CompX (NYSE: CIX), Tremont (NYSE: TRE) and Tremont's
39%-owned affiliate Titanium Metals Corporation ("TIMET," NYSE: TIE) file
periodic reports pursuant to the Securities Exchange Act of 1934, as amended.
NOTE 3 - MARKETABLE SECURITIES:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
(IN THOUSANDS)
<S> <C> <C>
Noncurrent assets (available-for-sale):
The Amalgamated Sugar Company LLC $170,000 $170,000
Halliburton Company common stock 79,710 87,901
Other securities 15,857 5,962
$265,567 $263,863
</TABLE>
At June 30, 1999, Valhi held 2.7 million shares of Halliburton common stock
(aggregate cost of $22 million) with a quoted market price of $45.25 per share,
or an aggregate market value of $122 million. Valhi's LYONs are exchangeable at
any time, at the option of the LYON holder, for such Halliburton shares, and the
carrying value of the Halliburton stock is limited to the accreted LYONs
obligation. See Note 8. See the 1998 Annual Report for a discussion of the
Company's investment in The Amalgamated Sugar Company LLC. The aggregate cost
of other available-for-sale securities (primarily common stocks) is $8 million
at June 30, 1999. In the second quarter of 1999, the Company sold certain
available-for-sale marketable securities with a cost basis of $6 million for
aggregate proceeds of $6.6 million.
NOTE 4 - INVENTORIES:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
(IN THOUSANDS)
<S> <C> <C>
Raw materials:
Chemicals $ 46,114 $ 44,171
Component products 6,520 8,677
52,634 52,848
In process products:
Chemicals 11,530 7,164
Component products 5,748 7,855
17,278 15,019
Finished products:
Chemicals 137,000 126,848
Component products 4,634 8,849
141,634 135,697
Supplies (primarily chemicals) 34,792 28,842
$246,338 $232,406
</TABLE>
NOTE 5 - ACCRUED LIABILITIES:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
(IN THOUSANDS)
<S> <C> <C>
Current:
Employee benefits $ 42,665 $ 36,679
Environmental costs 46,059 53,352
Interest 7,397 7,160
Deferred income 4,353 6,437
Other 48,364 46,228
$148,838 $149,856
Noncurrent:
Insurance claims and expenses $ 15,321 $ 14,712
Employee benefits 12,523 11,748
Deferred income 13,693 11,633
Other 2,683 5,086
$ 44,220 $ 43,179
</TABLE>
NOTE 6 - OTHER NONCURRENT ASSETS:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
(IN THOUSANDS)
<S> <C> <C>
Investment in affiliates:
Tremont Corporation $179,452 $182,514
TiO2 manufacturing joint venture 171,202 160,052
Waste Control Specialists LLC 10,000 -
360,654 342,566
Loan to Waste Control Specialists LLC 10,000 -
$370,654 $342,566
Loans and notes receivable:
Snake River Sugar Company $ 80,000 $ 80,000
Other 5,912 6,062
85,912 86,062
Less current portion 3,622 4,400
Noncurrent portion $ 82,290 $ 81,662
Deferred financing costs $ 5,674 $ 4,601
Intangible assets 4,923 7,896
Other 11,140 10,862
$ 21,737 $ 23,359
</TABLE>
At June 30, 1999, Valhi held 3.2 million shares of Tremont common stock
with a quoted market price of $21.50 per share, or an aggregate of $68 million.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of the Company's net carrying value of its
investment in Tremont. At June 30, 1999, the Company commenced consolidating
Waste Control Specialists. See Note 2.
NOTE 7 - ACCOUNTS WITH AFFILIATES:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
(IN THOUSANDS)
<S> <C> <C>
Receivables from affiliates:
Income taxes, net $11,719 $12,846
Other 171 74
$11,890 $12,920
Payables to affiliates:
Loan from Contran $ 9,500 $16,400
Louisiana Pigment Company 8,264 6,966
Tremont Corporation 3,053 1,793
Other, net (680) (299)
$20,137 $24,860
</TABLE>
NOTE 8 - NOTES PAYABLE AND LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
(IN THOUSANDS)
<S> <C> <C>
Notes payable -
Kronos - non-U.S. bank credit agreements
(DM 60,500 and DM 60,500) $ 32,132
$ 36,391
Long-term debt:
Valhi:
Snake River Sugar Company $250,000 $250,000
LYONs 84,104 87,901
334,104 337,901
NL Industries:
Senior Secured Notes 244,000 244,000
Deutsche mark bank credit facility
(DM 187,322 and DM 160,072) 112,674 85,015
Other 955 640
357,629 329,655
Other subsidiaries:
CompX bank credit facility - 20,000
Waste Control Specialists bank term loa - 4,530
Valcor Senior Notes 2,431 2,431
Other 1,838 2,434
4,269 29,395
696,002 696,951
Less current maturities 65,448 35,741
$630,554 $661,210
</TABLE>
Waste Control Specialists' bank term loan is due in installments through
December 1999 and is collateralized by substantially all of Waste Control
Specialists' assets. Waste Control Specialists intends to seek an extension of
the maturity date of such loan.
NOTE 9 - OTHER INCOME:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1998 1999
(IN THOUSANDS)
<S> <C> <C>
Securities earnings:
Dividends and interest $ 34,722 $ 21,475
Securities transactions 7,905 654
42,627 22,129
Noncompete agreement income 1,667 2,000
Currency transactions, net 1,901 7,431
Other, net 4,003 5,417
$50,198 $ 36,977
</TABLE>
NOTE 10 - PROVISION FOR INCOME TAXES:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1998 1999
(IN MILLIONS)
<S> <C> <C>
Income from continuing operations:
Expected tax expense $151.8 $ 19.0
Incremental U.S. tax and rate differences on
equity in earnings of non-tax group companies 72.4 10.4
Change in NL's deferred income tax
valuation allowance (45.1) (85.1)
Settlement of German income tax audits - (36.6)
Change in German income tax law - 24.1
U.S. state income taxes, net 7.9 .2
No tax benefit for goodwill amortization 10.7 2.0
Non-U.S. tax rates (.1) (.8)
Excess of tax basis over book basis of the
common stock of foreign subsidiaries sold (12.1) -
Other, net (1.1) (2.4)
$184.4 $(69.2)
Comprehensive provision (benefit) for income taxes
allocated to:
Continuing operations $184.4 $(69.2)
Discontinued operations - -
Extraordinary item (1.4) -
Other comprehensive income:
Marketable securities (.8) 1.4
Currency translation (1.2) (8.8)
Pension liabilities .6 (2.3)
$181.6 $(78.9)
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of a $90 million non-cash income tax
benefit recognized by NL in the second quarter of 1999.
NOTE 11 - MINORITY INTEREST:
The components of minority interest in net assets and income from
continuing operations are presented in the following tables.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
(IN THOUSANDS)
<S> <C> <C>
Minority interest in net assets:
NL Industries $ 64,268 $105,984
CompX 46,817 49,361
Subsidiaries of NL 633 2,839
Subsidiaries of CompX 4 69
$111,722 $158,253
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1998 1999
(IN THOUSANDS)
<S> <C> <C>
Minority interest in net earnings (losses) -
income from continuing operations:
NL Industries $43,891 $52,632
CompX 2,843 4,296
Subsidiaries of NL 19 2,250
Subsidiaries of CompX (78) (66)
$46,675 $59,112
</TABLE>
Waste Control Specialists was formed in 1995 by Valhi and another entity.
Waste Control Specialists assumed certain liabilities of the other owner and
such liabilities exceeded the carrying value of the assets contributed by the
other owner. Consequently, all of Waste Control Specialists' net losses or net
income will accrue to the Company for financial reporting purposes until Waste
Control Specialists reports positive equity attributable to the other owner.
Accordingly, no minority interest in Waste Control Specialists' net assets is
reported at June 30, 1999, and no minority interest in Waste Control
Specialists' net earnings or losses is expected to be reported at least through
the remainder of 1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
The Company reported income from continuing operations for the first six
months of 1999 of $64.2 million, or $.55 per diluted share, compared to income
of $202.6 million, or $1.75 per diluted share, in the first six months of 1998.
For the second quarter of 1999, Valhi reported income from continuing operations
of $61.8 million, or $.53 per diluted share, compared to a loss from continuing
operations of $2.1 million, or $.02 per diluted share, in the second quarter of
1998. Results for the second quarter of 1999 include a $90 million non-cash
income tax benefit ($52 million, or $.45 per diluted share, net of minority
interest) recognized by NL, as discussed below. The 1998 year-to-date results
include gains related to the sale of NL Industries' specialty chemicals business
and the initial public offering of CompX International common stock aggregating
$196 million, or $1.69 per diluted share, net of income taxes and minority
interest. 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 settlement of two lawsuits.
The statements in this Quarterly Report on Form 10-Q relating to matters
that are not historical facts, including, but not limited to, statements found
in this "Management's Discussion and Analysis of Financial Condition and Results
of Operations," are forward-looking statements that represent management's
belief and assumptions based on currently available information. Forward-
looking statements can be identified by the use of words such as "believes,"
"intends," "may," "should," "anticipates," "expected" or comparable terminology,
or by discussions of strategies or trends. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable, it
cannot give any assurances that these expectations will prove to be correct.
Such statements by their nature involve substantial risks and uncertainties that
could significantly impact expected results, and actual future results could
differ materially from those described in such forward-looking statements.
Among the factors that could cause actual future results to differ materially
are the risks and uncertainties discussed in this Quarterly Report and those
described from time to time in the Company's other filings with the Securities
and Exchange Commission, including, but not limited to, future supply and demand
for the Company's products, the extent of the dependence of certain of the
Company's businesses on certain market sectors (such as the dependence of
TIMET's titanium metals business on the aerospace industry), the cyclicality of
certain of the Company's businesses (such as NL's TiO2 operations and TIMET's
titanium metals operations), the impact of certain long-term contracts on
certain of the Company's businesses (such as the impact of TIMET's long-term
contracts with certain of its customers on its ability to raise selling prices
and the impact of TIMET's long-term contracts with certain of its vendors on its
ability to reduce or increase supply or achieve lower costs), general global
economic conditions, competitive products and substitute products, customer and
competitor strategies, the impact of pricing and production decisions, potential
difficulties in integrating completed acquisitions, the possibility of labor
disruptions, environmental matters, government regulations and possible changes
therein, the ultimate resolution of pending litigation, possible future
litigation and possible disruptions of normal business activity from Year 2000
issues. Should one or more of these risks materialize (or the consequences of
such a development worsen), or should the underlying assumptions prove
incorrect, actual results could differ materially from those forecasted or
expected. The Company disclaims any intention or obligation to update or revise
any forward-looking statement whether as a result of new information, future
events or otherwise.
CHEMICALS
NL's titanium dioxide pigments ("TiO2") operations are conducted through
its wholly-owned subsidiary Kronos, Inc. NL sold its specialty chemicals
business unit, conducted by its wholly-owned subsidiary Rheox, Inc., in January
1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, % JUNE 30, %
1998 1999 CHANGE 1998 1999 CHANGE
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net sales:
Kronos $241.6 $232.5 -4% $464.2 $434.1 -6%
Rheox - - 12.7 -
$241.6 232.5 -4% $476.9 $434.1 -9%
Operating income:
Kronos $ 42.0 $ 39.2 -6% $ 76.7 $ 65.2 -15%
Rheox - - 2.7 -
$ 42.0 $ 39.2 -6% $ 79.4 $ 65.2 -18%
</TABLE>
Kronos' TiO2 sales and operating income decreased in 1999 compared to 1998
due primarily to lower sales and production volumes for TiO2, partially offset
by a $5.3 million foreign currency transaction gain in the second quarter of
1999 related to certain of NL's short-term intercompany cross-border financings.
These NL intercompany financings were settled in July 1999.
NL's TiO2 sales volumes in the second quarter of 1999 decreased 1% from the
record sales volumes in the second quarter of 1998, but increased 24% from the
first quarter of 1999 sales volumes. TiO2 sales volumes in the first six months
of 1999 were 8% lower than the same period in 1998. NL's production rates
continue to closely match its sales volumes, and NL's average capacity
utilization rate was 98% in the second quarter of 1999 and was 91% for the first
six months of the year.
NL's average TiO2 selling prices during the second quarter of 1999
approximated the second quarter of 1998, but were 2% lower than the first
quarter of this year reflecting weaker prices in European and export markets
and, to a lesser degree, in North American markets. NL's average TiO2 selling
prices at the end of the second quarter of 1999 were 1% lower than the average
for the quarter. NL's average TiO2 selling prices in the first six months of
1999 were 3% higher than the first six months of 1998 due primarily to higher
North American prices.
NL believes its TiO2 selling prices in the second half of 1999 will be
below those of the first half of the year. However, NL does not expect the
downward pressures on Ti02 selling prices will be long-term in nature as a
result of the continuing recovery in Asia and NL's positive view of the
worldwide economy. In this regard, NL recently announced a 7.5% price increase
in Europe that NL expects will improve its pricing trends in late 1999. NL
currently expects its TiO2 sales volumes in calendar 1999 will approximate its
calendar 1998 sales volumes. Overall, NL expects its calendar 1999 TiO2
operating income will be lower than 1998 due to lower Ti02 production volumes
and lower Ti02 average selling prices.
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
increased NL's sales in the first six months of 1999 by $1 million compared to
the first six months of 1998. 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, other than the $5.3 million
foreign currency transaction gain discussed above, was not significant.
The Company's purchase accounting adjustments made in conjunction with the
acquisitions of its interest in NL result in additional depreciation, depletion
and amortization expense beyond those amounts separately-reported by NL. Such
additional non-cash expense currently reduces chemicals operating income, as
reported by Valhi, by approximately $19 million per year.
COMPONENT PRODUCTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, % JUNE 30, %
1998 1999 CHANGE 1998 1999 CHANGE
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net sales $39.7 $55.0 +39% $71.8 $110.2 +53%
Operating income 9.1 9.7 +5% 13.4 19.2 +43%
</TABLE>
Component products sales increased in 1999 compared to the same periods in
1998 due primarily to sales generated by the Thomas Regout slide operations
acquired in January 1999 and sales generated by two lock producers acquired in
March and November 1998. Component products operating income in the first six
months of 1998 included a $3.3 million first quarter non-recurring pre-tax
charge related to certain stock awarded in conjunction with CompX's March 1998
initial public offering. Excluding the effect of these acquisitions, component
products net sales increased 1% in the first six months of 1999 compared to the
first six months of 1998 as a 10% increase in sales of security products was
offset by a 3% decline in sales of slide and ergonomic products reflecting weak
demand in the office furniture industry. Excluding the effect of these
acquisitions and the stock award charge discussed above, component products
operating income decreased 4% in the first six months of 1999 compared to the
same period in 1998 as a result of the decline in slide and ergonomic product
sales.
EQUITY AFFILIATES
Tremont Corporation. As previously reported, Valhi commenced reporting
equity in Tremont's earnings in the third quarter of 1998. The Company's equity
in Tremont's earnings differs from the amount that would be expected by applying
the Company's ownership percentage to Tremont's separately-reported earnings
because of the effect of amortization of purchase accounting adjustments made in
conjunction with the Company's acquisitions of its interest in Tremont. Such
non-cash amortization currently reduces earnings (or increases losses)
attributable to Tremont as reported by the Company by approximately $3 million
per year.
Tremont accounts for its interests in both NL and TIMET by the equity
method. In the first six months of 1999, Tremont reported net income of $12.8
million comprised primarily of equity in net losses of TIMET ($1.9 million),
equity in earnings of NL ($23.2 million) and a provision for income taxes of
$7.2 million. Tremont's equity in earnings of TIMET and NL differs from the
amounts that would be expected by applying Tremont's ownership percentage to
TIMET's and NL's separately-reported earnings because of the effect of
amortization of purchase accounting adjustments made by Tremont in conjunction
with Tremont's acquisitions of its interests in TIMET and NL. Amortization of
such basis differences generally increases earnings (or reduces losses)
attributable to TIMET as reported by Tremont, and generally reduces earnings (or
increases losses) attributable to NL as reported by Tremont.
NL's operating results are discussed above. Tremont's equity in earnings of
NL in the first six months of 1999 includes Tremont's pro-rata share ($17.7
million) of NL's non-cash income tax benefit discussed below.
For the first six months of 1999, TIMET reported sales of $261.7 million,
an operating loss of $.4 million and a net loss of $6.4 million compared to
sales, operating income and net income of $377.9 million, $55.5 million and
$32.1 million, respectively, in the first six months of 1998. TIMET's results in
1999 were below those of 1998 principally due to a 26% decline in TIMET's year-
to-date mill products sales volumes caused by the previously-reported lower
demand in both its aerospace and industrial markets. Sales of $127.6 million in
the second quarter of 1999 were 5% lower than the first quarter of this year due
principally to lower volumes. However, TIMET's average mill product selling
prices in the second quarter of 1999 increased compared to the first quarter of
1999 due largely to changes in product mix, as over 60% of the decline in mill
product sales volumes from the first quarter to the second quarter occurred in
TIMET's lowest-priced industrial market product line. TIMET's previously-
reported cost reduction efforts and the change in product mix both contributed
to an improvement in TIMET's margins in the second quarter of 1999 compared to
the first quarter of this year. TIMET is focusing on improving its margins
through cost reductions, including shifting production to its more cost-
effective equipment acquired or refurbished as part of its recently-completed
capital expenditure program, and through increased utilization of its business-
enterprise SAP system to help improve business processes. TIMET reported a
modest operating profit in the second quarter, and TIMET's net loss of $2.5
million in the second quarter of 1999 was lower than the $3.9 million net loss
reported in the first quarter of this year.
TIMET believes that demand for titanium aerospace products continues to be
impacted by customer inventory levels as well as forecasted commercial aircraft
build rates. The time required for TIMET's customers to consume excess
inventories has been longer than TIMET previously anticipated. TIMET also
intends to increasingly compete on price, particularly in industrial markets.
TIMET currently expects its sales volumes during the last half of 1999 will be
higher than in the first half of the year, and expects its overall average mill
product selling prices will be lower, in part due to product mix changes.
Assuming demand remains at currently expected levels during the remainder of
1999, TIMET currently expects to return to modest profitability in the second
half of 1999.
Valhi periodically evaluates the net carrying value of its long-term
assets, including its investment in Tremont, to determine if there has been any
decline in value below their carrying amounts that is other than temporary and
would, therefore, require a write-down which would be accounted for as a
realized loss. At June 30, 1999, the NYSE price of $21.50 per Tremont share
indicated an aggregate NYSE market value of Valhi's investment in Tremont common
stock of approximately $68.3 million, or $114.2 million less than Valhi's $182.5
million net carrying value of its investment in Tremont at that date. Such
excess of net carrying value over aggregate market value at June 30, 1999 is
slightly lower than the excess amount at March 31, 1999. The Company believes
NYSE stock prices (particularly in the case of companies such as Tremont that
have a major shareholder and are not widely followed or traded) are not
necessarily indicative of a company's enterprise value or the value that could
be realized if the company were sold. After considering what it believes to be
all relevant factors including, among other things, the NYSE market prices of
Tremont's holdings of NL and TIMET, the relatively short time period during
which Tremont's NYSE price has been less than the Company's per share net
investment in Tremont, recent trends in Tremont's market price, Tremont's (and
hence NL's and TIMET's) operating results, financial position, estimated asset
values and prospects, the Company concluded that there had been no other than
temporary decline in value of the Company's investment in Tremont below its net
carrying value at June 30, 1999.
As discussed above, Tremont's major assets are its investments in NL (TiO2)
and TIMET (titanium metals). It is possible, should the TiO2 or titanium metals
industries in general, or NL or TIMET specifically, encounter a prolonged
recessionary environment, or suffer other unforeseen adverse events, that the
value of Valhi's investment in Tremont could decline to a level which would
result in a write-down of the Company's investment in Tremont. Valhi will
continue to monitor and evaluate the value of its investment in Tremont based
on, among other things, the results of operations, financial condition,
liquidity and business outlook for Tremont, TIMET and NL. In the event Valhi
determines that any decline in value of its investment in Tremont below its net
carrying values has occurred which is other than temporary, Valhi would report
an appropriate write-down at that time.
Waste Control Specialists. Waste Control Specialists reported a loss of
$8.5 million during the first six months of 1999 compared to a loss of $6.8
million during the first six months of 1998. Waste Control Specialists reported
sales of $8.3 million in the first six months of 1999 compared to $3.4 million
in the first six months of 1998. Waste Control Specialists' operating loss
increased in 1999 due in part to higher expenditures in connection with the
pursuit of permits covering the disposal of low-level and mixed radioactive
waste as well as higher legal expenses. As discussed in Note 2 to the
Consolidated Financial Statements, the Company will commence consolidating Waste
Control Specialists' results of operations and cash flows beginning in the third
quarter of 1999.
Waste Control Specialists currently has permits which allow it to treat,
store and dispose of a broad range of hazardous and toxic wastes, and to treat
and store a broad range of low-level and mixed radioactive wastes. As
previously-reported, the hazardous waste industry (other than low-level and
mixed radioactive waste) currently has excess industry capacity caused by a
number of factors, including a relative decline in the number of environmental
remediation projects generating hazardous wastes and efforts on the part of
generators to reduce the volume of waste and/or manage wastes onsite at their
facilities. These factors have led to reduced demand and increased price
pressure for non-radioactive hazardous waste management services. While Waste
Control Specialists believes its broad range of permits for the treatment and
storage of low-level and mixed radioactive waste streams provide certain
competitive advantages, a key element of Waste Control Specialists' strategy to
provide "one-stop shopping" for hazardous, low-level radioactive and mixed
wastes includes obtaining permits for the disposal of low-level and mixed
radioactive wastes.
The current state law in Texas (where Waste Control Specialists' disposal
facility is located) prohibits the applicable Texas regulatory agency from
issuing a permit for the disposal of low-level radioactive waste to a private
enterprise. During the recent Texas legislative session which ended in May
1999, Waste Control Specialists was supporting a proposed change in state law
which would allow the regulatory agency to issue a disposal permit to a private
entity. While the legislative session ended without any change in state law,
Waste Control Specialists has been pursuing other alternatives with respect to
the disposal of low-activity radioactive and mixed wastes, including obtaining
certain modifications to its existing permits that would allow Waste Control
Specialists to dispose of certain types of low-activity radioactive and mixed
wastes. Waste Control Specialists has recently obtained additional authority
that allows Waste Control Specialists to dispose of certain categories of low-
activity radioactive materials, including naturally occurring radioactive
material ("NORM") and exempt level materials (radioactive materials that do not
exceed certain specified radioactive concentrations and are exempt from
licensing). Although there are other categories of low-level and mixed
radioactive wastes that continue to be ineligible for disposal under the
increased authority, Waste Control Specialists will continue to pursue permit
modifications to further expand its treatment and disposal capabilities for low-
level and mixed radioactive wastes. Expenditures associated with any additional
permit modifications concerning the disposal of low-level and mixed radioactive
wastes are expected to be significantly lower than those incurred during the
first six months of this year in connection with the Texas legislative session.
There can be no assurance that Waste Control Specialists will be successful in
obtaining any future permit modifications.
In June 1999, Waste Control Specialists was awarded a contract by the
Kansas City District of the Corps of Engineers for the disposal of NORM, low-
activity radioactive materials and certain hazardous wastes, all of which are
eligible for treatment and disposal under Waste Control Specialists' permits
currently in place. The Corps of Engineers oversees the Formerly Utilized Sites
Remedial Action Program ("FUSRAP") that involves the remediation of 46
government sites in 14 states throughout the U.S. The contract provides for
disposal of FUSRAP wastes for a minimum volume of $500,000 and a maximum volume
of $96 million over a five year period ending July 2004, with an option to
extend the contract for an additional five years (the maximum contract value
remains $96 million). Waste Control Specialists believes this contract provides
a convenient vehicle for a variety of federal facilities to directly contract
with Waste Control Specialists for disposal of such wastes at listed prices.
Waste Control Specialists' ability to realize sales pursuant to this contract is
dependent upon a number of factors, including the availability of government
funding for the clean-up of specified sites and Waste Control Specialists'
successful marketing efforts that will focus on getting managers and operators
of these sites to select this contract vehicle for disposal of specified wastes.
As discussed above, the completion of the Texas legislative session is
expected to result in a significant reduction in the Company's expenditures for
permitting during the second half of 1999 compared to the first half of this
year. Waste Control Specialists has also commenced a program to focus on
improved operating efficiencies at its West Texas facility and to curtail
certain of its corporate and administrative costs. Waste Control Specialists
will also refocus its sales and marketing efforts to (i) emphasize opportunities
where Waste Control Specialists believes it has unique permitting capabilities
for the treatment and storage of mixed wastes that currently provide Waste
Control Specialists with certain competitive advantages and (ii) capitalize on
the recent permit modifications regarding disposal of certain types of low-level
radioactive wastes. Realizing significant sales volumes from these types of
waste streams may involve lengthy negotiations and due diligence processes
necessary to satisfy potential customers of the adequacy of Waste Control
Specialists' permitting ability for its facility and compliance with regulatory
procedures. The ability of Waste Control Specialists to achieve increased
volumes of these waste streams, together with improved operating efficiencies
through cost reductions and increased capacity utilization, are important
factors in Waste Control Specialists' ability to achieve improved cash flows.
The Company currently believes Waste Control Specialists can become a viable,
profitable operation with its current operating permits. However, there can be
no assurance that Waste Control Specialists' efforts will prove successful in
improving its cash flows. In the event such efforts are not successful or Waste
Control Specialists is not successful in expanding its disposal capabilities for
low-level radioactive wastes, it is possible that Valhi will consider other
strategic alternatives with respect to Waste Control Specialists.
OTHER
General corporate items. Interest and dividend income decreased in 1999
compared to 1998 due primarily to a lower level of funds available for
investment. Dividend distributions from The Amalgamated Sugar Company LLC are
dependent in part upon the LLC's results of operations, and the Company received
$11.7 million of dividend distributions from the LLC in the first six months of
1999 compared to $12.1 million in the first six months of 1998. Based on the
LLC's current projections, the Company currently expects aggregate dividend
distributions from the LLC in calendar 1999 will be higher than the $18.4
million received in calendar 1998. Despite the higher level of LLC
distributions expected to be received in 1999 compared to 1998, aggregate
general corporate interest and dividend income is expected to be lower in 1999
compared to 1998 due primarily to a lower level of funds available for
investment.
Securities transaction gains in both periods include gains related to the
disposition of a portion of the shares of Halliburton common stock held by the
Company when certain holders of the Company's LYONs debt obligation exercised
their right to exchange their LYONs for such Halliburton shares. Any additional
exchanges in 1999 or beyond would similarly result in additional securities
transaction gains. Securities transactions gains in the second quarter of 1999
also include an aggregate $.6 million gain from the sale of certain available-
for-sale marketable securities. See Notes 3 and 9 to the Consolidated Financial
Statements.
NL's previously-reported $20 million of proceeds from the disposal of its
specialty chemicals business unit related to its agreement not to compete in the
rheological products business is being recognized as a component of general
corporate income (expense) ratably over the five-year non-compete period ($1.7
million and $2 million in the first six months of 1998 and 1999, respectively).
See Note 9 to the Consolidated Financial Statements. Net general corporate
expenses in the second quarter of 1998 includes an aggregate $32 million pre-tax
charge associated to the settlement of two lawsuits.
Interest expense. Interest expense decreased in 1999 compared to 1998 due
primarily to a lower average level of outstanding indebtedness (primarily
related to NL's Senior Secured Discount Notes redeemed in October 1998).
Interest expense is expected to continue to be lower during the remainder of
1999 compared to the same periods in 1998.
Provision for income taxes. The principal reasons for the difference
between the Company's effective income tax rates and the U.S. federal statutory
income tax rate are explained in Note 10 to the Consolidated Financial
Statements. Certain subsidiaries, including NL and, beginning in March 1998,
CompX, are not members of the consolidated U.S. tax group of which Valhi is a
member, and the Company provides incremental income taxes on such earnings.
In the second quarter of 1999, NL recognized a $90 million non-cash income
tax benefit related to (i) a favorable resolution of NL's previously-reported
tax contingency in Germany ($36 million) and (ii) a net reduction in NL's
deferred income tax valuation allowance due to a change in estimate of NL's
ability to utilize certain income tax attributes under the "more-likely-than-
not" recognition criteria ($54 million). With respect to the German tax
contingency, the German government has conceded substantially all of its income
tax claims against NL, and the government has released a DM 94 million ($50
million) lien on one of NL's German TiO2 plants that secured the government's
claim. The $54 million net reduction in NL's deferred income tax valuation
allowance is comprised of (i) a $78 million decrease in the valuation allowance
to recognize the benefit of certain deductible income tax attributes which NL
now believes meets the recognition criteria as a result of, among other things,
a legal restructuring of NL's German subsidiaries and (ii) a $24 million
increase in the valuation allowance to reduce the previously-recognized benefit
of certain other deductible income tax attributes which NL now believes do not
meet the recognition criteria due to a change in German tax law. The German tax
law change, enacted on April 1, 1999, was effective retroactively to January 1,
1999 and resulted in an additional $3.2 million of current income tax expense
during the first six months of 1999 for NL.
Also during the first six months of 1999, NL reduced its deferred income
tax valuation allowance by $7 million primarily as a result of utilization of
certain tax attributes for which the benefit had not been previously recognized
under the "more-likely-than-not" recognition criteria.
Minority interest and discontinued operations. See Notes 11 and 1,
respectively, to the Consolidated Financial Statements.
Minority interest of NL's subsidiaries in 1999 relates principally to NL's
majority-owned environmental management subsidiary, NL Environmental Management
Services, Inc. ("EMS"). EMS was established in 1998, at which time EMS
contractually assumed certain of NL's environmental liabilities. EMS' earnings
are based, in part, upon its ability to favorably resolve these liabilities.
The shareholders of EMS, other than NL, actively manage these environmental
liabilities and share in 39% of any EMS cumulative earnings. NL continues to
consolidate EMS and provides accruals for the reasonably estimable costs for the
settlement of EMS' environmental liabilities, as discussed below.
YEAR 2000 ISSUE
General. As a result of certain computer programs being written using two
digits rather than four to define the applicable year, certain computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in normal business activities.
NL. NL is in the process of evaluating and upgrading its computer systems,
both information technology ("IT") systems and non-IT systems involving embedded
chip technology, and software applications to ensure that the systems function
properly beginning January 1, 2000. To achieve its Year 2000 compliance plan,
NL is utilizing internal and external resources to identify, correct or
reprogram, and test its systems.
NL has conducted an inventory of its IT systems worldwide and is currently
testing, where practical, the systems and applications that have been corrected
or reprogrammed for Year 2000 compliance. NL has completed an inventory of its
non-IT systems and is in the process of correcting or replacing date-deficient
systems. The remediation effort for all critical IT and non-IT systems is in
process, and NL anticipates that remediation of all systems will be
substantially completed by September 1999. Once systems undergo remediation,
they are tested for Year 2000 compliance. For critical systems, the testing
process usually involves subjecting the remediated system to a simulated change
of date from the year 1999 to the year 2000 using, in many cases, computer
resources. NL uses a number of packaged software products that have been
upgraded to a Year 2000 compliant version in the normal course of business.
Excluding the cost of these software upgrades, NL's cost of becoming Year 2000
compliant is expected to be approximately $2 million, of which about three-
fourths has been spent through June 30, 1999.
NL has approximately 30 major computer systems which have been assessed for
Year 2000 compliance. At June 30, 1999, NL believes approximately 90% of such
systems are Year 2000 compliant. Each operating unit has responsibility for its
own conversion, in line with overall guidance and oversight provided by a
corporate-level coordinator, and the status of each of the remaining systems
will be specifically tracked and monitored.
As part of its Year 2000 compliance plan, NL has requested confirmations
from its major domestic and foreign software and hardware vendors, primary
suppliers and major customers that they are developing and implementing plans to
become, or that they have become, Year 2000 compliant. Confirmations received
by NL to-date indicate that such parties generally are in the process of
becoming Year 2000 compliant by December 31, 1999. The major software vendors
used by NL have already delivered Year 2000 compliant software. Notwithstanding
these efforts, NL's ability to affect the Year 2000 preparedness of such
vendors, suppliers and customers is limited.
NL is in the process of developing a contingency plan to address potential
Year 2000 issues related to business interruption that may occur on January 1,
2000 or thereafter. NL's plan is expected to be completed in the third quarter
of 1999.
Although NL expects its systems to be Year 2000 compliant before December
31, 1999, it cannot predict the outcome or success of the Year 2000 compliance
programs of its vendors, suppliers and customers. NL also cannot predict
whether its major software vendors, who continue to test for Year 2000
compliance, will find additional problems that would result in unplanned
upgrades of their applications after December 31, 1999. As a result of these
uncertainties, NL cannot predict the impact on its consolidated financial
condition, results of operations or cash flows resulting from noncompliant Year
2000 systems that NL directly or indirectly relies upon. Should NL's Year 2000
compliance plan not be successful or be delayed beyond January 1, 2000, or
should one or more suppliers, vendors or customers fail to adequately address
their Year 2000 issues, the consequences to NL could be far-reaching and
material, including an inability to produce TiO2 at its manufacturing
facilities, which could lead to an indeterminate amount of lost revenue. Other
potential negative consequences could include plant malfunction, impeded
communications or power supplies, or slower transaction processing and financial
reporting. Although not anticipated, the most reasonably likely worst-case
scenario of failure by NL or its key suppliers or customers to become Year 2000
compliant would be a short-term slowdown or cessation of manufacturing
operations at one or more of its facilities and a short-term inability on the
part of NL to process orders and billings in a timely manner, and to deliver
products to customers.
CompX. CompX has installed information systems upgrades for both its U.S.
and Canadian facilities which contain, among many other features, software
compatibility with the Year 2000 issue. Excluding the cost of the information
systems upgrades, CompX's expenditures to-date to address the Year 2000
compliance have not been significant, and CompX does not currently anticipate
spending significant additional funds to address Year 2000 compliance in the
future.
As part of its Year 2000 compliance plan, CompX is seeking confirmation
from its major software and hardware vendors, primary suppliers and major
customers that they are developing and implementing plans to become, or that
they have become, Year 2000 compliant. Confirmations received by CompX to-date
indicate that such vendors, suppliers and customers generally are in the process
of becoming Year 2000 compliant by December 31, 1999. The major software
vendors used by CompX have already delivered Year 2000 compliant software.
Notwithstanding these efforts, CompX's ability to affect the Year 2000
preparedness of such vendors, suppliers and customers is limited.
CompX is developing a contingency plan to deal with potential Year 2000
issues related to business interruption that may occur on January 1, 2000 or
thereafter. CompX's plan is expected to be completed in the third quarter of
1999.
Although CompX expects its systems to be Year 2000 compliant before
December 31, 1999, it cannot predict the outcome or success of the Year 2000
compliance programs of its vendors, suppliers, and customers. CompX also cannot
predict whether its major software vendors, who continue to test for Year 2000
compliance, will find additional problems that might result in unplanned
upgrades of their applications after December 31, 1999. As a result of these
uncertainties, CompX cannot predict the impact on its consolidated financial
condition, results of operations or cash flows resulting from noncompliant Year
2000 systems that CompX directly or indirectly relies upon. Should CompX's Year
2000 compliance plan not be successful or be delayed beyond January 2000, or
should one or more suppliers, vendors or customers fail to adequately address
their Year 2000 issues, the consequences to CompX could be far-reaching and
material, including an inability to produce products at its manufacturing
facilities, which could lead to an indeterminate amount of lost revenue.
Although not anticipated, the most reasonably likely worst-case scenario of
failure by CompX or its key suppliers or customers to become Year 2000 compliant
would be a short-term slowdown or cessation of manufacturing operations at one
or more of CompX's facilities, delays in delivering products to customers and a
short-term inability on the part of CompX to process orders and billings in a
timely manner.
TIMET. Most of TIMET's information systems have been or are being replaced
in connection with the implementation of its business-enterprise SAP system.
The initial implementation of SAP has been completed. The cost of the new
system, including related equipment and networks, aggregated $50 million during
1997 and 1998 ($41 million capital; $9 million expense).
TIMET, with the help of outside specialists and consultants (i) has
completed an assessment of potential Year 2000 issues in its non-information
systems (e.g., its manufacturing and communication systems), as well as in those
information systems that were not replaced by the new SAP system and (ii) has
substantially completed the remediation and testing of all systems. TIMET's
Year 2000 readiness varies by location. Some of TIMET's locations had completed
their internal Year 2000 readiness plans by TIMET's June 1999 target date.
Certain other locations were delayed in completing their readiness plans in part
due to vendor release schedules. TIMET has contingency plans for certain
applications in the event its Year 2000 readiness is delayed, and TIMET is
currently developing contingency plans for certain other applications. TIMET
also intends to continue testing and retesting during the remainder of 1999.
TIMET has expended approximately $4 million through June 1999 ($2 million in the
first half of 1999) on these specific non-information system issues, principally
embedded system technology, and expects to incur approximately an additional
$1 million on such issues in the remainder of 1999. TIMET's evaluation of
potential Year 2000 exposure related to key suppliers and customers is also in
process and will continue throughout 1999. In this regard, TIMET is considering
the temporary shutdown of certain sensitive production operations for a few days
around the end of 1999 and early 2000 as an additional safeguard against the
unexpected loss of utilities service. TIMET expects to schedule production to
provide for such temporary shutdowns.
Although TIMET believes its key information and non-information systems
will be Year 2000 ready before the end of 1999, it cannot predict whether it
will find additional problems that would result in unplanned upgrades of
applications during the rest of 1999 or even after December 1999. As a result
of these uncertainties, TIMET cannot predict the impact on its consolidated
financial condition, results of operations or cash flows resulting from Year
2000 failures in systems that TIMET directly or indirectly relies upon. Should
TIMET's Year 2000 readiness plans not be successful or be delayed beyond
December 1999, the consequences to TIMET could be far-reaching and material,
including an inability to produce titanium metal products at its manufacturing
facilities, which could lead to an indeterminate amount of lost revenue. Other
potential negative consequences could include impeded communications or power
supplies, slower transaction processing and financial reporting, and potential
liability to third parties. Although not anticipated, the most reasonably
likely worst-case scenario of failure by TIMET or its key suppliers or customers
to become Year 2000 ready would be a short-term slowdown or cessation of
manufacturing operations at one or more of TIMET's facilities and a short-term
inability on the part of TIMET to process orders and billings in a timely
manner, and to deliver products to customers.
Waste Control Specialists. Waste Control Specialists' recently-installed
information system is Year 2000 compliant. The cost of such new information
system was not material to Waste Control Specialists. Waste Control
Specialists is in the process of evaluating any potential Year 2000 issues with
respect to embedded chip technology associated with the equipment at its
disposal facility; however, because such facility was constructed in the past
few years, Waste Control Specialists does not expect such equipment to present
any significant Year 2000 compliance issues. Waste Control Specialists is also
in the process of contacting its major suppliers and customers to confirm they
are developing and implementing plans to become, or that they have become, Year
2000 compliant. Notwithstanding these efforts, Waste Control Specialists'
ability to affect the Year 2000 preparedness of such suppliers and customers is
limited. Waste Control Specialists expects to have its evaluation of embedded
chip technology and Year 2000 compliance issues at significant suppliers and
customers completed in the third quarter of 1999, and any required remedial
actions completed prior to the end of 1999. Assuming Waste Control Specialists
does not encounter a significant Year 2000 compliance issue with respect to the
equipment at its disposal facility, Waste Control Specialists does not expect
its costs associated with Year 2000 compliance will be material.
Although Waste Control Specialists believes its information systems and
equipment at its disposal facility will be Year 2000 compliant before December
31, 1999, it cannot predict the outcome or success of the Year 2000 compliance
programs at its significant suppliers and customers. As a result, Waste Control
Specialists cannot predict the impact on its financial position, results of
operations or cash flows resulting from noncompliant Year 2000 systems that
Waste Control Specialists directly or indirectly relies upon. Should Waste
Control Specialists' Year 2000 compliance program not be successful or delayed
beyond January 2000, or should one or more suppliers or customers fail to
adequately address their Year 2000 issues, the consequences to Waste Control
Specialists could be far-reaching and material, including an inability to
operate the disposal facility, which could lead to an indeterminate amount of
lost revenue. Other potential adverse consequences could include impeded
communications or power supplies or slower transaction processing and financial
reporting.
Tremont. As a holding company, Tremont does not have numerous applications
or systems. Tremont (i) has completed an assessment of potential Year 2000
issues in its information systems and (ii) has implemented remedial actions,
including testing. The cost for Tremont's Year 2000 readiness is not material
to Tremont. Although not anticipated, the most reasonably likely worst-case
scenario of failure by Tremont or its key service providers to become Year 2000
ready would be a short-term inability on the part of Tremont to process banking
transactions.
Valhi. As a holding company, Valhi does not have numerous applications or
systems. Valhi believes its corporate information systems are Year 2000
compliant. However, for the reasons discussed above with respect to its
subsidiaries and affiliates, Valhi cannot predict the impact on its consolidated
financial position, results of operations or cash flows resulting from
noncompliant Year 2000 systems that Valhi, it subsidiaries and affiliates
directly or indirectly rely upon. The consequences to the Company could be far-
reaching and material, including the loss of an indeterminate amount of revenue.
Other potential negative consequences could include manufacturing equipment
malfunctions, impeded communications or power supplies or slower transaction
processing and financial reporting.
Other. The completion dates for these planned Year 2000 modifications are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no assurance that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.
EUROPEAN MONETARY CONVERSION
Beginning January 1, 1999, 11 of the 15 members of the European Union
("EU"), including Germany, Belgium, the Netherlands and France, established
fixed conversion exchange rates between their existing sovereign currencies and
the European currency unit ("euro"). Such members adopted the euro as their
common legal currency on that date. The remaining four EU members (including
the United Kingdom) may convert their sovereign currencies to the euro at a
later date. Certain European countries, such as Norway, are not members of the
EU and their sovereign currencies will remain intact. Each national government
retained authority to establish their own tax and fiscal spending policies and
public debt levels, although such public debt will be issued in, or re-
denominated into, the euro. However, monetary policies, including money supply
and official euro interest rates, are now established by a new European Central
Bank. Following the introduction of the euro, the participating countries'
national currencies are scheduled to remain legal tender as denominations of the
euro through January 1, 2002, although the exchange rates between the euro and
such currencies will remain fixed.
NL. NL conducts substantial operations in Europe, principally in Germany,
Belgium, the Netherlands, France and Norway. In addition, NL has a significant
amount of outstanding indebtedness denominated in the Deutsche Mark. The
national currency of the country in which such operations are located are such
operation's functional currency. The functional currency of the German, Belgian,
Dutch and French operations will convert from their respective sovereign
currencies to the euro over a two-year period beginning in 1999. NL has
assessed and evaluated the impact of the euro conversion on its business and has
made the necessary system conversions. The euro conversion may impact NL's
operations including, among other things, changes in product pricing decisions
necessitated by cross-border price transparencies. Such changes in product
pricing decisions could impact both sales prices and manufacturing costs, and
consequently favorably or unfavorably impact NL's reported consolidated results
of operations, financial condition or liquidity.
CompX. The functional currency of CompX's recently-acquired Thomas Regout
operations in the Netherlands and CompX's French lock operations will convert to
the euro from their respective national currencies over a two-year period
beginning in 1999. The euro conversion may impact CompX's operations including,
among other things, changes in product pricing decisions necessitated by cross-
border price transparencies. Such changes in product pricing decisions could
impact both selling prices and purchasing costs and, consequently, favorably or
unfavorably impact results of operations.
In 1998, CompX assessed and evaluated the impact of the euro conversion on
its business and made the necessary system conversions. Modifications of
information systems to handle euro-denominated transactions have been
implemented and were not extensive. Because of the inherent uncertainty of the
ultimate effect of the euro conversion, CompX cannot accurately predict the
impact of the euro conversion on its consolidated results of operations,
financial condition or liquidity.
TIMET. TIMET also has operations and assets located in Europe, principally
in the United Kingdom. The United Kingdom is not adopting the euro.
Approximately one-half of TIMET's European sales are denominated in currencies
other than the U.S. dollar, principally the major European currencies. Certain
purchases of raw materials for TIMET's European operations, principally titanium
sponge and alloys, are denominated in U.S. dollars while labor and other
production costs are primarily denominated in local currencies. The U.S. dollar
value of TIMET's foreign sales and operating costs are subject to currency
exchange rate fluctuations that can impact reported earnings and may affect the
comparability of period-to-period operating results. Costs associated with
modification of certain of TIMET's systems to handle euro-denominated
transactions have not been significant.
LIQUIDITY AND CAPITAL RESOURCES:
Operating activities. Trends in cash flows from operating annual
activities (excluding the impact of significant asset dispositions and relative
changes in assets and liabilities) are generally similar to trends in the
Company's earnings. Changes in assets and liabilities generally result from the
timing of production, sales, purchases and income tax payments. In addition,
cash flows from operating activities in 1998 include the impact of the payment
of cash income taxes related to the disposal of NL's specialty chemicals
business unit, even though the pre-tax proceeds from the disposal are reported
as a component of cash flows from investing activities. Noncash interest
expense consists of amortization of original issue discount on certain Valhi and
NL indebtedness and amortization of deferred financing costs.
Cash flows from investing and financing activities. Approximately 65% of
the Company's aggregate capital expenditures in the first six months of 1999
relates to NL, and substantially all of the remaining amount relates to CompX.
During the first quarter of 1999, (i) CompX acquired a precision ball
bearing slide producer for approximately $53 million using funds on hand and $20
million of borrowing under its unsecured revolving bank credit facility, (ii)
Valhi contributed an additional $10 million to Waste Control Specialists'
equity, (iii) Valhi purchased $1.9 million of additional shares of Tremont
common stock and $.6 million of additional shares of CompX common stock and (iv)
Valhi sold certain marketable securities for an aggregate of $6.6 million.
Net repayments of indebtedness in the first six months of 1999 include (i)
NL's repayment in full of the remaining DM 107 million outstanding under the
term loan portion of its DM credit facility ($60 million when repaid) using
funds on hand and a net DM 80 million ($45 million) increase in the revolver
portion of the DM facility and (ii) CompX's $20 million of borrowing under its
revolving bank credit facility.
At June 30, 1999, unused credit available under existing credit facilities
approximated $186 million, which was comprised of $80 million available to CompX
under its unsecured revolving senior credit facility, $56 million available to
NL under non-U.S. credit facilities and $50 million available to Valhi under its
bank facility. In early July 1999, Valhi borrowed $16 million under its bank
facility and used the proceeds to repay an equal amount of its unsecured, short-
term borrowings from Contran.
CHEMICALS - NL INDUSTRIES
Certain of NL's U.S. and non-U.S. tax returns are being examined and tax
authorities have or may propose tax deficiencies, including non-income tax
related items and interest. As discussed above, in the second quarter of 1999
certain significant German tax contingencies aggregated an estimated DM 188
million ($100 million) through 1998 were resolved in NL's favor.
On April 1, 1999, the German government enacted certain income tax law
changes that were retroactively effective as of January 1, 1999. Based on these
changes, NL's effective cash income tax rate in Germany increased beginning in
the second quarter of 1999.
During 1997, NL received a tax assessment from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($7 million at June 30,
1999) relating to 1994. NL has appealed this assessment and has begun
litigation proceedings. During 1998, NL was informed by the Norwegian tax
authorities that additional tax deficiencies of NOK 39 million ($5 million) will
likely be proposed for the year 1996. NL intends to vigorously contest this
issue and litigate, if necessary. Although NL believes that it will ultimately
prevail, NL has granted a lien for the 1994 tax assessment on its Norwegian Ti02
plant in favor of the Norwegian tax authorities and will be required to grant a
lien for the 1996 assessment when received.
No assurance can be given that these tax matters will be resolved in NL's
favor in view of the inherent uncertainties involved in court proceedings. NL
believes that it has provided adequate accruals for additional taxes and related
interest expense which may ultimately result from all such examinations and
believes that the ultimate disposition of such examinations should not have a
material adverse effect on its consolidated financial position, results of
operations or liquidity.
NL has been named as a defendant, potentially responsible party ("PRP"), or
both, in a number of legal proceedings associated with environmental matters,
including waste disposal sites, mining locations and facilities currently or
previously owned, operated or used by NL, certain of which are on the U.S. EPA's
Superfund National Priorities List or similar state lists. On a quarterly
basis, NL evaluates the potential range of its liability at sites where it has
been named as a PRP or defendant, including sites for which EMS has
contractually assumed NL's obligation as discussed above. NL believes it has
provided adequate accruals ($119 million at June 30, 1999) for reasonably
estimable costs of such matters, but NL's ultimate liability may be affected by
a number of factors, including changes in remedial alternatives and costs and
the allocation of such costs among PRPs. It is not possible to estimate the
range of costs for certain sites. The upper end of the range of reasonably
possible costs to NL for sites for which it is possible to estimate costs is
approximately $160 million. NL's estimates of such liabilities have not been
discounted to present value, and NL has not recognized any potential insurance
recoveries. No assurance can be given that actual costs will not exceed accrued
amounts or the upper end of the range for sites for which estimates have been
made and no assurance can be given that costs will not be incurred with respect
to sites as to which no estimate presently can be made. NL is also a defendant
in a number of legal proceedings seeking damages for personal injury and
property damage arising from the sale of lead pigments and lead-based paints.
NL has not accrued any amounts for the pending lead pigment and lead-based paint
litigation. There is no assurance that NL will not incur future liability in
respect of this pending litigation in view of the inherent uncertainties
involved in court and jury rulings in pending and possible future cases.
However, based on, among other things, the results of such litigation to date,
NL believes that the pending lead pigment and lead-based paint litigation is
without merit. Liability that may result, if any, cannot reasonably be
estimated. In addition, various legislation and administrative regulations
have, from time to time, been enacted or proposed that seek to impose various
obligations on present and former manufacturers of lead pigment and lead-based
paint with respect to asserted health concerns associated with the use of such
products and to effectively overturn court decisions in which NL and other
pigment manufacturers have been successful. Examples of such proposed
legislation include bills which would permit civil liability for damages on the
basis of market share, rather than requiring plaintiffs to prove that the
defendant's product caused the alleged damage. NL currently believes the
disposition of all claims and disputes, individually or in the aggregate, should
not have a material adverse effect on its consolidated financial position,
results of operations or liquidity. There can be no assurance that additional
matters of these types will not arise in the future.
NL periodically evaluates its liquidity requirements, alternative uses of
capital, capital needs and availability of resources in view of, among other
things, its capital resources, debt service and capital expenditure requirements
and estimated future operating cash flows. As a result of this process, NL has
in the past and may in the future seek to reduce, refinance, repurchase or
restructure indebtedness, raise additional capital, issue additional securities,
modify its dividend policy, restructure ownership interests, sell interests in
subsidiaries or other assets, or take a combination of such steps or other steps
to manage its liquidity and capital resources. In the normal course of its
business, NL may review opportunities for the acquisition, divestiture, joint
venture or other business combinations in the chemicals industry or other
industries. In the event of any such transaction, NL may consider using its
available cash, issuing its equity securities or refinancing or increasing its
indebtedness to the extent permitted by the agreements governing NL's existing
debt. In this regard, the indentures governing NL's publicly-traded debt contain
provisions which limit the ability of NL and its subsidiaries to incur
additional indebtedness or hold noncontrolling interests in business units.
COMPONENT PRODUCTS - COMPX INTERNATIONAL
In January 1999, CompX acquired a precision ball bearing slide producer for
approximately $53 million, using available cash on hand and $20 million of
borrowing under its revolving bank credit facility.
CompX periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements in light of its capital resources
and estimated future operating cash flows. As a result of this process, CompX
may in the future seek to raise additional capital, refinance or restructure
indebtedness, issue additional securities or take a combination of such steps or
other steps to manage its liquidity and capital resources. In the normal course
of business, CompX may review opportunities for acquisitions, joint ventures or
other business combinations in the component products industry. In the event of
any such transaction, CompX may consider using available cash, issuing
additional equity securities or increasing the indebtedness of CompX or its
subsidiaries.
Certain of CompX's sales generated by its Canadian operations are
denominated in U.S. dollars. To manage a portion of the foreign exchange rate
market risk associated with such receivables, in July 1999 CompX entered into a
series of short-term forward exchange contracts to exchange an aggregate of US$
7 million for an equivalent amount of Canadian dollars at exchange rates ranging
between Cdn$ 1.49 and Cdn$ 1.50 per U.S. dollar.
TREMONT CORPORATION
Tremont is primarily a holding company which, at June 30, 1999, owned
approximately 39% of TIMET and 20% of NL. At June 30, 1999, the market value of
the 12.3 million shares of TIMET and the 10.2 million shares of NL held by
Tremont was approximately $138 million and $114 million, respectively.
In 1998, Tremont entered into a revolving advance agreement with Contran.
Through June 30, 1999, Tremont had borrowed $13 million from Contran under such
facility, primarily to fund Tremont's purchases of shares of NL and TIMET common
stock. Absent additional purchases of NL and TIMET common stock, Tremont does
not currently believe it will need to borrow significant additional amounts from
Contran.
At June 30, 1999, Tremont reported total assets of $305 million and
stockholders' equity of $206 million. Tremont's total assets at such date
include its investments in TIMET ($155 million), NL ($111 million) and other
joint ventures ($14 million) and $3 million in cash and cash equivalents;
Tremont's total liabilities at such date include the demand loan owed to Contran
($13 million), accrued OPEB costs ($22 million), accrued insurance claims and
claim expenses related to its wholly-owned captive insurance subsidiary ($16
million) and deferred income taxes ($35 million).
Tremont periodically evaluates the net carrying value of its long-term
assets, principally its investments in NL and TIMET, to determine if there has
been any decline in value below their net carrying amounts that is other than
temporary and would, therefore, require a write-down which would be accounted
for as a realized loss. Tremont's per share net carrying amount of its
investment in NL at June 30, 1999 was $10.87 per share, compared to a NYSE per
share market price of $11.13 at that date. At June 30, 1999, the NYSE price of
$11.25 per TIMET share indicated an aggregate NYSE market value of Tremont's
investment in TIMET of $138 million, or $17 million less than Tremont's $155
million net carrying value of its investment in TIMET at that date ($12.65 per
TIMET share held). Tremont believes NYSE stock prices (particularly in the case
of companies such as TIMET and NL which have a major shareholder) are not
necessarily indicative of a company's enterprise value or the value that could
be realized if the company were sold. After considering what Tremont believes
to be all relevant factors including, among other things, the relatively short
period of time that the NYSE stock prices have been less than Tremont's per
share investment in TIMET and NL, recent ranges in market prices and TIMET's and
NL's operating results, financial position and prospects, Tremont has concluded
that there has been no other than temporary decline in the value of its
investment in TIMET or NL below their respective net carrying values at June 30,
1999.
It is possible, should the TiO2 or titanium metals industries in general,
or NL or TIMET specifically, encounter a prolonged downturn, or suffer other
unforeseen adverse events, that the value of Tremont's investment in TIMET, NL
or both, could decline to a level which would result in a write-down. Tremont
will continue to monitor and evaluate the value of its investment in TIMET and
NL based on, among other things, their respective results of operations,
financial condition, liquidity and business outlook. In the event Tremont
determines any decline in value of its investments below their net carrying
value has occurred which is other than temporary, Tremont would report an
appropriate write-down at that time.
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, 1999, 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 taken the
steps necessary to give itself the benefits of a temporary exemption under the
1940 Act and has sought an order from the Securities and Exchange Commission
that Tremont is primarily engaged, through TIMET and NL, in a non-investment
company business. Tremont believes another exemption may be currently available
to it under the 1940 Act should the Commission deny Tremont's application for an
exemptive order.
Tremont periodically evaluates its liquidity requirements, capital needs
and availability of resources in view of, among other things, its alternative
uses of capital, its debt service requirements, the cost of debt and equity
capital and estimated future operating cash flows. As a result of this process,
Tremont has in the past and may in the future seek to obtain financing from
related parties, 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.
Tremont owns indirect ownership interests in Basic Management Inc. ("BMI").
BMI provides utility services to, and owns property adjacent to (the "BMI
Complex"), TIMET's facility in Nevada. In the early 1990s, TIMET and certain
other companies that currently have or formerly had operations within the BMI
Complex (the "Steering Committee Companies") began environmental assessments of
the BMI Complex and each of the individual company sites located within the BMI
Complex pursuant to a series of consent agreements entered into with the Nevada
Division of Environmental Protection ("NDEP"). Most of this assessment work has
now been completed, although some of the assessment work with respect to TIMET's
property is continuing. In June 1999, TIMET entered into a series of agreements
with BMI and, in certain cases, other Steering Committee Companies, pursuant to
which, among other things: (i) BMI, TIMET and the other Steering Committee
Companies each agreed to contribute to the cost of remediating any soils
contamination within the BMI Complex (excluding the individual active plant
sites), certain lands surrounding the BMI Complex and certain lands owned by
TIMET adjacent to its plant site (the "TIMET Pond Property"), and TIMET
contributed $2.8 million to the cost of this remediation (which payment was
charged against TIMET's accrued liabilities), (ii) BMI assumed responsibility
for the conduct of soils remediation activities on the properties described,
including, subject to final NDEP approval, the responsibility to complete all
outstanding requirements under the consent agreements with NDEP insofar as they
relate to the investigation and remediation of soils conditions on such
properties, (iii) BMI indemnified TIMET and the other Steering Committee
Companies against certain future liabilities associated with any soils
contamination on such properties and (iv) TIMET agreed to convey to BMI, at no
additional cost, the TIMET Pond Property upon payment by BMI of the cost to
design, purchase, and install the technology and equipment necessary to allow
TIMET to stop discharging liquid and solid effluents and co-products onto the
TIMET Pond Property. With respect to the TIMET Pond Property project, BMI will
pay 100% of the first $15.9 million cost for this project, and TIMET will
contribute 50% of the cost in excess of $15.9 million, up to a maximum payment
by TIMET of $2 million. TIMET does not currently expect to incur any cost in
connection with this project. TIMET, BMI and the other Steering Committee
Companies are continuing investigation with respect to certain issues associated
with the properties described above. In addition, TIMET is continuing
assessment work with respect to its own active plant site.
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. Starting in the second quarter of 1998, NL
resumed regular quarterly dividends at a rate of $.03 per NL share, and NL
increased its quarterly dividend to $.035 per share in the first quarter of
1999. At the $.035 per share quarterly rate, and based on the 30.1 million NL
shares held by Valhi at June 30, 1999, Valhi would receive aggregate annual
dividends from NL of approximately $4.2 million. Tremont currently pays a
quarterly dividend of $.07 per share, and Valhi began to receive quarterly
dividends from Tremont in the third quarter of 1998. At that rate, and based
upon the 3.2 million Tremont shares owned by Valhi at June 30, 1999, Valhi would
receive aggregate annual dividends from Tremont of approximately $890,000.
Various credit agreements to which certain subsidiaries or affiliates are
parties contain customary limitations on the payment of dividends, typically a
percentage of net income or cash flow; however, such restrictions have not
significantly impacted Valhi's ability to service its parent company level
obligations. Valhi has not guaranteed any indebtedness of its subsidiaries or
affiliates. At June 30, 1999, Valhi had $5 million of parent level cash and
cash equivalents, including a portion held by Valcor which could be distributed
to Valhi, and had $16 million of short-term borrowings owed to Contran. In
addition, Valhi had $50 million of borrowing availability under its revolving
credit facility.
Valhi's LYONs do not require current cash debt service. At June 30, 1999,
Valhi held 2.7 million shares of Halliburton common stock, which shares are held
in escrow for the benefit of holders of the LYONs. The LYONs are exchangeable
at any time, at the option of the holder, for the Halliburton shares owned by
Valhi. Exchanges of LYONs for Halliburton stock result in the Company reporting
income related to the disposition of the Halliburton stock for both financial
reporting and income tax purposes, although no cash proceeds are generated by
such exchanges. Valhi's potential cash income tax liability that would have
been triggered at June 30, 1999, assuming exchanges of all of the outstanding
LYONs for Halliburton stock at such date, was approximately $26 million. Valhi
continues to receive regular quarterly Halliburton dividends (currently $.125
per share) on the escrowed shares. At June 30, 1999, the LYONs had an accreted
value equivalent to approximately $33 per Halliburton share, and the market
price of the Halliburton common stock was $45.25 per share.
Based on The Amalgamated Sugar Company LLC's current projections, Valhi
currently expects that distributions received from the LLC in 1999, which are
dependent in part upon the future operations of the LLC, will approximate its
debt service requirements under its $250 million loans from Snake River.
Certain covenants contained in Snake River Sugar Company's third-party senior
debt limit the amount of debt service payments (principal and interest) which
Snake River is permitted to remit to Valhi under Valhi's $80 million loan to
Snake River, and such loan is subordinated to Snake River's third-party senior
debt. Due to these covenants, Snake River has not made any principal or
interest payments on the $80 million loan in 1998 or to-date in 1999 other than
payment of the accrued and unpaid interest owed as of December 31, 1997 ($3
million). The Company does not currently expect that Snake River will remit a
significant amount of principal or interest during 1999. 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, 1999 will ultimately
be collected.
Redemption of the Company's interest in the LLC would result in the Company
reporting income related to the disposition of its LLC interest for both
financial reporting and income tax purposes, although the net cash proceeds that
would be generated from such a disposition would likely be less than the
specified redemption price due to Snake River's ability to simultaneously call
its $250 million loans to Valhi. As a result, such net cash proceeds generated
by redemption of the Company's interest in the LLC could be less than the income
taxes that would become payable as a result of the disposition.
The Company routinely compares its liquidity requirements and alternative
uses of capital against the estimated future cash flows to be received from its
subsidiaries, and the estimated sales value of those units. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify its dividend policies, consider
the sale of interests in subsidiaries, affiliates, business units, marketable
securities or other assets, or take a combination of such steps or other steps,
to increase liquidity, reduce indebtedness and fund future activities. Such
activities have in the past and may in the future involve related companies.
The Company and related entities routinely evaluate acquisitions of
interests in, or combinations with, companies, including related companies,
perceived by management to be undervalued in the marketplace. These companies
may or may not be engaged in businesses related to the Company's current
businesses. The Company intends to consider such acquisition activities in the
future and, in connection with this activity, may consider issuing additional
equity securities and increasing the indebtedness of the Company, its
subsidiaries and related companies. From time to time, the Company and related
entities also evaluate the restructuring of ownership interests among their
respective subsidiaries and related companies. In this regard, the indentures
governing the publicly-traded debt of NL contain provisions which limit the
ability of NL and its subsidiaries to incur additional indebtedness or hold
noncontrolling interests in business units.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Reference is made to the 1998 Annual Report and prior 1999 periodic reports
for descriptions of certain legal proceedings.
In May 1999, a jury awarded a judgment of approximately $800,000 plus
attorney fees in favor of a former employee of Waste Control Specialists in the
previously-reported Kenneth F. Jackson v. Waste Control Specialists LLC, et al.
Waste Control Specialists intends to file for a judgment notwithstanding the
verdict and file a motion for a new trial.
In June 1999, the U.S. District Court for the Northern District of Texas
approved the Department of Energy's change of venue motion to have the
previously-reported case Waste Control Specialists LLC v. United States
Department of Energy transferred to the U.S. District Court for the Southern
District of Ohio. Waste Control Specialists subsequently filed a motion
requesting that the case be dismissed with prejudice. The Court granted such
request and the case was dismissed.
The City of New York, et al. v. Lead Industries Association, et al. In
July 1999, the court heard oral arguments on plaintiffs' and defendants' motions
for partial summary judgment in this previously-reported case.
Sweet, et al. v. Sheahan, et al. In July 1999, the defendants filed a
motion to dismiss this previously-reported case for lack of jurisdiction.
Cherokee County, Kansas Site. NL and other PRPs have entered into a
consent decree agreeing to perform the remedy previously selected in the Record
of Decision at the Baxter Springs subsite, and agreeing that NL is not
responsible for performing the remedy at the Treece subsite.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Valhi's 1999 Annual Meeting of Stockholders was held on May 4, 1999.
Norman S. Edelcup, Kenneth R. Ferris, Glenn R. Simmons, Harold C. Simmons, J.
Walter Tucker, Jr. and Steven L. Watson were elected as directors, each
receiving votes "For" their election from over 98% 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
27.1 -Financial Data Schedule for the six-month period ended June 30,
1999.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended June 30, 1999.
April 28, 1999 - Reported Items 5 and 7.
May 4, 1999 - Reported Items 5 and 7.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALHI, INC.
(Registrant)
Date August 13, 1999 By /s/ Bobby D. O'Brien
Bobby D. O'Brien
(Vice President and Treasurer,
Principal Financial Officer)
Date August 13, 1999 By /s/ Gregory M. Swalwell
Gregory M. Swalwell
(Vice President and 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 13, 1999 By
Bobby D. O'Brien
(Vice President and Treasurer,
Principal Financial Officer)
Date August 13, 1999 By
Gregory M. Swalwell
(Controller,
Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
VALHI, INC.'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 168,882
<SECURITIES> 0
<RECEIVABLES> 203,037
<ALLOWANCES> 2,831
<INVENTORY> 232,406
<CURRENT-ASSETS> 655,751
<PP&E> 707,610
<DEPRECIATION> 166,492
<TOTAL-ASSETS> 2,216,010
<CURRENT-LIABILITIES> 316,851
<BONDS> 661,210
0
0
<COMMON> 1,256
<OTHER-SE> 617,492
<TOTAL-LIABILITY-AND-EQUITY> 2,216,010
<SALES> 544,310
<TOTAL-REVENUES> 544,310
<CGS> 397,476
<TOTAL-COSTS> 397,476
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 603
<INTEREST-EXPENSE> 36,363
<INCOME-PRETAX> 54,168
<INCOME-TAX> (69,179)
<INCOME-CONTINUING> 64,235
<DISCONTINUED> 2,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,235
<EPS-BASIC> .58
<EPS-DILUTED> .57
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