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, 2000 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, 2000: 114,680,014.
<PAGE>
VALHI, INC. AND SUBSIDIARIES
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1999
and June 30, 2000 3-4
Consolidated Statements of Income -
Three months and six months ended
June 30, 1999 and 2000 5-6
Consolidated Statements of Comprehensive Income -
Six months ended June 30, 1999 and 2000 7
Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 2000 8
Consolidated Statements of Cash Flows -
Six months ended June 30, 1999 and 2000 9-10
Notes to Consolidated Financial Statements 11-18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 19-34
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 35-36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 6. Exhibits and Reports on Form 8-K. 36
<PAGE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
ASSETS December 31, June 30,
1999 2000
---- ----
Current assets:
<S> <C> <C>
Cash and cash equivalents .................. $ 174,982 $ 183,278
Legal settlement receivable ................ -- 45,000
Accounts and other receivables ............. 202,200 227,287
Refundable income taxes .................... 5,146 2,840
Receivables from affiliates ................ 14,606 2,604
Inventories ................................ 219,618 190,055
Prepaid expenses ........................... 7,221 6,335
Deferred income taxes ...................... 14,330 13,683
---------- ----------
Total current assets ................... 638,103 671,082
---------- ----------
Other assets:
Marketable securities ...................... 266,362 268,604
Investment in affiliates ................... 256,982 242,478
Loans and notes receivable ................. 83,268 83,116
Mining properties .......................... 17,035 13,917
Prepaid pension costs ...................... 23,271 21,685
Goodwill ................................... 356,523 349,808
Deferred income taxes ...................... 2,672 1,710
Other ...................................... 22,467 22,082
---------- ----------
Total other assets ..................... 1,028,580 1,003,400
---------- ----------
Property and equipment:
Land ....................................... 25,952 25,149
Buildings .................................. 167,100 160,458
Equipment .................................. 550,145 526,381
Construction in progress ................... 13,843 25,453
---------- ----------
757,040 737,441
Less accumulated depreciation .............. 188,554 199,720
---------- ----------
Net property and equipment ............. 568,486 537,721
---------- ----------
$2,235,169 $2,212,203
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, June 30,
1999 2000
---- ----
Current liabilities:
<S> <C> <C>
Notes payable .............................. $ 57,076 $ 36,418
Current maturities of long-term debt ....... 27,846 21,638
Accounts payable ........................... 70,971 64,899
Accrued liabilities ........................ 163,556 165,400
Payables to affiliates ..................... 25,266 24,390
Income taxes ............................... 7,203 13,016
Deferred income taxes ...................... 326 767
----------- -----------
Total current liabilities .............. 352,244 326,528
----------- -----------
Noncurrent liabilities:
Long-term debt ............................. 609,339 629,197
Accrued OPEB costs ......................... 58,756 51,001
Accrued pension costs ...................... 39,612 32,045
Accrued environmental costs ................ 73,062 62,424
Deferred income taxes ...................... 266,752 277,803
Other ...................................... 45,164 43,426
----------- -----------
Total noncurrent liabilities ........... 1,092,685 1,095,896
----------- -----------
Minority interest ............................ 200,826 177,637
----------- -----------
Stockholders' equity:
Common stock ............................... 1,256 1,257
Additional paid-in capital ................. 43,444 44,247
Retained earnings .......................... 538,744 572,617
Accumulated other comprehensive income:
Marketable securities .................... 127,837 129,892
Currency translation ..................... (40,833) (55,524)
Pension liabilities ...................... (5,775) (4,834)
Treasury stock ............................. (75,259) (75,513)
----------- -----------
Total stockholders' equity ............. 589,414 612,142
----------- -----------
$ 2,235,169 $ 2,212,203
=========== ===========
</TABLE>
Commitments and contingencies (Note 1)
<PAGE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
1999 2000 1999 2000
---- ---- ---- ----
Revenues and other income:
<S> <C> <C> <C> <C>
Net sales ........................... $ 287,536 $ 319,944 $ 544,310 $ 621,672
Other, net .......................... 20,890 62,009 36,977 77,881
--------- --------- --------- ---------
308,426 381,953 581,287 699,553
--------- --------- --------- ---------
Costs and expenses:
Cost of sales ....................... 208,961 216,437 397,476 431,040
Selling, general and administrative . 44,663 53,240 89,275 103,213
Interest ............................ 17,952 17,673 36,363 35,021
--------- --------- --------- ---------
271,576 287,350 523,114 569,274
--------- --------- --------- ---------
36,850 94,603 58,173 130,279
Equity in earnings of:
Titanium Metals Corporation ("TIMET") -- (2,190) -- (6,511)
Tremont Corporation* ................ 5,192 -- 4,491 --
Waste Control Specialists* .......... (3,272) -- (8,496) --
Other ............................... -- (7) -- 269
--------- --------- --------- ---------
Income before income taxes ........ 38,770 92,406 54,168 124,037
Provision for income taxes (benefit) .. (74,290) 40,292 (69,179) 55,064
Minority interest in after-tax earnings 51,188 17,144 59,112 23,518
--------- --------- --------- ---------
Income from continuing operations . 61,872 34,970 64,235 45,455
Discontinued operations ............... 2,000 -- 2,000 --
--------- --------- --------- ---------
Net income ........................ $ 63,872 $ 34,970 $ 66,235 $ 45,455
========= ========= ========= =========
</TABLE>
*Prior to consolidation.
See accompanying notes to consolidated financial statements.
<PAGE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------- -------------
1999 2000 1999 2000
---- ---- ---- ----
Basic earnings per common share:
<S> <C> <C> <C> <C>
Continuing operations ............................ $ .54 $ .30 $ .56 $ .39
Discontinued operations .......................... .02 -- .02 --
----------- ----------- ----------- -----------
Net income ..................................... $ .56 $ .30 $ .58 $ .39
=========== =========== =========== ===========
Diluted earnings per common share:
Continuing operations ............................ $ .53 $ .30 $ .55 $ .39
Discontinued operations .......................... .02 -- .02 --
----------- ----------- ----------- -----------
Net income ..................................... $ .55 $ .30 $ .57 $ .39
=========== =========== =========== ===========
Cash dividends per share ........................... $ .05 $ .05 $ .10 $ .10
=========== =========== =========== ===========
Shares used in the calculation of per share amounts:
Basic earnings per common share .................. 115,011 115,116 114,997 115,103
Dilutive impact of outstanding
stock options ................................... 1,182 1,124 1,192 1,115
----------- ----------- ----------- -----------
Diluted earnings per share ....................... 116,193 116,240 116,189 116,218
=========== =========== =========== ===========
</TABLE>
<PAGE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Six months ended June 30, 1999 and 2000
(In thousands)
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Net income ........................................... $ 66,235 $ 45,455
-------- --------
Other comprehensive income (loss), net of tax:
Marketable securities adjustment:
Unrealized gains arising during the period ....... 3,652 2,080
Less reclassification for gains included
in net income ................................... (425) (25)
-------- --------
3,227 2,055
Currency translation adjustment .................... (14,589) (14,691)
Pension liabilities adjustment ..................... (3,568) 941
-------- --------
Total other comprehensive income (loss), net ..... (14,930) (11,695)
-------- --------
Comprehensive income ........................... $ 51,305 $ 33,760
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended June 30, 2000
(In thousands)
<TABLE>
<CAPTION>
Additional Accumulated other comprehensive income Total
Common paid-in Retained Marketable Currency Pension Treasury stockholders'
stock capital earnings securities translation liabilities stock equity
------ --------- -------- ---------- ----------- ----------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 ......... $1,256 $43,444 $ 538,744 $127,837 $(40,833) $(5,775) $(75,259) $ 589,414
Net income ........................... -- -- 45,455 -- -- -- -- 45,455
Dividends ............................ -- -- (11,582) -- -- -- -- (11,582)
Other comprehensive income (loss), net -- -- -- 2,055 (14,691) 941 -- (11,695)
Other, net ........................... 1 803 -- -- -- -- (254) 550
------ ------- --------- -------- -------- ------- -------- ---------
Balance at June 30, 2000 ............. $1,257 $44,247 $ 572,617 $129,892 $(55,524) $(4,834) $(75,513) $ 612,142
====== ======= ========= ======== ======== ======= ======== =========
</TABLE>
<PAGE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 1999 and 2000
(In thousands)
<TABLE>
<CAPTION>
1999 2000
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income ......................................... $ 66,235 $ 45,455
Depreciation, depletion and amortization ........... 31,747 36,070
Legal settlement, net .............................. -- (43,000)
Securities transactions ............................ (654) (5,591)
Noncash interest expense ........................... 4,857 4,628
Deferred income taxes .............................. (77,243) 29,654
Minority interest .................................. 59,112 23,518
Other, net ......................................... (4,504) (4,332)
Equity in:
TIMET ............................................ -- 6,511
Tremont Corporation .............................. (4,491) --
Waste Control Specialists ........................ 8,496 --
Discontinued operations .......................... (2,000) --
Other ............................................ -- (269)
Distributions from:
Manufacturing joint venture ...................... 11,150 5,250
Tremont Corporation .............................. 432 --
Other ............................................ -- 81
-------- --------
93,137 97,975
Change in assets and liabilities:
Accounts and other receivables ................... (45,830) (33,551)
Inventories ...................................... 8,489 24,836
Accounts payable and accrued liabilities ......... (16,592) (10,575)
Accounts with affiliates ......................... (7,852) 10,277
Income taxes ..................................... 3,813 8,091
Other, net ....................................... (9,724) 621
-------- --------
Net cash provided by operating activities .... 25,441 97,674
-------- --------
Cash flows from investing activities:
Capital expenditures ............................... (26,364) (23,928)
Purchases of:
Business units ................................... (53,084) (9,475)
Tremont common stock ............................. (1,945) (20,681)
NL common stock .................................. -- (13,958)
CompX common stock ............................... (624) --
Investment in Waste Control Specialists (prior
to consolidation) ................................. (10,000) --
Proceeds from disposal of:
Marketable securities ............................ 6,588 --
Discontinued operations .......................... 2,000 --
Loans to affiliates:
Loans ............................................ (6,000) (21,969)
Collections ...................................... 6,000 21,969
Other, net ......................................... 2,131 2,012
-------- --------
Net cash used by investing activities ........ (81,298) (66,030)
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Six months ended June 30, 1999 and 2000
(In thousands)
<TABLE>
<CAPTION>
1999 2000
---- ----
Cash flows from financing activities:
Indebtedness:
<S> <C> <C>
Borrowings ......................................... $ 76,271 $ 29,795
Principal payments ................................. (72,043) (35,937)
Loans from affiliate:
Loans .............................................. 29,000 2,329
Repayments ......................................... (22,100) (3,082)
Valhi dividends paid ................................. (11,571) (11,582)
Distributions to minority interest ................... (1,524) (4,901)
Other, net ........................................... 609 1,357
--------- ---------
Net cash used by financing activities ............ (1,358) (22,021)
--------- ---------
Cash and cash equivalents - net change from:
Operating, investing and financing activities ...... (57,215) 9,623
Currency translation ............................... (3,366) (1,327)
Business units acquired ............................ 4,157 --
Consolidation of Waste Control Specialists ......... 734 --
Cash and equivalents at beginning of period .......... 224,572 174,982
--------- ---------
Cash and equivalents at end of period ................ $ 168,882 $ 183,278
========= =========
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized ............. $ 31,704 $ 30,679
Income taxes, net ................................ 4,869 6,162
Business units acquired - net assets consolidated:
Cash and cash equivalents ........................ $ 4,157 $ --
Goodwill and other intangible assets ............. 15,800 2,539
Other non-cash assets ............................ 52,799 8,458
Liabilities ...................................... (19,672) (1,522)
--------- ---------
Cash paid ...................................... $ 53,084 $ 9,475
========= =========
Consolidation of 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>
<PAGE>
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, 1999 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 2000, and the consolidated statements of
income, comprehensive income, stockholders' equity and cash flows for the
interim periods ended June 30, 1999 and 2000, 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 prior
year amounts have been reclassified to conform to the current year presentation,
and 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, 1999 (the "1999 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 1999 Annual Report.
Contran Corporation holds, directly or through subsidiaries,
approximately 93% 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.
Note 2 - Business segment information:
% owned at
Operations Principal entities June 30, 2000
Chemicals NL Industries, Inc. 60%*
Component products CompX International Inc. 64%
Titanium metals Tremont Corporation 61%*
Waste management Waste Control Specialists 69%
* Tremont is a holding company which owns 39% of TIMET and an additional 20% of
NL. NL owns an additional 9% of Tremont.
<PAGE>
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
1999 2000 1999 2000
---- ---- ---- ----
(In millions)
Net sales:
<S> <C> <C> <C> <C>
Chemicals ............................ $232.5 $251.1 $434.1 $482.1
Component products ................... 55.0 65.1 110.2 131.2
Waste management (after consolidation) -- 3.8 -- 8.4
------ ------ ------ ------
Total net sales .................... $287.5 $320.0 $544.3 $621.7
====== ====== ====== ======
Operating income:
Chemicals ............................ $ 39.2 $ 56.5 $ 65.2 $ 96.3
Component products ................... 9.7 11.5 19.2 22.4
Waste management (after consolidation) -- (1.4) -- (3.0)
------ ------ ------ ------
Total operating income ............. 48.9 66.6 84.4 115.7
General corporate items:
Legal settlement gain, net ........... -- 43.0 -- 43.0
Interest and dividend income ......... 10.9 8.8 21.5 20.3
Securities transactions .............. .6 5.6 .6 5.6
Expenses, net ........................ (5.6) (11.8) (12.0) (19.4)
Interest expense ....................... (18.0) (17.7) (36.4) (35.0)
------ ------ ------ ------
36.8 94.5 58.1 130.2
Equity in:
TIMET ................................ -- (2.2) -- (6.5)
Tremont Corporation .................. 5.2 -- 4.5 --
Waste Control Specialists ............ (3.3) -- (8.5) --
Other ................................ -- -- -- .3
------ ------ ------ ------
Income before income taxes ......... $ 38.7 $ 92.3 $ 54.1 $124.0
====== ====== ====== ======
</TABLE>
In January 2000, CompX acquired a lock producer for an aggregate of $9
million cash consideration. The Company accounted for this acquisition by the
purchase method. During the first six months of 2000, (i) NL purchased shares of
its common stock in market transactions for an aggregate of $14.0 million and
(ii) Valhi and NL each purchased shares of Tremont common stock in market
transactions for an aggregate of $20.7 million. The Company accounted for such
increases in its ownership of NL and Tremont by the purchase method (step
acquisitions).
NL (NYSE: NL), CompX (NYSE: CIX), Tremont (NYSE: TRE) and TIMET (NYSE:
TIE) each file periodic reports with the Securities and Exchange Commission
("SEC") pursuant to the Securities Exchange Act of 1934, as amended.
<PAGE>
Note 3 - Marketable securities:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
---- ----
(In thousands)
Noncurrent assets (available-for-sale):
<S> <C> <C>
The Amalgamated Sugar Company LLC .............. $170,000 $170,000
Halliburton Company common stock ............... 91,825 96,020
Other common stocks ............................ 4,537 2,584
-------- --------
$266,362 $268,604
======== ========
</TABLE>
At June 30, 2000, Valhi held 2.7 million shares of Halliburton common
stock (aggregate cost of $22 million) with a quoted market price of $47.19 per
share, or an aggregate market value of $127 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 7. See the 1999 Annual Report and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of the Company's investment in The Amalgamated
Sugar Company LLC. The aggregate cost of other available-for-sale common stocks
is approximately $8 million at June 30, 2000.
Note 4 - Inventories:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
---- ----
(In thousands)
Raw materials:
<S> <C> <C>
Chemicals .................................. $ 54,861 $ 40,616
Component products ......................... 9,038 11,390
-------- --------
63,899 52,006
-------- --------
In process products:
Chemicals .................................. 8,065 6,876
Component products ......................... 8,669 12,524
-------- --------
16,734 19,400
-------- --------
Finished products:
Chemicals .................................. 100,973 81,253
Component products ......................... 9,898 11,938
-------- --------
110,871 93,191
-------- --------
Supplies (primarily chemicals) ............... 28,114 25,458
-------- --------
$219,618 $190,055
======== ========
</TABLE>
<PAGE>
Note 5 - Other noncurrent assets:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
---- ----
(In thousands)
Investment in affiliates:
<S> <C> <C>
TiO2 manufacturing joint venture ............. $157,552 $152,302
TIMET ........................................ 85,772 76,330
Other ........................................ 13,658 13,846
-------- --------
$256,982 $242,478
======== ========
Loans and notes receivable:
Snake River Sugar Company .................... $ 80,000 $ 80,000
Other ........................................ 7,259 5,102
-------- --------
87,259 85,102
Less current portion ......................... 3,991 1,986
-------- --------
Noncurrent portion ........................... $ 83,268 $ 83,116
======== ========
Intangible assets .............................. $ 6,979 $ 6,493
Deferred financing costs ....................... 3,668 3,287
Other .......................................... 11,820 12,302
-------- --------
$ 22,467 $ 22,082
======== ========
</TABLE>
At June 30, 2000, Tremont held 12.3 million shares of TIMET common
stock with a quoted market price of $4.69 per share, or an aggregate of $58
million. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for selected financial information concerning TIMET.
As more fully described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Company has reached an
agreement in principle with Snake River Sugar Company whereby, among other
things, the interest rate on the Company's $80 million loan to Snake River would
be decreased from 12.99% to 6.49% effective April 1, 2000. The accompanying
consolidated financial statements have been prepared to reflect such lower
interest rate effective April 1, 2000.
Note 6 - Accrued liabilities:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
---- ----
(In thousands)
Current:
<S> <C> <C>
Environmental costs ........................ $ 48,891 $ 62,164
Employee benefits .......................... 45,674 41,606
Interest ................................... 7,210 6,910
Deferred income ............................ 7,924 4,849
Other ...................................... 53,857 49,871
-------- --------
$163,556 $165,400
======== ========
Noncurrent:
Insurance claims and expenses .............. $ 21,690 $ 22,210
Employee benefits .......................... 11,403 11,879
Deferred income ............................ 9,573 7,513
Other ...................................... 2,498 1,824
-------- --------
$ 45,164 $ 43,426
======== ========
</TABLE>
<PAGE>
Note 7 - Notes payable and long-term debt:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
---- ----
(In thousands)
Notes payable -
<S> <C> <C>
Kronos - non-U.S. bank credit agreements ........... $ 57,076 $ 36,418
======== ========
Long-term debt:
Valhi:
Snake River Sugar Company ........................ $250,000 $250,000
LYONs ............................................ 91,825 96,020
Bank credit facility ............................. 21,000 20,000
-------- --------
362,825 366,020
-------- --------
NL Industries:
Senior Secured Notes ............................. 244,000 244,000
Other ............................................ 478 312
-------- --------
244,478 244,312
-------- --------
Other subsidiaries:
CompX bank credit facility ....................... 20,000 31,000
Waste Control Specialists bank term loan ......... 4,304 5,423
Valcor Senior Notes .............................. 2,431 2,431
Other ............................................ 3,147 1,649
-------- --------
29,882 40,503
-------- --------
637,185 650,835
Less current maturities ............................ 27,846 21,638
-------- --------
$609,339 $629,197
======== ========
</TABLE>
In May 2000, Waste Control Specialists obtained a new bank term loan
that replaced its prior bank term loan. The new term loan is due in installments
through November 2004.
Note 8 - Accounts with affiliates:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
---- ----
(In thousands)
Receivables from affiliates:
<S> <C> <C>
Income taxes receivable from Contran .............. $13,124 $1,232
TIMET ............................................. 907 935
Other ............................................. 575 437
------- ------
$14,606 $2,604
======= ======
Payables to affiliates:
Demand loan from Contran:
Tremont .................................... $13,743 $15,272
Valhi ...................................... 2,282 --
Louisiana Pigment Company .................... 8,381 8,059
Other ........................................ 860 1,059
------- -------
$25,266 $24,390
======= =======
</TABLE>
<PAGE>
Note 9 - Minority interest:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
---- ----
(In thousands)
Minority interest in net assets:
<S> <C> <C>
NL Industries .............................. $ 57,723 $ 61,580
Tremont Corporation ........................ 81,451 52,035
CompX International ........................ 53,487 55,703
Subsidiaries of NL ......................... 3,903 4,075
Subsidiaries of Tremont .................... 4,159 4,244
Subsidiaries of CompX ...................... 103 --
-------- --------
$200,826 $177,637
======== ========
</TABLE>
<TABLE>
<CAPTION>
Six months ended
June 30,
1999 2000
---- ----
(In thousands)
Minority interest in net earnings (losses):
<S> <C> <C>
NL Industries ............................ $ 52,632 $ 17,629
Tremont Corporation ...................... -- 728
CompX International ...................... 4,296 4,878
Subsidiaries of NL ....................... 2,250 201
Subsidiaries of Tremont .................. -- 85
Subsidiaries of CompX .................... (66) (3)
-------- --------
$ 59,112 $ 23,518
======== ========
</TABLE>
As previously reported, all of Waste Control Specialists aggregate net
losses to date have accrued to the Company for financial reporting purposes, and
all of Waste Control Specialists future net income or net losses will also
accrue to the Company until Waste Control Specialists reports positive equity
attributable to its other owner. Accordingly, no minority interest in Waste
Control Specialists' net assets or net losses is reported at June 30, 2000.
Note 10 - Other income:
<TABLE>
<CAPTION>
Six months ended
June 30,
1999 2000
---- ----
(In thousands)
Securities earnings:
<S> <C> <C>
Dividends and interest ..................... $21,475 $20,353
Securities transactions .................... 654 5,591
------- -------
22,129 25,944
Legal settlement gain, net ................... -- 43,000
Noncompete agreement income .................. 2,000 2,000
Currency transactions, net ................... 7,431 3,607
Other, net ................................... 5,417 3,330
------- -------
$36,977 $77,881
======= =======
</TABLE>
<PAGE>
In the second quarter of 2000, NL received 389,691 shares of common
stock of MetLife, Inc. pursuant to MetLife's demutualization. The Company
recognized a $5.6 million securities transaction gain based on MetLife's initial
public offering price of $14.25 per share. NL placed such common stock in a
trust, the assets of which may only be used to pay for certain of NL's retiree
benefits. The Company accounted for the $5.6 million contribution of the MetLife
common stock to the trust as a reduction of its accrued OPEB costs.
In the second quarter of 2000, NL recognized a $43 million net gain from
a June 2000 settlement with one of its two principal former insurance carriers.
The settlement resolved a court proceeding in which NL sought reimbursement from
the carrier for legal defense expenditures and indemnity coverage for certain of
its environmental remediation expenditures. The $43 million gain is stated net
of $2 million of commissions associated with the settlement. Proceeds from the
settlement were transferred by the carrier in July 2000 to a special purpose
trust formed by NL to pay for certain of its future remediation and other
environmental expenditures.
Note 11 - Provision for income taxes:
<TABLE>
<CAPTION>
Six months ended
June 30,
1999 2000
---- ----
(In millions)
<S> <C> <C>
Expected tax expense ..................................... $19.0 $43.4
Incremental U.S. tax and rate differences on
equity in earnings of non-tax group companies ........... 10.4 9.6
Change in NL's and Tremont's deferred income tax
valuation allowance, net ................................ (85.1) 1.1
Settlement of German income tax audits ................... (36.6) --
Change in German income tax law .......................... 24.1 --
No tax benefit for goodwill amortization ................. 2.0 2.7
U.S. state income taxes, net ............................. .2 1.1
Non-U.S. tax rates ....................................... (.8) (3.1)
Other, net ............................................... (2.4) .2
----- -----
$(69.2) $55.0
===== =====
Comprehensive provision (benefit)
for income taxes allocated to:
Income from continuing operations ...................... $(69.2) $55.0
Discontinued operations ................................ -- --
Other comprehensive income:
Marketable securities ................................ 1.4 1.0
Currency translation ................................. (8.8) (11.0)
Pension liabilities .................................. (2.3) .6
----- -----
$(78.9) $45.6
===== =====
</TABLE>
<PAGE>
Note 12 - Accounting principles not yet adopted:
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, including
derivatives embedded in non-derivative host contracts. As permitted by the
transition requirements of SFAS No. 133, as amended, the Company will exempt
from the scope of SFAS No. 133 all host contracts containing embedded
derivatives which were issued or acquired prior to January 1, 1999.
The Company will adopt the SEC's Staff Accounting Bulletin ("SAB") No.
101, Revenue Recognition, as amended, in the fourth quarter of 2000. SAB No. 101
provides guidance on the recognition, presentation and disclosure of revenue,
including specifying basic criteria that must be met before revenue can be
recognized. The impact on the Company of adopting SAB No. 101, if any, has not
yet been determined, in part because the SEC is continuing to provide additional
informal guidance and clarification concerning the exact requirements of SAB No.
101. If the impact of adopting SAB No. 101 is material, the Company will adopt
SAB No. 101 retroactively to the beginning of 2000, and previously-reported
results of operations for the first three quarters of 2000 would be restated.
<PAGE>
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS:
The Company reported income from continuing operations in the second
quarter of 2000 of $35.0 million, or $.30 per diluted share, compared to income
of $61.8 million, or $.53 per diluted share, in the second quarter of 1999
($17.7 million, or $.15 per diluted share, in the second quarter of 2000
compared to income of $9.6 million, or $.08 per diluted share, in the second
quarter of 1999 excluding the effects of non-recurring items discussed in the
next paragraph). For the first six months of 2000, Valhi reported income from
continuing operations of $45.5 million, or $.39 per diluted share, compared to
income of $64.2 million, or $.55 per diluted share, in the first six months of
1999 ($28.2 million, or $.24 per diluted share, in the first six months of 2000
compared to income of $11.9 million, or $.10 per diluted share, in the first six
months of 1999 excluding the effects of non-recurring items discussed in the
next paragraph).
The Company's results in 2000 include a $43 million second quarter
pre-tax net gain ($17.3 million, or $.15 per diluted share, net of income taxes
and minority interest) related to NL's June 2000 settlement with one of its two
principal former insurance carriers. The settlement ends a court proceeding
against the carrier in which NL sought reimbursement for legal defense
expenditures and indemnity coverage for certain of NL's environmental
remediation expenditures. Proceeds from the settlement will be used by NL to pay
for certain of its future remediation and other environmental expenditures. The
Company's results in 1999 include the previously-reported $90 million second
quarter income tax benefit ($52 million, or $.45 per diluted share, net of
minority interest) recognized by NL.
Total operating income in the second quarter of 2000 increased 36%
compared to the second quarter of 1999, and increased 37% in the first six
months of 2000 compared to the same period in 1999, due principally to higher
chemicals earnings at NL.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that 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 beliefs 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. While it is
not possible to identify all factors, the Company continues to face many risks
and uncertainties. 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 and such customers'
performance thereunder 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), customer inventory levels, the possibility of labor disruptions,
general global economic conditions, competitive products and substitute
products, customer and competitor strategies, the impact of pricing and
production decisions, competitive technology positions, potential difficulties
in integrating completed acquisitions (such as CompX's acquisitions of two slide
producers in 1999 and its acquisition of a lock producer in January 2000),
environmental matters (such as those requiring emission and discharge standards
for existing and new facilities), government regulations and possible changes
therein, the ultimate resolution of pending litigation (such as NL's lead
pigment litigation and litigation surrounding environmental matters of NL,
Tremont and TIMET) and possible future litigation. 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.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ % ----------------- %
1999 2000 Change 1999 2000 Change
---- ---- ---- ----
(In millions) (In millions)
<S> <C> <C> <C> <C> <C> <C>
Net sales .............. $232.5 $251.1 +8% $434.1 $482.1 +11%
Operating income ....... 39.2 56.5 +44% 65.2 96.3 +48%
</TABLE>
Kronos' sales and operating income in the second quarter and first six
months of 2000 increased compared to the same periods in 1999 due primarily to
higher average TiO2 selling prices and higher TiO2 sales and production volumes.
In addition, chemicals operating income in 1999 includes a $5.3 million second
quarter foreign currency transaction gain related to certain of NL's short-term
intercompany cross-border financings that were settled in July 1999. Excluding
the effect of fluctuations in the value of the U.S. dollar relative to other
currencies, Kronos' average TiO2 selling prices (in billing currencies) during
the second quarter of 2000 were 5% higher than the second quarter of 1999, with
increased prices in all major regions. Compared to the first quarter of 2000,
Kronos' average TiO2 selling prices in the second quarter of 2000 increased 3%,
with higher prices in European and export markets and flat selling prices in
North America. Kronos' average TiO2 selling prices in the first six months of
2000 were 3% higher than the same period in 1999, with increases in all major
regions. Kronos' TiO2 sales volumes in the second quarter of 2000, the highest
quarter in NL's history, were 9% higher than both the second quarter of 1999 and
the first quarter of 2000, reflecting sustained demand in all major regions.
TiO2 sales volumes in the first six months of 2000 were 16% higher than the
first six months of 1999. Kronos' TiO2 production volumes in the second quarter
of 2000 were slightly higher than the second quarter of 1999, with operating
rates in both periods near full capacity. Production volumes in the first six
months of 2000 were 8% higher than the same period in 1999.
During May 2000, a confederation of labor organizations in Norway
implemented a work stoppage directed at various Norwegian employers, including
NL's 30,000 metric ton TiO2 facility and ilmenite mining operations. The work
stoppage only lasted a few days and did not have a material adverse effect on
NL's consolidated financial position, results of operations or cash flows.
During the second quarter of 2000, one of NL's facilities in Germany
suffered a small fire in one of its production lines, resulting in approximately
5,000 metric tons of lost production. The production line has been fully
repaired and on stream since early June. NL believes the lost production and
damaged property are fully insured, and in the second quarter of 2000 NL accrued
$4.1 million of expected insurance reimbursements as a reduction in cost of
sales to offset unallocated period costs that were recorded as a result of the
lost production.
NL expects its TiO2 sales volumes for all of 2000 will be higher than
its sales volumes in 1999, with NL's volumes in the second half of 2000 lower
than its record volumes of the second half of 1999. NL has announced TiO2 price
increases of 7% in Europe and 4% in North America, both of which NL expects to
implement during the second half of 2000. The successful implementation of any
such price increase will depend on market conditions. NL expects to produce more
Ti02 in 2000 than its record 434,000 metric tons produced in 1998. As a result
of anticipated higher TiO2 average selling prices, higher Ti02 sales and
production volumes and its continued focus on controlling costs, NL expects its
chemicals operating income in 2000 will be higher than 1999. The extent of the
improvement will be determined primarily by the magnitude of realized price
increases.
NL has substantial operations and assets located outside the United
States (principally Germany, Belgium, Norway and Canada). 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 the euro, other major European
currencies and the Canadian dollar. In addition, a portion of NL's sales
generated from its non-U.S. operations are denominated in the U.S. dollar.
Certain raw materials, primarily titanium-containing feedstocks, are purchased
in U.S. dollars, while labor and other production costs are denominated
primarily in local currencies. 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 may
affect the comparability of period-to-period operating results. Including the
effect of fluctuations in the value of the U.S. dollar relative to other
currencies, Kronos' average TiO2 selling prices (in billing currencies) in the
second quarter of 2000 decreased 1% compared to the second quarter of 1999 and
the first quarter of 2000. Such average TiO2 selling prices in the first six
months of 2000 decreased 3% compared to the same period in 1999. Overall,
fluctuations in the value of the U.S. dollar relative to other currencies,
primarily the euro, decreased TiO2 sales in the second quarter and first six
months of 2000 by a net $17 million and $30 million, respectively, compared to
the same periods in 1999. 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 second quarter
1999 foreign currency transaction gain discussed above, was not significant
during 2000 compared to 1999.
Chemicals operating income, as presented above, is stated net of
amortization of Valhi's purchase accounting adjustments made in conjunction with
its acquisitions of its interest in NL. Such adjustments result in additional
depreciation, depletion and amortization expense beyond amounts separately
reported by NL. Such additional non-cash expenses reduced chemicals operating
income, as reported by Valhi, by approximately $9.8 million and $9.6 million in
the first six months of 1999 and 2000, respectively, as compared to amounts
separately reported by NL. As discussed below, the Company commenced
consolidating Tremont's results of operations effective January 1, 2000. Tremont
owns 20% of NL and accounts for its interest in NL by the equity method. Tremont
also has purchase accounting adjustments made in conjunction with the
acquisitions of its interest in NL. Prior to the Company's consolidation of
Tremont's results of operations effective January 1, 2000, amortization of such
purchase accounting adjustments were included in the Company's equity in
earnings of Tremont. In the first six months of 2000, amortization of such
Tremont purchase accounting adjustments further reduced chemicals operating
income, as reported by Valhi, compared to amounts separately reported by NL by
approximately $3.1 million. Had the Company consolidated Tremont's results of
operations effective January 1, 1999, amortization of Tremont's purchase
accounting adjustments related to NL would have further reduced chemicals
operating income, as presented above, for the first six months of 1999 by $3.5
million.
Component Products
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ % --------------- %
1999 2000 Change 1999 2000 Change
---- ---- ---- ----
(In millions) (In millions)
<S> <C> <C> <C> <C> <C> <C>
Net sales ................ $ 55.0 $ 65.1 +18% $110.2 $131.2 +19%
Operating income ......... 9.7 11.5 +20% 19.2 22.4 +17%
</TABLE>
Component products sales and operating income increased in 2000
compared to the same periods in 1999 due primarily to increased demand for
CompX's office furniture products, market share gains for its slide products and
the effect of acquisitions. Excluding the effect of acquisitions, component
products sales increased 6% in the second quarter of 2000 compared to the second
quarter of 1999, and increased 7% in the first six months of 2000 compared to
the same period in 1999, due primarily to higher sales of slides, as sales of
both ergonomic products and security products were essentially flat. Operating
income margins remained fairly constant in the 2000 periods compared to 1999 as
the favorable effect of improved manufacturing efficiencies associated with the
higher sales of slide products was offset by lower margins associated with the
lock operations acquired in January 2000.
CompX has substantial operations and assets located outside the United
States (principally Canada, The Netherlands and Taiwan). A portion of CompX's
sales generated from its non-U.S. operations are denominated in currencies other
than the U.S. dollar, principally the Canadian dollar, the Dutch guilder and the
euro. In addition, a portion of CompX's sales generated from its non-U.S.
operations (principally in Canada) are denominated in the U.S. dollar. Most raw
materials, labor and other production costs for such non-U.S. operations are
denominated primarily in local currencies. Consequently, the translated U.S.
dollar value of CompX's foreign sales and operating results are subject to
currency exchange rate fluctuations which may favorably or unfavorably impact
reported earnings and may affect comparability of period-to-period operating
results. During the first six months of 2000, weakness in the euro negatively
impacted component products sales and operating income comparisons (principally
with respect to slide products). Excluding the effect of currency and
acquisitions, component products sales increased 8% in the second quarter of
2000 compared to the second quarter of 1999, and operating income increased 15%.
Excluding the effect of currency and acquisitions, component products sales
increased 9% in the first six months of 2000 compared to the same period in
1999, and operating income increased 12%.
<PAGE>
Waste Management
As previously reported, the Company commenced consolidating Waste
Control Specialists' results of operations in the third quarter of 1999. Prior
to consolidation, the Company reported its interest in Waste Control Specialists
by the equity method. During the second quarter and first six months of 1999,
Waste Control Specialists reported sales of $4.7 million and $8.3 million,
respectively, operating losses (net loss before interest expense) of $2.9
million and $8.0 million, respectively, and net losses of $3.3 million and $8.5
million, respectively. During the second quarter and first six months of 2000,
Waste Control Specialists reported sales of $3.8 million and $8.4 million,
respectively, and operating losses of $1.4 million and $3.0 million,
respectively. The improvement in Waste Control Specialists' results of
operations in 2000 compared to the same periods in 1999 is due primarily to the
favorable effect of certain cost control measures implemented during the second
half of 1999.
The completion of the Texas legislative session in May 1999 resulted in
a significant reduction in the Company's expenditures for permitting during the
last half of 1999 and first six months of 2000 compared to the first half of
1999. Expenditures associated with any additional permit modifications
concerning the disposal of low-level and mixed radioactive wastes during the
remainder of 2000 are expected to be significantly lower than those incurred in
connection with the Texas legislative session which ended in May 1999. Waste
Control Specialists' program to improve operating efficiencies at its West Texas
facility and to curtail certain of its corporate and administrative costs has
also reduced operating costs in the last half of 1999 and the first six months
of 2000 compared to the first half of 1999. Waste Control Specialists continues
to emphasize its sales and marketing efforts to improve its sales volumes from
waste streams that conform to Waste Control Specialists' permits currently in
place. Waste Control Specialists has entered into agreements to lease certain
equipment that will provide the ability to process certain waste streams that
require thermal treatment and processing. The ability of Waste Control
Specialists to achieve increased volumes of these waste streams, together with
improved operating efficiencies through further 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.
Tremont Corporation and TIMET
As previously reported, the Company commenced consolidating Tremont's
balance sheet at December 31, 1999, and commenced consolidating Tremont's
results of operations and cash flows effective January 1, 2000. Prior to
December 31, 1999, the Company accounted for its interest in Tremont by the
equity method.
Tremont accounts for its interests in both NL and TIMET by the equity
method. NL's results of operations are discussed above. Tremont's equity in
earnings of TIMET differs from the amounts that would be expected by applying
Tremont's ownership percentage to TIMET'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.
Amortization of such basis differences generally increases earnings (or reduces
losses) attributable to TIMET as reported by Tremont compared to amounts
separately-reported by TIMET.
During the second quarter of 2000, TIMET reported net sales of $108.8
million, an operating loss of $9.5 million and a net loss of $9.5 million
compared to sales of $127.6 million, operating income of $1 million and a net
loss of $2.5 million in the second quarter of 1999. During the first six months
of 2000, TIMET reported sales of $213.5 million, an operating loss of $27.9
million and a net loss of $24.6 million compared to sales of $261.7 million, an
operating loss of $.4 million and a net loss of $6.4 million in the first six
months of 1999. TIMET's results in the second quarter and first six months of
2000 were below those of the same periods in 1999 due principally to lower mill
products average selling prices caused by lower demand in the aerospace market
and competitive pricing pressures in certain product lines. While TIMET's mill
products sales volumes in the second quarter of 2000 were 3% higher than the
second quarter of 1999, TIMET's mill products average selling prices declined
10%. During the first six months of 2000, TIMET's mill products sales volumes
declined 4% compared to the first six months of 1999, and mill products average
selling prices were 8% lower. Sales of ingot and slab represent about 10% of
TIMET's sales. TIMET's sales volumes of ingot and slab increased 34% in the
second quarter of 2000 compared to the second quarter of 1999, while average
selling prices for ingot and slab declined 4%. During the first six months of
2000, ingot and slab sales volumes decreased 2% compared with the first six
months of 1999, and average selling prices declined 4%. Compared to the first
quarter of 2000, TIMET's mill products sales volumes in the second quarter of
2000 increased 7%, while mill products average selling prices decreased 6%.
Ingot and slab sales volumes in the second quarter of 2000 increased 53%
compared to the first quarter of 2000, while ingot and slab average selling
prices decreased 4%. TIMET's year-to-date results in 2000 also include a net
$8.3 million of special items, consisting of restructuring charges,
equipment-related impairment charges and environmental remediation charges
aggregating $9.5 million, offset by a $1.2 million gain from the sale of its
castings joint venture. The restructuring charge relates to personnel reductions
of about 200 employees.
TIMET believes its business continues to be adversely impacted by an
excess supply of titanium inventory throughout the aerospace industry supply
chain, although TIMET believes there are signs of abatement in selected
products. Such excess supply, along with the competitive environment, continues
to result in a softening of TIMET's selling prices. Current indications are that
TIMET's sales and operating margins, exclusive of special charges, will be
slightly lower in the second half of 2000 compared to the first half of 2000.
TIMET is continuing to increase its sales effort and reduce costs whenever
possible. It is too early for TIMET to determine how successful these efforts
will be. TIMET's backlog was approximately $160 million at June 30, 2000,
compared to $185 million at March 31, 2000 and $240 million at June 30, 1999.
In March 2000, TIMET filed a lawsuit against The Boeing Company in
Colorado state court seeking damages for Boeing's repudiation and breach of
TIMET's long-term sales agreement with Boeing. TIMET's complaint seeks damages
from Boeing that TIMET believes are in excess of $600 million and a declaration
from the court of TIMET's rights under the contract. Boeing has responded
denying substantially all of TIMET's allegations, and Boeing has alleged certain
counterclaims against TIMET. TIMET believes such counterclaims are without merit
and intends to vigorously defend against such claims. Since April 2000, TIMET
and Boeing have held discussions to determine if a settlement of this litigation
can be reached. Such discussions are ongoing, and no assurance can be given that
any settlement will be reached.
Tremont periodically evaluates the net carrying value of its long-term
assets, including its investments 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. At December 31, 1999, after considering what it believed to be
all relevant factors, including, among other things, TIMET's consolidated
operating results, financial position, estimated asset values and prospects, the
Company recorded a non-cash charge to earnings to reduce the net carrying value
of its investment in TIMET for an other than temporary impairment. In
determining the amount of the impairment charge, Tremont considered, among other
things, then-recent ranges of TIMET's NYSE market price and estimates of TIMET's
future operating losses which would further reduce Tremont's carrying value of
its investment in TIMET as it records additional equity in losses of TIMET. At
June 30, 2000, Tremont's net carrying value of its investment in TIMET was $6.22
per share compared to a NYSE market price at that date of $4.69.
General corporate and other items
General corporate. General corporate interest and dividend income
decreased in the second quarter of 2000 compared to the second quarter of 1999
due primarily to a lower level of distributions received from The Amalgamated
Sugar Company ($4.9 million in 2000 compared to $6.1 million in 1999), as well
as a lower interest rate on the Company's $80 million loan to Snake River Sugar
Company effective April 1, 2000, both as discussed below. General corporate
interest and dividend income decreased in the first six months of 2000 compared
to the same period in 1999 due primarily to such lower interest rate on the $80
million loan. Aggregate general corporate interest and dividend income is
currently expected to be lower during the remainder of 2000 compared to the same
periods in 1999 due primarily to such lower interest rate on the $80 million
loan to Snake River.
Securities transactions in 2000 consist primarily of a $5.6 million
second quarter gain related to common stock received by NL from the
demutualization of an insurance company from which NL had purchased certain
insurance policies. Other securities transactions in both 2000 and 1999 relate
to the disposition of a portion of the shares of Halliburton Company common
stock held by the Company when certain holders of the Company's LYONs debt
obligations exercised their right to exchange their LYONs for such Halliburton
shares. See Notes 3, 7 and 10 to the Consolidated Financial Statements. Any
additional exchanges in 2000 or thereafter would similarly result in additional
securities transaction gains. Absent significant additional LYONs exchanges in
2000, the Company currently expects securities transactions in the second half
of 2000 will be nominal.
The $43 million legal settlement gain relates to NL's settlement with a
former insurance carrier discussed above. See also Note 10 to the Consolidated
Financial Statements. General corporate expenses increased in 2000 compared to
the same periods in 1999 due primarily to higher environmental and legal
expenses of NL and the effect of consolidating Tremont's results of operations
effective January 1, 2000.
Interest expense. Interest expense declined in 2000 compared to the
same periods in 1999 due primarily to lower average levels of outstanding
indebtedness and lower average European borrowing rates at NL. Assuming interest
rates do not increase significantly from current levels and that there is not a
significant reduction in the amount of outstanding LYONs indebtedness from
exchanges, interest expense in 2000 is not expected to be significantly
different from interest expense in 1999 due principally to the net effects of
(i) lower expected levels of outstanding indebtedness and interest rates with
respect to NL, (ii) higher levels of outstanding indebtedness with respect to
CompX and (iii) the consolidation of Tremont's results of operations effective
January 1, 2000.
Provision for income taxes. The principal reasons for the difference
between the Company's effective income tax rates and the U.S. federal statutory
income tax rates are explained in Note 11 to the Consolidated Financial
Statements. Income tax rates vary by jurisdiction (country and/or state), and
relative changes in the geographic mix of the Company's pre-tax earnings can
result in fluctuations in the effective income tax rate. Certain subsidiaries,
including NL, Tremont and 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 addition, Tremont, NL and TIMET are each in separate
U.S. tax groups, and Tremont provides incremental income taxes on its earnings
with respect to both NL and TIMET.
During the first six months of 2000, NL reduced its deferred income tax
valuation allowance by $1.3 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. During the first six
months of 2000, Tremont increased its deferred income tax valuation allowance by
$2.5 million primarily due to its equity in losses of TIMET for which
recognition of a deferred tax benefit is not currently considered appropriate
under the "more-likely-than-not" recognition criteria.
Minority interest. See Note 9 to the Consolidated Financial Statements.
As discussed above, the Company commenced consolidating Tremont's results of
operations beginning in 2000. Consequently, the Company commenced reporting
minority interest in Tremont's net earnings or losses beginning in 2000.
Minority interest in earnings of Tremont's subsidiaries in 2000 relates to TRECO
L.L.C., a 75%-owned subsidiary of Tremont that holds Tremont's interests in
certain joint ventures. Minority interest in earnings of NL's subsidiaries
relates principally to NL's majority-owned environmental management subsidiary,
NL Environmental Management Services, Inc. ("EMS").
Discontinued operations. Discontinued operations in 1999 represents
additional consideration received by the Company related to its 1997 disposal of
its fast food operations.
Accounting principles not yet adopted. See Note 12 to the Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES:
Consolidated cash flows
Operating activities. Trends in cash flows from operating 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.
Investing and financing activities. Approximately 53% of the Company's
aggregate capital expenditures during the six months of 2000 relate to NL, and
substantially all of the remainder relates to CompX.
During the first six months of 2000, (i) CompX acquired a lock producer
for $9.5 million using borrowings under its unsecured revolving bank credit
facility, (ii) NL purchased $14.0 million of shares of its common stock and
(iii) NL and Valhi purchased an aggregate of $20.7 million of shares of Tremont
common stock.
During the first six months of 2000, (i) CompX borrowed a net $11
million under its unsecured revolving bank credit facility, (ii) NL repaid euro
17.9 million ($16.7 million when paid) of its euro-denominated short-term
indebtedness, (iii) Valhi repaid a net $1 million under its bank credit facility
and a net $2.3 million of short-term borrowings from Contran and (iv) Tremont
increased its short-term borrowings from Contran by a net amount of $1.5
million.
At June 30, 2000, unused credit available under existing credit
facilities approximated $126 million, which was comprised of $69 million
available to CompX under its revolving senior credit facility discussed below,
$28 million available to NL under non-U.S. credit facilities and $29 million
available to Valhi under its revolving bank credit facility.
Chemicals - NL Industries
In November 1999, NL's board of directors authorized NL to purchase up
to 1.5 million shares of its common stock in open market or privately-negotiated
transactions over an unspecified period of time. Through June 30, 2000, NL had
purchased 1,479,100 of its shares pursuant to such authorization for an
aggregate of $21.2 million, including $14.0 million purchased in the first six
months of 2000. In July 2000, NL purchased additional shares of its common
stock, completing the first 1.5 million repurchase program, and NL's board of
directors authorized a second 1.5 million share repurchase program.
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
related items and interest.
During 1997, NL received a tax assessment from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($6 million at June 30,
2000) relating to 1994. NL appealed the 1994 assessment, and in February 2000
the Norwegian local court ruled in favor of the Norwegian tax authorities on the
primary issue, but asserted such tax authorities' assessment was overstated by
NOK 34 million ($4 million). In March 2000, the tax authorities agreed with the
Norwegian local court and reduced the 1994 assessment to NOK 17 million ($2
million). The tax authorities have also issued a NOK 13 million ($1 million)
assessment for 1996, which was computed on a basis similar to the revised 1994
assessment. NL has appealed the local court's decision on the primary issue
related to the 1994 assessment to a higher court, and NL believes the outcome of
the 1996 assessment is dependent upon the eventual outcome of the 1994 case. NL
has granted a lien for both the 1994 and 1996 tax assessments on its Norwegian
Ti02 plant in favor of the Norwegian tax authorities.
No assurance can be given that these tax matters will be resolved in
NL's favor in view of the inherent uncertainties involved in court proceedings.
NL believes that it has 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. NL believes it has provided adequate
accruals ($113 million at June 30, 2000) 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 $170 million. NL's
estimates of such liabilities have not been discounted to present value, and
other than the $43 million net settlement discussed above with respect to one of
NL's two principal former insurance carriers, NL has not recognized any
potential insurance recoveries. NL will continue to pursue similar claims with
other insurance carriers and expects to recover additional amounts, although
there can be no assurance that any such additional claims would result in NL's
receipt of additional amounts. 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 allegedly 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, and
bills which would revive actions currently barred by statutes of limitations. 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,
repurchase shares of its common stock, 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.
<PAGE>
Component products - CompX International
In January 2000, CompX acquired a lock producer for $9 million cash
consideration using borrowings under its bank credit facility.
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 or similar exchange rate risk
associated with future sales, at June 30, 2000 CompX had entered into a series
of short-term forward exchange contracts maturing through December 2000 to
exchange an aggregate of $18.2 million for an equivalent amount of Canadian
dollars at exchange rates between approximately Cdn. $1.45 and Cdn. $1.47.
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, modify its dividend policy 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.
Tremont Corporation and Titanium Metals Corporation
Tremont. Tremont is primarily a holding company which, at June 30,
2000, owned approximately 39% of TIMET and 20% of NL. At June 30, 2000, the
market value of the 12.3 million shares of TIMET and the 10.2 million shares of
NL held by Tremont was approximately $58 million and $156 million, respectively.
In 1998, Tremont entered into a revolving advance agreement with
Contran. Through June 30, 2000, Tremont had net borrowings of $15.3 million from
Contran under such facility, primarily to fund Tremont's purchases of shares of
NL and TIMET common stock. Tremont expects to begin to repay such loans from
Contran in 2000 as the cash received from its dividends from NL, which increased
its quarterly dividend rate to $.15 per share beginning in 2000, is expected to
exceed its other cash requirements (including its dividends).
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 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 or third parties, raise additional capital, modify its
dividend policy, restructure ownership interests of subsidiaries and affiliates,
incur, refinance or restructure 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.
TIMET. At June 30, 2000, TIMET reported total assets and stockholders'
equity of $785.8 million and $376.0 million, respectively. TIMET's total assets
at such date include current assets of $265.4 million, property and equipment of
$314.2 million and goodwill and other intangible assets of $66.4 million.
TIMET's total liabilities at such date include current liabilities of $123.2
million, long-term debt of $32.6 million, accrued OPEB costs of $19.5 million
and convertible preferred securities of $201.3 million.
TIMET's plan to address current market conditions includes more
effective working capital management, particularly inventories and receivables,
both of which were reduced in the first six months of 2000. TIMET received tax
refunds of $6.7 million in the second quarter of 2000 and $.7 million in July
2000.
At June 30, 2000, TIMET had net debt of approximately $64 million ($70
million of notes payable and long-term debt and $6 million of cash and
equivalents). In February 2000, TIMET entered into a new $125 million U.S.
revolving credit agreement which replaced its previous U.S. credit facility.
Borrowings under the new facility are limited to a formula-determined borrowing
base derived from the value of accounts receivable, inventories and equipment.
The new facility limits additional indebtedness of TIMET, prohibits the payment
of common stock dividends and contains other covenants customary in lending
transactions of this type. In addition, in February 2000 TIMET also entered into
a new U.K. credit facility denominated in Pound Sterling which replaced its
prior U.K. credit facility. At June 30, 2000, TIMET had $112 million of
borrowing availability, principally under these new facilities. TIMET believes
these two new credit facilities will provide TIMET with the liquidity necessary
for its current market and operating conditions.
At June 30, 2000, TIMET had $201.3 million outstanding of its 6.625%
convertible preferred securities. Such convertible preferred securities do not
require principal amortization, and TIMET has the right to defer dividend
payments for one or more quarters of up to 20 consecutive quarters. TIMET is
prohibited from, among other things, paying dividends on its common stock while
dividends are being deferred on the convertible preferred securities. TIMET
suspended the payment of dividends on its common stock during the fourth quarter
of 1999 in view of, among other things, the continuing weakness in demand for
titanium metals products. TIMET's new U.S. credit facility prohibits the payment
of dividends on TIMET's common stock, and the facility also prohibits the
payment of dividends on the convertible preferred securities under certain
conditions. In April 2000, TIMET exercised its rights under the convertible
preferred securities and commenced deferring future dividend payments on these
securities. Although the dividend payments are deferred, interest will continue
to accrue at the coupon rate on the principal and unpaid dividends. TIMET has
stated that its goal is to resume dividends on the convertible preferred
securities when the outlook for its results of operations improves
substantially.
In October 1998, TIMET purchased for cash $80 million of Special Metals
Corporation 6.625% convertible preferred stock (the "SMC Preferred Stock"), in
conjunction with, and concurrent with, SMC's acquisition of a business unit from
Inco Limited. Dividends on the SMC Preferred Stock are being accrued but,
through June 30, 2000, have not been paid (with the exception of one quarterly
payment received in April 2000) due to limitations imposed by SMC's bank credit
agreement. As a result, TIMET has classified its accrued dividends on the SMC
preferred securities ($8 million at June 30, 2000) as a non-current asset. There
can be no assurance that TIMET will receive additional dividends during the
remainder of 2000, although SMC also paid a quarterly dividend on the SMC
Preferred stock in July 2000.
A preliminary study of environmental issues at TIMET's Nevada facility
was completed late in the first quarter of 2000. TIMET accrued $3.3 million
based on the estimated cost of groundwater remediation activities described in
the study. The undiscounted environmental remediation charges are expected to be
paid over a period of up to thirty years.
TIMET 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,
TIMET has in the past and may in the future seek to raise additional capital,
modify its common and preferred dividend policies, restructure ownership
interests, incur, refinance or restructure indebtedness, repurchase shares of
capital stock, sell assets, or take a combination of such steps or other steps
to increase or manage its liquidity and capital resources. In the normal course
of business, TIMET investigates, evaluates, discusses and engages in
acquisition, joint venture, strategic relationship and other business
combination opportunities in the titanium and related industries. In the event
of any future acquisition or joint venture opportunities, TIMET may consider
using then-available liquidity, issuing equity securities or incurring
additional indebtedness.
General corporate - Valhi
Valhi's operations are conducted primarily through its subsidiaries
(NL, 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 increased its quarterly dividend from $.035 per share
to $.15 per share in the first quarter of 2000. At the current $.15 per share
quarterly rate, and based on the 30.1 million NL shares held by Valhi at June
30, 2000, Valhi would receive aggregate annual dividends from NL of
approximately $18.1 million. Tremont's quarterly dividend is currently $.07 per
share. At that rate, and based upon the 3.8 million Tremont shares owned by
Valhi at June 30, 2000 (which includes Tremont shares purchased late in the
first quarter of 2000), Valhi would receive aggregate annual dividends from
Tremont of approximately $1.1 million. CompX commenced quarterly dividends of
$.125 per share in the fourth quarter of 1999. At this current rate and based on
the 10.4 million CompX shares held by Valhi and Valcor, Valhi/Valcor would
receive annual dividends from CompX of $5.2 million. 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, 2000,
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 $20 million
of outstanding borrowings under its revolving bank credit agreement. In
addition, Valhi had $29 million of borrowing availability under its bank credit
facility.
Valhi's LYONs do not require current cash debt service. At June 30,
2000, 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, 2000, assuming exchanges of all of the
outstanding LYONs for Halliburton stock at such date, was approximately $29
million. Valhi continues to receive regular quarterly Halliburton dividends
(currently $.125 per share) on the escrowed shares. At June 30, 2000, the LYONs
had an accreted value equivalent to approximately $35.80 per Halliburton share,
and the market price of the Halliburton common stock was $47.19 per share. Such
market price of Halliburton is equal to the equivalent accreted LYONs obligation
in July 2003.
Valhi received approximately $73 million cash in early 1997 at the
transfer of control of its refined sugar operations previously conducted by the
Company's wholly-owned subsidiary, The Amalgamated Sugar Company, to Snake River
Sugar Company, an agricultural cooperative formed by certain sugarbeet growers
in Amalgamated's area of operation. Pursuant to the transaction, Amalgamated
contributed substantially all of its net assets to The Amalgamated Sugar Company
LLC, a limited liability company controlled by Snake River, on a tax-deferred
basis in exchange for a non-voting ownership interest in the LLC. As part of the
transaction, Snake River made certain loans to Valhi aggregating $250 million in
January 1997. Such loans bear interest (which is paid monthly) at a weighted
average fixed interest rate of 9.4%, are presently nonrecourse to Valhi and are
collateralized by the Company's investment in the LLC ($170 million carrying
value at June 30, 2000). Snake River's sources of funds for its loans to Valhi,
as well as for the $14 million it contributed to The Amalgamated Sugar Company
LLC for its voting interest in the LLC, included cash capital contributions by
the grower members of Snake River and $192 million in debt financing provided by
Valhi in January 1997, of which $100 million was subsequently prepaid in 1997
when Snake River obtained $100 million of third-party term loan financing. In
addition, another $12 million of loans from Valhi were prepaid during 1997.
After these prepayments, $80 million of Valhi's loans to Snake River Sugar
Company remain outstanding. See Notes 3, 5 and 7 to the Consolidated Financial
Statements.
The terms of the LLC provide for annual "base level" of cash dividend
distributions (sometimes referred to distributable cash) by the LLC of $26.7
million, from which the Company is entitled to a 95% preferential share.
Distributions from the LLC are dependent, in part, upon the operations of the
LLC. Each month, the LLC estimates its distributable cash for the year and makes
a distribution based on such estimated distributable cash. Revisions during the
year of such estimated distributable cash result in adjustments to the amount of
dividend distributions paid by the LLC in the month such revisions are made. The
Company records dividend distributions from the LLC as income upon receipt,
which is the same month in which they are declared by the LLC. To the extent the
LLC's distributable cash is below this base level in any given year, the Company
is entitled to an additional 95% preferential share of any future annual LLC
distributable cash in excess of the base level until such shortfall is
recovered.
The Company has the ability to temporarily take control of the LLC in
the event the Company's cumulative distributions from the LLC fall below
specified levels. Over the past year, the refined sugar industry has been
experiencing, among other things, downward pressure on selling prices due
principally to relative supply/demand relationships. Snake River's board of
directors are authorized to require the sugarbeet growers to make capital
contributions to Snake River in the form of "unit retains." Such unit retain
capital contributions are deducted from the payments made to the growers for
supplying the LLC with sugarbeets, thereby decreasing the LLC's raw material
costs. During each of 1998 and 1999, Snake River's board of directors authorized
such unit retains in order to (i) increase the profitability and cash flows of
the LLC and (ii) maintain the Company's cumulative distributions from the LLC
above such specified levels. Through March 31, 2000, the Company's cumulative
distributions from the LLC had not fallen below such specified levels, in part
because of the LLC's estimate of the amount it would ultimately pay the growers
for supplying sugarbeets to the LLC during 2000, including the effect of unit
retains.
In part because of the current depressed market conditions for refined
sugar, the Company and Snake River have held discussions over the past few
months in an attempt to reach an agreement whereby, among other things, the
Company would provide (i) relief from the level of dividend distributions
required to be paid by the LLC to the Company and (ii) modification to certain
terms of the Company's $80 million loan to Snake River. During April and May
2000, the LLC increased its estimate of the amount it would pay the growers for
supplying sugarbeets to the LLC during 2000, which reduced previous estimates of
the LLC's distributable cash for 2000. Consequently, the LLC did not pay a
dividend distribution to the Company during either April or May 2000. Although
this resulted in the Company's cumulative distributions from the LLC becoming
lower than the specified levels referred to above, to date the Company has not
yet exercised its right to temporarily take control of the LLC. If the Company
exercises such right, it would be required to escrow certain funds pursuant to
an agreement with Snake River's third-party senior lender, unless the Company
and Snake River's third-party lender otherwise mutually agree. While the Company
did not receive a distribution from the LLC in either April or May 2000, the
Company did pay the April and May 2000 interest payments owed to Snake River
under its $250 million in loans from Snake River.
In June 2000, the Company and Snake River reached an agreement in
principle whereby, among other things, (i) the specified levels of cumulative
unpaid LLC distributions which allow the Company to temporarily take control of
the LLC would be increased effective April 2000, (ii) the interest rate on the
Company's $80 million loan to Snake River would be reduced from 12.99% to 6.49%
effective April 1, 2000, (iii) the amount of interest forgone as a result of
such proposed reduction in the interest rate on the $80 million loan would be
recouped via additional future LLC distributions upon achievement of specified
levels of future LLC profitability, (iv) the Company would receive a lien on
substantially all of Snake River's assets to collateralize such $80 million
loan, such lien being subordinated only to the lien on such assets held by Snake
River's third-party senior lender and (v) Snake River would agree that the
annual amount of LLC distributions paid by the LLC to the Company plus the
annual amount of debt service payments paid by Snake River to the Company on the
$80 million loan would at least equal the annual amount of interest payments
owed by the Company to Snake River on its $250 million in loans from Snake
River. The Company and Snake River are presently negotiating definitive
agreements to effect such agreement in principle, and while there can be no
assurance that such definitive agreements will be executed, the Company
presently believes such definitive agreements will be completed and executed by
the end of the third quarter of 2000.
Because of such agreement in principle, the LLC in June 2000 decreased
its estimate of the amount it would pay the growers for supplying sugarbeets to
the LLC during 2000, and the LLC paid a $4.9 million distribution to the Company
in June 2000. The LLC continued to pay dividend distributions in July 2000. The
Company received aggregate LLC distributions of $4.9 million and $11.5 million
during the second quarter and first six months of 2000, respectively, compared
to $6.1 million and $11.7 million, respectively, received in the second quarter
and first six months of 1999.
Certain covenants contained in Snake River'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 was limited in the amount of debt service it
could pay on the $80 million loan to $3 million in 1998, $7.2 million in 1999
and $950,000 in the first six months of 2000. At June 30, 2000, the accrued and
unpaid interest on the $80 million loan to Snake River aggregated $14.9 million.
Such amount of accrued and unpaid interest reflects the agreement in principle
to reduce the interest rate on such loan from 12.99% to 6.49% effective April 1,
2000. The Company currently believes it will ultimately realize both the $80
million principal amount and the accrued and unpaid interest, whether through
cash generated from the future operations of Snake River and the LLC or
otherwise (including any liquidation of Snake River/LLC).
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. The 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, the 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.
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the 1999 Annual Report and prior 2000 periodic
reports for descriptions of certain legal proceedings.
Defendants' motion to dismiss pursuant to Rule 12(b)(6) in the
previously-reported Envirocare of Utah, Inc., et al. v. Waste Control
Specialists LLC, et al was denied by the court, and defendants were ordered to
file an answer to plaintiffs' complaint before August 10, 2000.
City of St. Louis v. Lead Industries Association, et al. (No. 002-245,
Division 1). In May 2000, defendants moved to dismiss all claims. Briefing is
not yet complete.
Brenner, et al. v. American Cyanamid, et al. (No. 12596-93). In June
2000, following remand of the appellate court's dismissal of market share
claims, the trial court dismissed all remaining claims. The time for plaintiffs
to appeal has not yet run.
Parker v. NL Industries, et al. (No. 97085060 CC915). In June 2000,
following a two-week trial, the jury returned a verdict for NL. Plaintiffs have
appealed.
Thomas v. Lead Industries Association, et al. (No. 99-CV-6411). In June
2000, the trial court granted defendants' motion to dismiss the product defect
and Wisconsin consumer protection statute claims.
Smith, et al. v. Lead Industries Association, et al. (No.
24-C-99-004490). In June 2000, defendants moved to dismiss all claims for lack
of product identification. Briefing is not yet complete.
County of Santa Clara v. Atlantic Richfield Company, et al. (No.
CV788657). In June 2000, defendants filed demurrers to dismiss all claims.
Briefing is not yet complete.
In June 2000, two complaints were filed in Texas state court, Spring
Branch Independent School District v. Lead Industries Association, et al.
(District Court of Harris County, Texas, No. 2000-31175), and Houston
Independent School District v. Lead Industries Association, et al. (District
Court of Harris County, Texas, No. 2000-33725). NL has not been served in either
case. The School Districts seek past and future damages and exemplary damages
for costs they have allegedly incurred due to the presence of lead-based paint
in their buildings from NL, the Lead Industries Association ("LIA") and seven
other companies sued as former manufacturers of lead-based paint. Plaintiffs
allege claims for design defect and marketing defect, negligent product design
and failure to warn, fraudulent misrepresentation, negligent misrepresentation,
concert of action, conspiracy, and indemnity. NL intends to deny all allegations
of wrongdoing and liability and to defend the cases vigorously.
In June 2000, a complaint was filed in Illinois state court, Mary
Lewis, et al. v. Lead Industries Association, et al. (Circuit Court of Cook
County, Illinois, County Department, Chancery Division, Case No. 00CH09800). NL
has not been served. Plaintiffs seek to represent two classes, one of all minors
between the ages of six months and six years who resided in housing in Illinois
built before 1978, and one of all individuals between the ages of six and twenty
years who lived between the ages of six months and six years in Illinois housing
built before 1978 and had blood lead levels of 10 micrograms/deciliter or more.
The complaint seeks a medical screening fund for the first class to determine
blood lead levels, a medical monitoring fund for the second class to detect the
onset of latent diseases, and a fund for a public education campaign. The
complaint seeks to hold NL, the LIA, and seven other companies sued as former
manufacturers of lead pigment and/or lead paint jointly and severally liable.
Plaintiffs allege claims for negligent product design, negligent failure to
warn, strict products liability, violation of the Illinois Consumer Fraud Act,
fraud by omission, market share liability, civil conspiracy, concert of action,
enterprise liability and alternative liability. NL intends to deny all
allegations of wrongdoing and liability and to defend the case vigorously.
Cherokee County, Kansas Site. In June 2000, NL finalized the
previously-reported agreement in principle allocating remediation costs among
the PRPs at the Baxter Springs subsite in Cherokee County.
Effective in July 2000, Tremont entered into a voluntary settlement
agreement with the Arkansas Department of Environmental Quality pursuant to
which Tremont and other PRPs will undertake certain investigatory and
remediation activities at an abandoned barite mining site located in Hot Spring
County, Arkansas. Tremont currently believes it has accrued adequate amounts to
cover its share of the costs for such remediation activities. Tremont believes
that to the extent it has any additional liability for remediation at this site,
it is only one of a number of PRPs that would ultimately share in any such
costs. At June 30, 2000, Tremont had accrued approximately $6 million related to
these matters.
Item 4. Submission of Matters to a Vote of Security Holders.
Valhi's 2000 Annual Meeting of Stockholders was held on May 11, 2000.
Norman S. Edelcup, Kenneth R. Ferris, Edward J. Hardin, 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 114.6
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, 2000.
(b) Reports on Form 8-K
Reports on Form 8-K for the six-month period ended June 30, 2000.
April 28, 2000 - Reported Items 5 and 7. May 11, 2000 - Reported
Items 5 and 7.
<PAGE>
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 11, 2000 By /s/ Bobby D. O'Brien
------------------- ------------------------------
Bobby D. O'Brien
(Vice President and Treasurer,
Principal Financial Officer)
Date August 11, 2000 By /s/ Gregory M. Swalwell
------------------- ------------------------------
Gregory M. Swalwell
(Vice President and Controller,
Principal Accounting Officer)
<PAGE>
