SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1995 COMMISSION FILE NUMBER 33-63044
VALCOR, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 74-2678674
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ FREEWAY, SUITE 1700, DALLAS, TEXAS 75240-2697
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 233-1700
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS. YES X NO
THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF VALHI, INC. (FILE NO. 1-5467) AND
MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(A) AND (B) OF FORM
10-Q FOR REDUCED DISCLOSURE FORMAT.
VALCOR, INC.
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1994
and March 31, 1995 3-4
Consolidated Statements of Income - Three
months ended March 31, 1994 and 1995 5
Consolidated Statements of Cash Flows - Three
months ended March 31, 1994 and 1995 6
Consolidated Statement of Stockholder's Equity -
Three months ended March 31, 1995 7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 12-15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 15
VALCOR, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS December 31, March 31,
1994 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 23,256 $ 18,594
Accounts and notes receivable 26,888 34,520
Receivable from affiliates 4,285 1,037
Inventories 31,016 28,418
Prepaid expenses 3,553 3,384
Deferred income taxes 1,595 2,368
Total current assets 90,593 88,321
Other assets:
Timber and timberlands 53,114 53,704
Intangible assets 19,202 18,741
Other 11,947 12,053
Total other assets 84,263 84,498
Property and equipment:
Land 19,186 20,750
Buildings 44,345 45,304
Equipment 177,790 178,358
Construction in progress 2,001 4,043
243,322 248,455
Less accumulated depreciation 97,483 100,884
Net property and equipment 145,839 147,571
$320,695 $320,390
</TABLE>
VALCOR, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY December 31, March 31,
1994 1995
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 12,738 $ 13,882
Accounts payable 16,207 17,597
Accrued liabilities 24,430 24,066
Payable to affiliates 69 39
Income taxes 1,318 903
Total current liabilities 54,762 56,487
Noncurrent liabilities:
Long-term debt 201,796 194,743
Deferred income taxes 25,938 26,009
Other 3,349 3,737
Total noncurrent liabilities 231,083 224,489
Stockholder's equity:
Common stock 1 1
Additional paid-in capital 520 520
Retained earnings 34,623 39,204
Currency translation adjustment (294) (311)
Total stockholder's equity 34,850 39,414
$320,695 $320,390
</TABLE>
[FN]
Commitments and contingencies (Note 8)
VALCOR, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Revenues and other income:
Net sales $84,746 $105,546
Other, net 643 920
85,389 106,466
Costs and expenses:
Cost of sales 67,601 82,822
Selling, general and administrative 5,960 7,643
Interest 4,288 4,973
77,849 95,438
Income before income taxes 7,540 11,028
Provision for income taxes 3,289 4,275
Net income $ 4,251 $ 6,753
</TABLE>
VALCOR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,251 $ 6,753
Depreciation, depletion and amortization 3,993 4,921
Deferred income taxes 484 (771)
Other, net 187 372
8,915 11,275
Change in assets and liabilities:
Accounts and notes receivable (2,135) (7,657)
Inventories 662 2,598
Accounts payable and accrued liabilities 3,130 3,084
Accounts with affiliates 574 3,218
Other, net (1,397) (512)
Net cash provided by operating activities 9,749 12,006
Cash flows from investing activities:
Capital expenditures (9,147) (8,562)
Other, net (47) (8)
Net cash used by investing activities (9,194) (8,570)
Cash flows from financing activities:
Indebtedness:
Borrowings 30,316 8,680
Principal payments (23,518) (14,589)
Dividends - (2,172)
Net cash provided (used) by financing activities 6,798 (8,081)
Net increase (decrease) 7,353 (4,645)
Currency translation (219) (17)
Cash and cash equivalents at beginning of period 10,363 23,256
Cash and cash equivalents at end of period $ 17,497 $ 18,594
Supplemental disclosures - cash paid for:
Interest, net of amount capitalized $ 1,721 $ 2,615
Income taxes 2,899 2,234
</TABLE>
VALCOR, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
THREE MONTHS ENDED MARCH 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL CURRENCY TOTAL
COMMON PAID-IN RETAINED TRANSLATION STOCKHOLDER'S
STOCK CAPITAL EARNINGS ADJUSTMENT EQUITY
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $1 $520 $34,623 $(294) $34,850
Net income - - 6,753 - 6,753
Dividends - - (2,172) - (2,172)
Currency translation adjustment, net - - - (17) (17)
Balance at March 31, 1995 $1 $520 $39,204 $(311) $39,414
</TABLE>
VALCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION:
The consolidated balance sheet at December 31, 1994 has been condensed from
the Company's audited consolidated financial statements at that date. The
consolidated balance sheet at March 31, 1995 and the consolidated statements of
income, cash flows and stockholder's equity for the interim periods ended
March 31, 1994 and 1995 have been prepared by the Company, without audit. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial position,
results of operations and cash flows have been made. The results of operations
for the interim periods are not necessarily indicative of the operating results
for a full year or of future operations.
Certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted. The accompanying consolidated financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 1994 (the "1994 Annual Report"). Commitments and contingencies are
discussed in Note 8, Item 2 -- "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the 1994 Annual Report.
NOTE 2 - BUSINESS SEGMENT INFORMATION:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1994 1995
(IN MILLIONS)
<S> <C> <C>
Net sales:
Building products - Medite Corporation $40.0 $ 58.6
Hardware products - National Cabinet Lock, Inc. 18.0 20.1
Fast food - Sybra, Inc. 26.7 26.8
$84.7 $105.5
Operating income:
Building products $ 5.1 $ 10.3
Hardware products 5.1 5.5
Fast food 1.6 1.1
Total operating income 11.8 16.9
Interest expense (4.3) (5.0)
Corporate expenses, net - (.9)
Income before income taxes $ 7.5 $ 11.0
</TABLE>
NOTE 3 - INVENTORIES:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1994 1995
(IN THOUSANDS)
<S> <C> <C>
Raw materials:
Building products $13,050 $10,169
Hardware products 1,313 1,545
Fast food 1,426 1,230
15,789 12,944
In process products:
Building products 1,481 1,584
Hardware products 4,437 4,331
5,918 5,915
Finished products:
Building products 2,711 2,508
Hardware products 2,510 2,661
5,221 5,169
Supplies 4,088 4,390
$31,016 $28,418
</TABLE>
NOTE 4 - ACCRUED LIABILITIES:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1994 1995
(IN THOUSANDS)
<S> <C> <C>
Current accrued liabilities:
Employee benefits $ 9,978 $ 7,686
Interest 2,221 4,356
Insurance claims and expenses 3,412 2,880
Equipment purchases 2,157 443
Other 6,662 8,701
$24,430 $24,066
Other noncurrent liabilities:
Insurance claims and expenses $ 1,339 $ 1,339
Accrued OPEB cost 298 298
Other 1,712 2,100
$ 3,349 $ 3,737
</TABLE>
NOTE 5 - LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1994 1995
(IN THOUSANDS)
<S> <C> <C>
Valcor - 95/8% Senior Notes Due 2003 $100,000 $100,000
Medite:
Bank term loans 89,411 81,411
Bank working capital facilities 8,802 6,656
Other 4,360 4,311
102,573 92,378
Other:
Sybra bank credit agreements 5,500 10,000
Sybra capital lease obligations 6,321 6,117
National Cabinet Lock capital lease obligation 140 130
11,961 16,247
214,534 208,625
Less current maturities 12,738 13,882
$201,796 $194,743
</TABLE>
NOTE 6 - INTANGIBLE AND OTHER NONCURRENT ASSETS:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1994 1995
(IN THOUSANDS)
<S> <C> <C>
Intangible assets:
Goodwill $ 5,328 $ 5,285
Franchise fees 6,299 6,109
Other 7,575 7,347
$19,202 $18,741
Other assets:
Deferred financing costs $ 3,537 $ 3,375
Prepaid pension cost 4,363 4,448
Property held for sale 3,979 3,984
Other 68 246
$11,947 $12,053
</TABLE>
NOTE 7 - PROVISION FOR INCOME TAXES:
<TABLE>
<CAPTION>
Three months ended
March 31,
1994 1995
(In millions)
<S> <C> <C>
Expected tax expense $2.6 $ 3.9
Non-U.S. tax rates (.4) (1.4)
Incremental tax on non-U.S. earnings 1.0 1.5
State income taxes and other, net .1 .3
$3.3 $ 4.3
</TABLE>
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
At March 31, 1995, the estimated cost to complete capital projects in
process approximated $6.3 million, most of which relates to new Sybra stores and
productivity-enhancing equipment at Medite.
Medite has entered into interest rate swaps to mitigate the impact of
changes in interest rates for $26 million of its U.S. bank term loan due in
1998-2000 that results in a weighted average interest rate of 7.6% for such
borrowings. At March 31, 1995, the fair value of the interest rate swaps, based
upon quotes obtained from the counter party financial institution, is a $1.7
million receivable, representing the estimated amount Medite would receive if it
were to terminate the swap agreements at that date.
Medite has entered into the equivalent of approximately $9 million of
forward currency contracts to mitigate certain exchange rate fluctuation risk
for a portion of its future sales denominated in European Currency Units. These
contracts expire throughout 1995 and the counter parties are major international
financial institutions. At March 31, 1995, the aggregate fair value of these
contracts, based upon quotes obtained from the counter party institutions,
approximated the aggregate contract amount.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
OVERVIEW
Net income was $6.7 million for the first quarter of 1995, up 59% from the
first quarter of 1994. Operating income increased 43% to $16.9 million on a 25%
increase in sales to $105.5 million. The Company's overall operating income
margin was 16% in the first quarter, up from 14% last year. These improvements
were primarily driven by higher selling prices and volumes for medium density
fiberboard ("MDF").
BUILDING PRODUCTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1994 1995 % CHANGE
(IN MILLIONS)
<S> <C> <C> <C>
Net sales:
Medium density fiberboard $31.2 $45.5 + 46%
Traditional timber products 9.2 13.6 + 48%
Eliminations (.4) (.5)
$40.0 $58.6 + 46%
Operating income:
Medium density fiberboard $ 5.7 $ 9.6 + 70%
Traditional timber products (.6) .7
$ 5.1 $10.3 +101%
Operating income margins:
Medium density fiberboard 18.2% 21.2%
Traditional timber products -5.9% 5.1%
Aggregate margin 12.8% 17.6%
</TABLE>
MDF volume increased 13% (specialty products +23% and standard products
+11%) principally due to production from Medite's expanded Irish MDF plant
completed in October 1994. Average MDF selling prices (in billing currency
terms) were 24% above year-ago levels due to the combined effect of higher
product selling prices and product mix, however the Company has recently
experienced some softening in customer orders and lower prices quoted by
competitors. The expanded MDF plant in Ireland is expected to continue to
result in higher year-to-year volume comparisons for both specialty and standard
products.
MDF margins improved from 18% to 21% as average selling price increases
outpaced increases in per-unit costs. Wood costs continue to be influenced by
recent increases in demand from paper and pulp producers while resin costs rose
throughout 1994 due to shortages of methanol, a primary element in resin
manufacture. Recent declines in methanol prices are beginning to result in some
reductions in resin prices. Fluctuations in the value of the U.S. dollar
relative to other currencies increased MDF sales by approximately $2 million in
the first quarter of 1995 compared to the same period in 1994, and similarly
contributed to the increase in average per-unit MDF costs.
Traditional timber products results improved due primarily to the net
effect of higher veneer sales volume, higher log and veneer selling prices and
lower selling prices for stud lumber. Operating results in 1994 were also
adversely impacted by startup costs associated with Medite's Rogue River veneer
and chipping plant.
HARDWARE PRODUCTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1994 1995 % CHANGE
(IN MILLIONS)
<S> <C> <C> <C>
Net sales $18.0 $20.1 +12%
Operating income 5.1 5.5 + 8%
Operating income margin 28.3% 27.3%
</TABLE>
Volumes increased in each of the Company's three major hardware products
lines (locks, computer keyboard/workstation supports and drawer slides).
Operating margins were impacted slightly by higher raw material costs (zinc,
copper and steel). In response to the higher material costs, certain selling
prices were increased in April 1995. Fluctuations in the value of the U.S.
dollar relative to the Canadian dollar have continued to favorably impact
operating results. National Cabinet Lock continues to add new products to its
STOCK LOCKS product line as well as to its Waterloo Furniture Components support
arm and drawer slide lines.
FAST FOOD
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1994 1995 % CHANGE
(IN MILLIONS)
<S> <C> <C> <C>
Net sales $26.7 $26.8 + 0%
Operating income 1.6 1.1 -34%
Operating income margin 6.0% 3.9%
</TABLE>
The fast food industry continues to be very competitive. Same store sales
declined 2.5% in 1995 as declines in Sybra's Michigan and Florida regions more
than offset increases in other regions. Despite stable to lower food costs,
higher marketing and labor costs hampered operating margins. Sybra's
competitive responses have been to increase promotions and discounts, and demand
for labor has been strong in all of the Company's markets.
During the first quarter of 1995, Sybra opened one new store and closed
five stores and at March 31, 1995 operated a total of 158 Arby's restaurants.
Sybra expects to open four new Arby's restaurants in the second quarter and
three to five more during the last half of 1995. In addition, it may close one
or two more stores later in the year.
OTHER
Interest expense increased due to higher average borrowing levels
associated primarily with facilities expansion and higher average variable
borrowing rates. Approximately $159 million of the Company's indebtedness bears
interest at fixed rates averaging 9.1%. The average interest rate on the $50
million of floating rate borrowings outstanding at March 31, 1995 was 7.9% (7.8%
at December 31, 1994 and 5.4% at December 31, 1993).
Income tax rates vary by jurisdiction (country and/or state) and relative
changes in the geographic source of the Company's pre-tax earnings, and in the
related availability and usage of foreign tax credits, can result in
fluctuations in the effective income tax rate. See Note 7 to the Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES:
Cash flows from operating activities. Cash flow from operating activities
before changes in assets and liabilities increased 26% to $11.3 million,
reflecting the Company's improved operating results. Changes in assets and
liabilities result primarily from the timing of production, sales and purchases
and generally tend to even out over time.
Cash flows from investing and financing activities. Lower capital spending
resulting from completion of the Irish MDF plant expansion was offset in part by
higher spending by Sybra for new stores. Net repayments of indebtedness in 1995
and net borrowings during the 1994 period relate to changes in outstanding
revolving borrowings and cash balances.
Revolving credit facilities. Effective March 31, 1995, Sybra obtained an
$8 million increase in its revolving credit facilities for its expansion and
remodeling programs. Including this increase, unused credit available under
existing facilities approximated $44 million.
Other. In addition to the recent completion of the second MDF production
line in Ireland, Medite intends to add other new MDF production capacity during
the next two to three years. Although there are no plans or arrangements in
place with respect to such MDF capacity additions, Medite is actively exploring
expansion opportunities through acquisitions, strategic joint ventures and new
construction. The Company also continues to explore additional expansion and/or
acquisition opportunities for its high-margin hardware products business.
Sybra's Consolidated Development Agreement with Arby's, Inc. requires Sybra
to open another 20 new stores through 1997 in its existing markets. Sybra
currently anticipates that its planned expansion program will meet or exceed the
CDA requirements.
Valcor's operations are conducted through its subsidiaries (Medite,
National Cabinet Lock and Sybra). Accordingly, Valcor's long-term ability to
meet its parent company level obligations (principally debt service on the
Senior Notes) is largely dependent on the receipt of dividends or other
distributions from its subsidiaries, the realization of its investments through
the sale of interests in such entities and investment income. Various credit
agreements to which Valcor's subsidiaries are parties contain customary
limitations on the payment of dividends, typically a percentage of net income or
cash flow. Valcor has not guaranteed any indebtedness of its subsidiaries. The
Company believes that future distributions from its subsidiaries will be
sufficient to enable Valcor to meet its obligations.
Valcor dividends to Valhi are generally limited to 50% of consolidated net
income, as defined in the Senior Note indenture. In May 1995 Valcor declared a
$4.1 million dividend to Valhi, which amount approximated dividend availability
at March 31, 1995.
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 may in the future seek to raise additional capital,
refinance or restructure indebtedness, modify its dividend policy, consider the
sale of interests in subsidiaries, business units or other assets, or take a
combination of such steps or other steps, to increase liquidity, reduce
indebtedness and fund future activities. The Company may also evaluate
acquisitions of interests in, or combinations with, companies related to its
current businesses. The Company and its subsidiaries intend 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 and its subsidiaries. In this regard, the Valcor Senior Note
Indenture contains limitations on the ability of the Company and its
subsidiaries to incur additional indebtedness. In April 1995, due to
unfavorable market conditions, Valhi withdrew its proposed public offering of
Medite common stock.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 - Financial Data Schedule for the three-month period ended
March 31, 1995.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended March 31, 1995 and the month
of April 1995:
January 30, 1995 - Reported Items 5 and 7.
April 25, 1995 - Reported Items 5 and 7.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALCOR, INC.
(Registrant)
Date May 9, 1995 By /s/ William C. Timm
William C. Timm
Vice President - Finance and
Treasurer
(Principal Financial Officer)
Date May 9, 1995 By /s/ J. Thomas Montgomery, Jr.
J. Thomas Montgomery, Jr.
Vice President and Controller
(Principal Accounting Officer)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALCOR, INC.
(Registrant)
Date May 9, 1995 By
William C. Timm
Vice President - Finance and
Treasurer
(Principal Financial Officer)
Date May 9, 1995 By
J. Thomas Montgomery, Jr.
Vice President and Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VALCOR,
INC.'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 18,594
<SECURITIES> 0
<RECEIVABLES> 34,820
<ALLOWANCES> 572
<INVENTORY> 28,418
<CURRENT-ASSETS> 88,321
<PP&E> 248,455
<DEPRECIATION> 100,884
<TOTAL-ASSETS> 320,390
<CURRENT-LIABILITIES> 56,487
<BONDS> 194,743
<COMMON> 1
0
0
<OTHER-SE> 39,413
<TOTAL-LIABILITY-AND-EQUITY> 320,390
<SALES> 105,546
<TOTAL-REVENUES> 105,546
<CGS> 82,822
<TOTAL-COSTS> 82,822
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 83
<INTEREST-EXPENSE> 4,973
<INCOME-PRETAX> 11,028
<INCOME-TAX> 4,275
<INCOME-CONTINUING> 6,753
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,753
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
