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 SEPTEMBER 30, 1998 COMMISSION FILE NUMBER 1-5467
VALHI, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 87-0110150
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5430 LBJ FREEWAY, SUITE 1700, DALLAS, TEXAS 75240-2697
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 233-1700
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS.
YES X NO
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ON OCTOBER 31, 1998: 114,480,014.
VALHI, INC. AND SUBSIDIARIES
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1997
and September 30, 1998 3-4
Consolidated Statements of Income -
Three months and nine months ended
September 30, 1997 and 1998 5-6
Consolidated Statements of Comprehensive Income -
Nine months ended September 30, 1997 and 1998 7
Consolidated Statement of Stockholders' Equity -
Nine months ended September 30, 1998 8
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1997 and 1998 9-10
Notes to Consolidated Financial Statements 11-20
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 21-39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 40
Item 6. Exhibits and Reports on Form 8-K. 40
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS DECEMBER 31, SEPTEMBER 30,
1997 1998
Current assets:
Cash and cash equivalents $ 360,369 $ 376,868
Accounts and other receivables 172,378 192,086
Refundable income taxes 1,941 10,638
Receivable from affiliates 104 12,470
Inventories 204,718 208,239
Prepaid expenses 3,607 7,729
Deferred income taxes 7,541 4,910
Total current assets 750,658 812,940
Other assets:
Marketable securities 273,616 263,701
Investment in and advances to affiliates 192,239 370,796
Loans and notes receivable 82,556 82,428
Mining properties 30,363 14,250
Prepaid pension cost 24,111 24,501
Goodwill 256,539 259,325
Deferred income taxes 110 -
Other 26,267 25,505
Total other assets 885,801 1,040,506
Property and equipment:
Land 17,100 15,971
Buildings 145,599 146,135
Equipment 506,402 495,255
Construction in progress 3,284 13,757
672,385 671,118
Less accumulated depreciation 130,731 151,034
Net property and equipment 541,654 520,084
$2,178,113 $2,373,530
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY DECEMBER 31, SEPTEMBER 30,
1997 1998
Current liabilities:
Notes payable $ 13,968 $ 35,864
Current long-term debt 76,854 185,161
Accounts payable 71,559 59,461
Accrued liabilities 114,721 173,572
Payable to affiliates 30,996 13,740
Income taxes 15,103 16,653
Deferred income taxes 891 931
Total current liabilities 324,092 485,382
Noncurrent liabilities:
Long-term debt 1,008,087 639,787
Accrued pension cost 45,641 42,020
Accrued OPEB cost 51,273 43,814
Accrued environmental costs 128,246 81,844
Deferred income taxes 207,403 351,420
Other 28,180 44,355
Total noncurrent liabilities 1,468,830 1,203,240
Minority interest 257 106,468
Stockholders' equity:
Common stock 1,253 1,255
Additional paid-in capital 38,355 42,781
Retained earnings 315,977 511,582
Accumulated other comprehensive income:
Marketable securities 127,731 121,728
Currency translation (24,440) (22,127)
Pension liabilities (2,533) (1,520)
Treasury stock (71,409) (75,259)
Total stockholders' equity 384,934 578,440
$2,178,113 $2,373,530
Commitments and contingencies (Note 1)
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
Revenues and other income:
Net sales $275,193 $260,218 $820,719 $ 808,939
Gain on:
Disposal of business unit - - - 330,217
Reduction in interest in
CompX - - - 67,902
Other, net 20,040 12,531 60,017 62,729
295,233 272,749 880,736 1,269,787
Costs and expenses:
Cost of sales 201,067 180,062 618,098 563,772
Selling, general and
administrative 45,727 41,034 175,413 164,956
Interest 30,161 23,005 91,434 71,889
276,955 244,101 884,945 800,617
18,278 28,648 (4,209) 469,170
Equity in earnings of:
Tremont Corporation - 2,986 - 2,986
Waste Control Specialists (3,398) (2,706) (8,880) (9,552)
Income (loss) before income
taxes 14,880 28,928 (13,089) 462,604
Provision for income taxes
(benefit) 6,427 531 (1,066) 184,908
Minority interest in after-tax
earnings
7 15,322 35 61,997
Income (loss) from continuin
operations 8,446 13,075 (12,058) 215,699
Discontinued operations (950) - 34,463 -
Extraordinary item (3,897) (1,424) (4,291) (2,747)
Net income $ 3,599 $ 11,651 $ 18,114 $212,952
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
Basic earnings per share:
Continuing operations $ .07 $ .11 $ (.10) $ 1.87
Discontinued operations (.01) - .30 -
Extraordinary item (.03) (.01) (.04) (.02)
Net income $ .03 .10 .16 1.85
Diluted earnings per share:
Continuing operations $ .07 $ .11 (.10) 1.86
Discontinued operations (.01) - .30 -
Extraordinary item (.03) (.01) (.04) (.02)
Net income $ .03 $ .10 $ .16 $ 1.84
Cash dividends per share $ .05 $ .05 $ .15 $ .15
Shares used in the calculation
of earnings per share:
Basic earnings per share 115,129 114,946 114,978 115,011
Dilutive impact of stock
options 822 1,337 - 1,090
Diluted earnings per share 115,951 116,283 114,978 116,101
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(IN THOUSANDS)
1997 1998
Net income $18,114 $212,952
Other comprehensive income, net of tax:
Marketable securities adjustment:
Unrealized gains (losses) arising during
the period 89,432
(1,399)
Less reclassification for gains included
in net income
(1,372) (5,204)
88,060 (6,003)
Currency translation adjustment (10,620) 2,313
Pension liabilities adjustment - 1,013
Total other comprehensive income, net 77,440 (2,677)
Comprehensive income $95,554 $210,275
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
Balance at December 31, 1997 $1,253 $38,355 $315,977
Net income - - 212,952
Other comprehensive income, net - - -
Dividends - - (17,347)
Common stock reacquired - - -
Other, net 2 4,426 -
Balance at September 30, 1998 $1,255 $42,781 $511,582
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
ACCUMULATED OTHER COMPREHENSIVE INCOME TOTAL
MARKETABLE CURRENCY PENSION TREASURY STOCKHOLDERS'
SECURITIES TRANSLATION LIABILITIES STOCK EQUITY
Balance at December $127,731 $(24,440) $(2,533) $(71,409) $384,934
31, 1997
Net income - - - - 212,952
Other comprehensive (6,003) 2,313 1,013 - (2,677)
income, net
Dividends - - - - (17,347)
Common stock - - - (3,692) (3,692)
reacquired
Other, net - - - (158) 4,270
Balance at September $121,728 $(22,127) $(1,520) $(75,259) $578,440
30, 1998
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(IN THOUSANDS)
1997 1998
Cash flows from operating activities:
Net income $ 18,114 $ 212,952
Depreciation, depletion and amortization 46,503 43,881
Noncash interest expense 27,626 23,107
Gain on:
Disposal of business unit - (330,217)
Reduction in interest in CompX - (67,902)
Change in accounting principle 30,000 -
Deferred income taxes (14,109) 139,240
Minority interest 35 61,997
Other, net (11,440) (15,000)
Equity in:
Tremont Corporation - (2,986)
Waste Control Specialists 8,880 9,552
Discontinued operations (34,463) -
Extraordinary item 4,291 2,747
Dividends from Tremont Corporation - 215
75,437 77,586
Discontinued operations, net (41,524) -
Change in assets and liabilities:
Accounts and notes receivable (38,094) (36,285)
Inventories 45,181 (15,886)
Accounts payable and accrued liabilities 15,747 14,099
Accounts with affiliates 9,032 (29,806)
Income taxes 8,825 (5,307)
Other, net (6,032) 5,827
Net cash provided by operating activities 68,572 10,228
Cash flows from investing activities:
Capital expenditures (28,015) (20,446)
Purchases of:
Tremont common stock - (172,918)
NL common stock (2,752) (13,890)
CompX common stock - (5,587)
Marketable securities (6,000) (3,766)
Business unit - (33,372)
Investment in Waste Control Specialists (3,000) (10,000)
Proceeds from disposal of:
Business unit - 435,080
Marketable securities - 6,875
Loans to affiliates:
Loans (50,025) (123,250)
Collections 23,525 120,250
Other loans and notes receivable:
Loans (200,600) -
Collections 112,869 -
Pre-close dividend from Amalgamated Sugar Company 11,518 -
Discontinued operations, net 91,805 -
Other, net 8,760 590
Net cash provided (used) by investing
activities
(41,915) 179,566
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(IN THOUSANDS)
1997 1998
Cash flows from financing activities:
Indebtedness:
Borrowings $ 390,369 $ 31,012
Principal payments (316,750) (288,479)
Deferred financing costs paid (4,643) (220)
Proceeds from issuance of CompX common stock - 110,378
Loans from affiliates:
Loans - 3,000
Repayments (7,244) -
Valhi dividends paid (17,356) (17,347)
Common stock reacquired - (3,692)
Discontinued operations, net 22,380 -
Other, net 3,043 (20)
Net cash provided (used) by financing
activities
69,799 (165,368)
Cash and cash equivalents - net change from:
Operating, investing and financing activities 96,456 24,426
Currency translation (1,202) (297)
Business unit sold - (7,630)
Cash and equivalents at beginning of period 255,679 360,369
Cash and equivalents at end of period $ 350,933 $376,868
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 60,419 $ 40,326
Income taxes, net 41,167 77,917
Business unit acquired - net assets consolidated:
Cash and cash equivalents $
Goodwill and other intangible assets - 23,399
Other non-cash assets - 17,782
Liabilities - (7,809)
Cash paid $ - $ 33,372
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION:
The consolidated balance sheet of Valhi, Inc. and Subsidiaries
(collectively, the "Company") at December 31, 1997 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at September 30, 1998 and the consolidated statements
of income, comprehensive income, stockholders' equity and cash flows for the
interim periods ended September 30, 1997 and 1998 have been prepared by the
Company, without audit. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
consolidated financial position, results of operations and cash flows have been
made. The results of operations for the interim periods are not necessarily
indicative of the operating results for a full year or of future operations.
Certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted. The accompanying consolidated financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 (the "1997 Annual Report").
The results of the Company's former building products and fast food
operations are presented as discontinued operations. See Note 14. The
extraordinary item, stated net of allocable income tax benefit and minority
interest, relates to the prepayment of certain indebtedness at NL Industries.
Basic earnings per share of common stock is based upon the weighted average
number of common shares actually outstanding during each period. Diluted
earnings per share of common stock includes the impact of outstanding dilutive
stock options.
In January 1998, the Company's board of directors authorized the Company to
purchase up to 2 million shares of its common stock in open market or privately-
negotiated transactions over an unspecified period of time. As of September 30,
1998, the Company had purchased approximately 383,000 shares for an aggregate of
$3.7 million pursuant to such authorization. Other commitments and
contingencies are discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Legal Proceedings" and the 1997
Annual Report.
Contran Corporation holds, directly or through subsidiaries, approximately
92% of Valhi's outstanding common stock. Substantially all of Contran's
outstanding voting stock is held by trusts established for the benefit of
certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons is
sole trustee. Mr. Simmons, the Chairman of the Board and Chief Executive
Officer of Valhi and Contran, may be deemed to control such companies.
The Company will adopt Statement of Financial Accounting Standards ("SFAS")
No. 133, Accounting for Derivative Instruments and Hedging Activities, no later
than the first quarter of 2000. Under SFAS No. 133, all derivatives will be
recognized as either assets or liabilities and measured at fair value. The
accounting for changes in fair value of derivatives will depend upon the
intended use of the derivative. The Company is currently studying this new
accounting rule, and the impact of adopting SFAS No. 133, if any, has not yet
been determined but will be dependent upon the extent to which the Company is a
party to derivative contracts or hedging activities covered by SFAS No. 133 at
the time of adoption.
NOTE 2 - BUSINESS SEGMENT INFORMATION:
% OWNED AT
OPERATIONS PRINCIPAL ENTITIES SEPTEMBER 30, 1998
Chemicals NL Industries, Inc. 58%*
Component products CompX International Inc. 64%
Titanium metals Tremont Corporation 48%
Waste management Waste Control Specialists 64%
* Tremont owns an additional 19% of NL Industries.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
(IN MILLIONS)
Net sales:
Chemicals $248.3 $221.5 $740.5 $698.4
Component products 27.0 38.7 80.3 110.5
$275.3 $260.2 $820.8 $808.9
Operating income:
Chemicals $ 32.1 $ 40.2 $ 69.5 $119.6
Component products 6.9 8.8 20.1 22.2
39.0 49.0 89.6 141.8
Gain on:
Disposal of business unit - - - 330.2
Reduction in interest in CompX - - - 67.9
General corporate items:
Securities transactions 1.9 .1 2.1 8.0
Interest and dividend income 15.4 8.2 46.5 42.9
Expenses, net (7.8) (5.6) (50.9) (49.7)
Interest expense (30.2) (23.0) (91.5) (71.9)
18.3 28.7 (4.2) 469.2
Equity in earnings of:
Tremont Corporation - 3.0 - 3.0
Waste Control Specialists (3.4) (2.8) (8.9) (9.6)
Income (loss) before income
taxes $ 14.9 $ 28.9 $(13.1) $462.6
NL Industries. In January 1998, NL sold its specialty chemicals business
unit conducted by its subsidiary Rheox, Inc. See Note 12. NL's remaining
chemicals operations are conducted through its subsidiary Kronos, Inc. (titanium
dioxide pigments or "TiO2"). In July 1998, NL reached an agreement to acquire
certain operations of a TiO2 competitor, including the other 50% interest in
NL's TiO2 manufacturing joint venture. Completion of the transaction is subject
to certain conditions. See Note 5 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." During the first nine months of
1998, the Company purchased 813,000 shares of NL common stock in market
transactions for an aggregate $13.9 million.
CompX. Prior to March 1998, CompX was a wholly-owned subsidiary of Valcor,
Inc., a wholly-owned subsidiary of Valhi. In March 1998, CompX completed an
initial public offering of shares of its common stock which reduced the
Company's ownership interest in CompX to 62%. See Note 13. In March 1998,
CompX completed the acquisition of a lock competitor for $33 million cash
consideration. Such acquisition was accounted for by the purchase method.
During the third quarter of 1998, Valhi purchased 329,000 shares of CompX common
stock in market transactions for an aggregate of $5.6 million, thereby
increasing the Company's ownership interest of CompX to 64%.
Waste Control Specialists. The Company has not consolidated its majority-
owned subsidiary, Waste Control Specialists, because the Company is not deemed
to control Waste Control Specialists. See the 1997 Annual Report. In April
1998, Valhi contributed $10 million to Waste Control Specialists' equity,
thereby increasing its membership interest to 64%. Approximately $7 million of
such contribution was used by Waste Control Specialists to reduce the
outstanding balance of its revolving borrowings from the Company. The Company
also holds an option to make an additional $10 million equity contribution to
Waste Control Specialists which, if contributed, would increase its membership
interest to approximately 69%. See Note 5.
Tremont. On June 19, 1998, Valhi purchased 2.9 million shares of Tremont
Corporation common stock from Contran and certain of Contran's subsidiaries for
an aggregate of $165.4 million cash, including fees and expenses. Valhi also
purchased, on open market transactions during the first nine months of 1998, an
additional 141,000 shares of Tremont at an aggregate cost of $7.5 million. At
September 30, 1998, the 3.1 million Tremont shares held by Valhi represent
approximately 48% of Tremont's outstanding common shares at that date. Valhi
accounts for its interest in Tremont by the equity method, and commenced
recognizing equity in Tremont's earnings in the third quarter of 1998. See Note
5. Tremont is primarily a holding company which owns approximately 33% of the
outstanding common stock of Titanium Metals Corporation ("TIMET") and 19% of
NL's common stock at September 30, 1998. Tremont accounts for its interests in
both NL and TIMET by the equity method.
General. Each of NL (NYSE: NL), CompX (NYSE: CIX), Tremont (NYSE: TRE) and
TIMET (NYSE: TIE) file periodic reports pursuant to the Securities Exchange Act
of 1934, as amended. The aggregate pro forma impact of CompX's acquisition of a
lock competitor and Valhi's acquisition of Tremont common stock, assuming such
acquisitions occurred at the beginning of 1997, is not material.
NOTE 3 - MARKETABLE SECURITIES:
DECEMBER 31, SEPTEMBER 30,
1997 1998
(IN THOUSANDS)
Noncurrent assets (available-for-sale)
The Amalgamated Sugar Company LLC $170,000 $170,000
Halliburton Company common stock 87,823 77,356
Other securities 15,793 16,345
$273,616 $263,701
At September 30, 1998, Valhi held 2.7 million shares of Halliburton common
stock (aggregate cost of $22 million) with a quoted market price of $28.75 per
share, or an aggregate market value of $77 million. Valhi's LYONs are
exchangeable at any time, at the option of the LYON holder, for such Halliburton
shares, and the carrying value of the Halliburton stock is limited to the
accreted LYONs obligation. See Note 8. Prior to the September 1998 merger of
Halliburton and Dresser Industries, Inc., in which each share of Dresser common
stock was exchanged for one share of Halliburton common stock, Valhi held
Dresser shares. See the 1997 Annual Report for a discussion of the Company's
investment in The Amalgamated Sugar Company LLC. The aggregate cost of other
available-for-sale securities (primarily common stocks) is $14 million at
September 30, 1998.
NOTE 4 - INVENTORIES:
DECEMBER 31, SEPTEMBER 30,
1997 1998
(IN THOUSANDS)
Raw materials:
Chemicals $ 45,844 $ 37,984
Component products 2,057 5,102
47,901 43,086
In process products:
Chemicals 8,018 11,472
Component products 5,193 6,335
13,211 17,807
Finished products:
Chemicals 108,292 108,243
Component products 3,775 4,405
112,067 112,648
Supplies 31,539 34,698
$204,718 $208,239
NOTE 5 - OTHER NONCURRENT ASSETS:
DECEMBER 31, SEPTEMBER 30,
1997 1998
(IN THOUSANDS)
Investment in affiliates:
TiO2 manufacturing joint venture $170,830 $171,202
Tremont Corporation - 176,628
Waste Control Specialists LLC 15,518 15,966
Other 1,891 -
188,239 363,796
Loan to Waste Control Specialists LLC 4,000 7,000
$192,239 $370,796
Loans and notes receivable:
Snake River Sugar Company $ 80,000 $ 80,000
Other 12,183 5,878
92,183 85,878
Less current portion 9,627 3,450
Noncurrent portion $ 82,556 $ 82,428
Other noncurrent assets:
Deferred financing costs $ 11,646 $ 8,013
Intangible assets 4,487 5,597
Other 10,134 11,895
$ 26,267 $ 25,505
At September 30, 1998, Valhi held 3.1 million shares of Tremont Corporation
common stock with a quoted market price of $42.25 per share, or an aggregate of
$131 million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a discussion of the Company's net carrying value
of its investment in Tremont. In April 1998, the maturity of the Company's $10
million revolving loan facility to Waste Control Specialists was extended one
year to December 31, 1999.
NOTE 6 - ACCOUNTS WITH AFFILIATES:
DECEMBER 31, SEPTEMBER 30,
1997 1998
(IN THOUSANDS)
Current receivable from affiliates:
Income taxes receivable from Contran $ - $12,285
Other, net 104 185
$ 104 $12,470
Current payable to affiliates:
Income taxes payable to Contran $19,472 $ -
Demand loan payable to Contran - 3,000
Louisiana Pigment Company 8,513 7,838
Tremont Corporation 3,354 3,134
Other, net (343) (232)
$30,996 $13,740
NOTE 7 - ACCRUED LIABILITIES:
DECEMBER 31, SEPTEMBER 30,
1997 1998
(IN THOUSANDS)
Current:
Employee benefits $ 44,457 $ 41,002
Environmental costs 11,118 49,174
Interest 7,019 15,476
Plant closure costs 3,289 1,861
Deferred income 915 5,377
Other 47,923 60,682
$114,721 $173,572
Noncurrent:
Insurance claims and expenses $ 13,674 $ 14,894
Employee benefits 11,490 11,550
Deferred income 1,480 14,723
Other 1,536 3,188
$ 28,180 $ 44,355
NOTE 8 - NOTES PAYABLE AND LONG-TERM DEBT:
DECEMBER 31, SEPTEMBER 30,
1997 1998
(IN THOUSANDS)
Notes payable -
Kronos - non-U.S. bank credit agreement
(DM 25,000 and DM 60,500)
$ 13,968 $ 35,864
Long-term debt:
Valhi: Snake River Sugar Company $ 250,000 $250,000
LYONs 87,823 82,212
NL Industries:
Senior Secured Notes 250,000 244,000
Senior Secured Discount Notes 169,857 118,583
Deutsche mark bank credit facility
(DM 288,322 and DM 207,322) 161,085 124,419
Rheox bank credit facility 117,500 -
Joint venture term loan 42,429 -
Other 3,282 1,518
Total NL Industries 744,153 488,520
Other 2,965 4,216
1,084,941 824,948
Less current maturities 76,854 185,161
$1,008,087 $639,787
NL redeemed its Senior Secured Discount Notes in October 1998 using
available cash on hand, and accordingly such indebtedness has been classified as
a current liability at September 30, 1998.
NOTE 9 - PROVISION FOR INCOME TAXES (BENEFIT):
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1998
(IN MILLIONS)
Continuing operations:
Expected tax expense (benefit) $ (4.6) $161.9
Incremental tax and rate differences on
equity in earnings of non-tax group companies (9.2) 74.5
Change in NL's deferred income tax
valuation allowance 10.5 (49.7)
State income taxes, net 2.1 8.0
Refund of prior-year dividend withholding tax - (8.2)
Excess of tax basis over book basis of the
common stock of foreign subsidiaries sold - (12.1)
No tax benefit on goodwill amortization 2.4 11.6
Non-U.S. tax rates (.7) .1
Other, net (1.6) (1.2)
$ (1.1) $184.9
Comprehensive provision (benefit) for income
taxes:
Continuing operations $ (1.1) $184.9
Discontinued operations 13.7 -
Extraordinary item (2.3) (2.8)
Other comprehensive income:
Marketable securities 55.4 (3.2)
Currency translation (5.7) 1.0
Pension liabilities - .6
$ 60.0 $180.5
NOTE 10 - OTHER INCOME:
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1998
(IN THOUSANDS)
Securities earnings:
Interest and dividends $46,348 $42,855
Securities transactions 2,110 8,006
48,458 50,861
Currency transactions, net 2,795 3,085
Disposal of property and equipment 2,453 32
Noncompete agreement income - 2,667
Other, net 6,311 6,084
$60,017 $62,729
NOTE 11 - MINORITY INTEREST:
The components of minority interest in net assets and net earnings are
presented in the following tables.
DECEMBER 31, SEPTEMBER 30,
1997 1998
(IN THOUSANDS)
Minority interest in net assets:
NL Industries $ - $ 61,236
CompX - 44,594
Subsidiaries of NL 257 624
Subsidiaries of CompX - 14
$ 257 $106,468
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1998
(IN THOUSANDS)
Minority interest in net earnings (losses) -
continuing operations:
NL Industries $ - $57,011
CompX - 5,082
Subsidiaries of NL 35 36
Subsidiaries of CompX - (132)
$ 35 $61,997
NL Industries. At December 31, 1997, NL's separate financial statements
reflected a stockholders' deficit of $222 million and, accordingly, no minority
interest in NL was reported in the Company's consolidated balance sheet at that
date. Until such time as NL reported positive stockholders' equity, all
undistributed income or loss and other undistributed changes in NL's reported
stockholders' equity accrued to the Company for financial reporting purposes.
Beginning in the first quarter of 1998, NL resumed reporting positive
stockholders' equity, and consequently the Company resumed reporting minority
interest in NL's net earnings and net assets in 1998.
CompX. In March 1998, CompX completed an initial public offering of shares
of its common stock. Prior to that date, CompX was a wholly-owned subsidiary of
Valcor. See Note 13. Following CompX's public offering, the Company commenced
reporting minority interest in CompX's net earnings and net assets.
NOTE 12 - DISPOSAL OF BUSINESS UNIT:
In January 1998, NL sold its specialty chemicals business unit conducted by
Rheox for $465 million cash consideration (before fees and expenses), including
$20 million attributable to a five-year agreement by NL not to compete in the
rheological products business. The Company reported a $330.2 million pre-tax
gain on the disposal of this business unit in the first quarter of 1998. The
Company's results and operations for the first nine months of 1997 included net
sales of $111.4 million and operating income of $33.2 million related to this
business unit (1998 prior to the sale - $12.7 million and $2.7 million,
respectively).
NOTE 13 - REDUCTION IN INTEREST IN COMPX:
In March 1998, CompX completed an initial public offering of shares of its
common stock for net proceeds to CompX of approximately $110.4 million. CompX
used $75 million of such net proceeds to repay outstanding borrowings under its
new bank credit facility, of which $50 million was incurred in connection with
the repayment of certain intercompany indebtedness owed by CompX to Valcor and
$25 million which was incurred in connection with CompX's March 1998 acquisition
of a lock competitor. As a result of the public offering of shares of CompX
common stock and CompX's award of certain shares of its common stock in
connection with the offering, the Company's ownership interest in CompX was
reduced to 62% from 100%. The Company reported a $67.9 million pre-tax gain on
the Company's reduction in interest in CompX in the first quarter of 1998.
Deferred income taxes were provided on this gain on reduction in interest in
CompX.
NOTE 14 - DISCONTINUED OPERATIONS:
The components of discontinued operations for the first nine months of 1997
are presented in the following table.
AMOUNT
(IN THOUSANDS)
Medite Corporation (building products) $14,717
Sybra, Inc. (fast food) 19,746
$34,463
Condensed income statement and cash flow data for Medite and Sybra for the
first nine months of 1997 is presented below.
MEDITE SYBRA
(IN MILLIONS)
Income statement data:
Operations:
Net sales $ 23.6 $37.9
Operating income $ 1.7 $ 1.7
Interest expense and other, net (.3) (.6)
Pre-tax income 1.4 1.1
Income tax expense .6 .5
.8 .6
Net gain on disposal:
Pre-tax gain 22.3 23.2
Income tax expense 8.4 4.1
13.9 19.1
$ 14.7 $19.7
Cash flow data:
Cash flows from operating activities $(40.4) $(1.1)
Cash flows from investing activities:
Capital expenditures (.4) (1.8)
Proceeds from disposal of assets 38.3 55.3
Other, net - .4
37.9 53.9
Cash flows from financing activities:
Indebtedness, net - 22.4
$ (2.5) $75.2
NOTE 15 - RELATED PARTY TRANSACTIONS:
In June 1998, Contran used a portion of the proceeds from the sale of the
shares of Tremont common stock to Valhi discussed in Note 2 to repay in full
approximately $105 million of principal and accrued interest that it owed to
Valhi under the previously-reported $120 million revolving line of credit
between Valhi and Contran, and the facility was canceled.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
The Company reported income from continuing operations of $13.1 million, or
$.11 per diluted share, in the third quarter of 1998 compared to income of $8.4
million, or $.07 per diluted share, in the third quarter of 1997. For the first
nine months of 1998, the Company reported income from continuing operations of
$215.7 million, or $1.86 per diluted share, compared to a loss from continuing
operations of $12.1 million, or $.10 per diluted share, in the first nine months
of 1997.
The year-to-date 1998 results include (i) a first quarter $330 million pre-
tax gain ($152 million, or $1.31 per diluted share, net of income taxes and
minority interest) related to the sale of NL's specialty chemicals business
unit, (ii) a first quarter $68 million pre-tax gain ($44 million, or $.38 per
diluted share, net of income taxes) related to the Company's reduction in
interest in CompX, (iii) pre-tax securities transactions gains, principally in
the second quarter, of approximately $8 million ($5 million, or $.04 per diluted
share, net of income taxes) and (iv) an aggregate second quarter charge of $32
million ($21 million, or $.18 per diluted share, net of income taxes) related to
the cash payments made by Valhi as part of the settlement of two shareholder
derivative lawsuits in which Valhi was a defendant. In addition, the provision
for income taxes in the third quarter of 1998 includes an $8 million tax benefit
($5 million, or $.04 per diluted share, net of minority interest) resulting from
a refund of prior-year German dividend withholding taxes received by NL. See
Notes 9, 12 and 13. The 1997 first nine months results include a first quarter
$30 million pre-tax charge ($19.5 million, or $.17 per diluted share, net of
income taxes) related to adoption of a new accounting standard regarding
accounting for environmental remediation liabilities at NL.
The statements in this Quarterly Report on Form 10-Q relating to matters
that are not historical facts, including, but not limited to, statements found
in this "Management's Discussion and Analysis of Financial Condition and Results
of Operations," are forward-looking statements that involve a number of risks
and uncertainties. The actual future results of the events described in such
forward-looking statements could differ materially from those expressed in such
forward-looking statements, and 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. Factors that could cause
actual future results to differ materially from those expressed in such forward-
looking statements include, but are not limited to, future supply and demand for
the Company's products (including cyclicality thereof), general global economic
conditions, competitive products and substitute products, customer and
competitor strategies, the impact of pricing and production decisions, potential
difficulties in integrating completed acquisitions, successful completion of
pending acquisitions, environmental matters, government regulations and possible
changes therein, the ultimate resolution of pending litigation and possible
future litigation, possible disruptions of normal business activity from Year
2000 issues and other risks and uncertainties as discussed in this Quarterly
Report and the 1997 Annual Report.
CHEMICALS
As discussed above, in January 1998 NL sold its specialty chemicals
business unit conducted by Rheox.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, % SEPTEMBER 30, %
1997 1998 CHANGE 1997 1998 CHANGE
(IN MILLIONS) (IN MILLIONS)
Net sales:
Kronos $210.5 $221.5 +5% $629.1 $685.7 +9%
Rheox 37.8 - 111.4 12.7
$248.3 $221.5 -11% $740.5 $698.4 -6%
Operating income:
Kronos $ 20.3 $ 40.2 +98% $ 36.3 $116.9 +222%
Rheox 11.8 - 33.2 2.7
$ 32.1 $ 40.2 +25% $ 69.5 $119.6 +72%
Kronos' TiO2 sales and operating income increased in 1998 compared to 1997
due primarily to higher average TiO2 selling prices, partially offset by lower
sales volumes. Kronos' average TiO2 selling prices have generally been
increasing since early 1997, and Kronos' average TiO2 selling prices in the
third quarter of 1998 were 17% higher than the third quarter of 1997 and 2%
higher than the second quarter of 1998. TiO2 sales volumes in the third quarter
of 1998 decreased 9% from the record sales volumes in the third quarter of 1997
as demand moderated. Sales volumes in the first nine months of 1998 were 2%
lower than the 1997 period primarily reflecting lower volumes in Asia, partially
offset by higher volumes in Europe. NL expects demand for TiO2 in the fourth
quarter of 1998 will be moderately below that of the fourth quarter of 1997.
Kronos' operating income in the third quarter of 1997 includes income of $9.7
million related to refunds of German franchise taxes related to prior years,
including interest. NL expects its TiO2 operating income and margins in the
fourth quarter of 1998 will continue to exceed prior-year levels due primarily
to expected higher average TiO2 selling prices, partially offset by moderately
lower sales volumes.
A significant amount of NL's sales generated from its non-U.S. operations
are denominated in currencies other than the U.S. dollar, primarily major
European currencies and the Canadian dollar. Consequently, the translated U.S.
dollar value of NL's foreign sales and operating results are subject to currency
exchange rate fluctuations which may favorably or adversely impact reported
earnings and affect the comparability of period to period operating results. In
addition, a portion of NL's sales generated from its non-U.S. operations are
denominated in the U.S. dollar, and exchange rate fluctuations do not impact the
reported amount of such net sales. Certain raw materials, primarily titanium-
containing feedstocks, are purchased in U.S. dollars, while labor and other
production costs are denominated primarily in the local currencies.
Fluctuations in the value of the U.S. dollar relative to other currencies
decreased NL's sales in the third quarter and first nine months of 1998 by $3
million and $26 million, respectively, compared to the same periods in 1997.
Fluctuations in the value of the U.S. dollar relative to other currencies
similarly impacted NL's foreign currency-denominated operating expenses, and the
net impact of currency exchange rate fluctuations on NL's operating income in
the third quarter and first nine months of 1998 compared to the same periods in
1997 was not significant.
Amortization of the Company's purchase accounting adjustments made in
conjunction with the acquisitions of its interest in NL result in additional
depreciation, depletion and amortization expense beyond amounts separately-
reported by NL. Such additional non-cash expenses reduce chemicals operating
income, as reported by Valhi, by approximately $21 million annually as compared
to amounts separately reported by NL (approximately $19 million related to TiO2
and approximately $2 million related to the disposed specialty chemicals
business unit).
In July 1998, NL reached an agreement to acquire certain TiO2 operations of
Tioxide Group Limited, a subsidiary of Imperial Chemical Industries plc ("ICI").
Under the agreement, NL would acquire Tioxide's North American TiO2 operations
and one of its European TiO2 facilities for an aggregate of $335 million cash
consideration. The operations to be acquired from Tioxide include (i) the other
50% interest in the Louisiana TiO2 manufacturing joint venture (see Note 5),
which has aggregate production capacity of approximately 120,000 metric tons per
year, (ii) a 75,000 metric ton sulfate-process TiO2 facility in the United
Kingdom, (iii) a 52,000 metric ton TiO2 finishing facility in Canada, (iv)
Tioxide's North American marketing and distribution business and (v)
approximately $50 million in working capital. NL would also pay an additional
$30 million fee in return for the cancellation of certain chloride-process TiO2
technology rights which NL had previously licensed to Tioxide in 1993 in
connection with the formation of the Louisiana TiO2 manufacturing joint venture.
The transaction is subject to, among other things, obtaining certain regulatory
clearances and completion of ICI's sale of Tioxide's other TiO2 businesses to
E.I. du Pont de Nemours & Co. There can be no assurance that any such
transaction will be completed. Funds for the purchase will be provided by NL's
cash on hand and aggregate borrowings of $250 million in new bank financing
which NL expects to obtain. Assuming regulatory approvals are received in 1998,
NL currently expects to complete the transaction by the end of the first quarter
of 1999. Following completion of the acquisition and DuPont's purchase of
Tioxide's other TiO2 businesses, NL expects to become the world's third largest
producer of TiO2, increasing its annual TiO2 production capacity by
approximately 135,000 metric tons.
COMPONENT PRODUCTS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, % SEPTEMBER 30, %
1997 1998 CHANGE 1997 1998 CHANGE
(IN MILLIONS) (IN MILLIONS)
Net sales $27.0 $38.7 +43% $80.3 $110.5 +38%
Operating income 6.9 8.8 +26% 20.1 22.2 +10%
Component products net sales increased in 1998 compared to 1997 due
primarily to higher sales volumes in all three major product lines (ergonomic
computer support systems, precision ball bearing slides and locking systems).
The higher sales volumes of locking systems resulted primarily from the March
1998 acquisition of a lock competitor. Component products operating income for
the first nine months of 1998 includes a first quarter $3.3 million non-cash
charge related to the award of certain shares of CompX's common stock in
connection with the completion of its initial public offering in March 1998.
Excluding such charge, operating income increased in 1998 due primarily to the
higher sales volumes, offset in part by lower margins attributable to sales from
the business unit acquired in March 1998. Fluctuations in the value of the U.S.
dollar relative to the Canadian dollar accounted for about 20% of the increase
in components products operating income in each of the 1998 periods.
EQUITY AFFILIATES
Tremont Corporation. In late June 1998, the Company acquired 2.9 million
shares of Tremont Corporation common stock held by Contran and certain of
Contran's subsidiaries. See Notes 2 and 5. Such shares, along with an
additional 141,000 Tremont common shares purchased by Valhi through open market
transactions during the first nine months of 1998, represent approximately 48%
of Tremont's outstanding common stock at September 30, 1998. Valhi accounts for
its interest in Tremont by the equity method, and commenced reporting equity in
Tremont's earnings beginning in the third quarter of 1998. The information
included below related to the financial position, results of operations and
liquidity and capital resources of Tremont has been summarized from the reports
filed with the SEC by Tremont, which reports contain more detailed information
concerning Tremont on its historical basis of accounting. The Company's equity
in Tremont's earnings differs from the amount that would be expected by applying
the Company's 48% ownership percentage to Tremont's separately-reported earnings
because of amortization of purchase accounting adjustments made in conjunction
with the Company's acquisitions of its interest in Tremont. At the Company's
current 48% ownership interest in Tremont, such non-cash amortization reduces
earnings attributable to Tremont as reported by the Company by approximately $3
million per year.
Tremont accounts for its interests in both NL and TIMET by the equity
method. For the three months ended September 30, 1998, Tremont reported income
from continuing operations of $7.9 million, comprised principally of equity in
earnings of TIMET ($5.0 million) and NL ($4.8 million) and a provision for
income taxes of $1.8 million on pre-tax earnings of $9.7 million. Tremont's
effective income tax rate varies from the 35% U.S. federal statutory income tax
rate primarily because no income tax provision is currently required on
Tremont's equity in earnings of NL.
NL's operating results are discussed above. For the three months ended
September 30, 1998, TIMET reported net sales, operating income and income from
continuing operations of $173.5 million, $27.3 million and $16.1 million,
respectively, compared to $177.2 million, $33.3 million and $21.3 million,
respectively, for the same period in 1997. For the third quarter of 1998,
TIMET's mill product shipments were lower than the third quarter of 1997. The
lower level of shipments reflects reduced demand for both TIMET's aerospace and
industrial products. TIMET believes the reduction in demand for aerospace
products is attributable in large part to inventory reductions by its major
customers and a decline in the number of aircraft forecasted to be produced.
The major reason for the reduction in demand for industrial products is the
deterioration in Asian economies, including the strength of the U.S. dollar
versus the Japanese yen. General and administrative expenses were $6.3 million
higher compared to the third quarter of 1997 due primarily to costs incurred in
implementing TIMET's new enterprise-wide SAP information system as well as costs
incurred to address the Year 2000 issue discussed below.
TIMET anticipates that its shipments and earnings in the fourth quarter of
1998 will be lower than in the third quarter of 1998, and expenses associated
with the new SAP system and Year 2000 issues are expected to continue to remain
high. TIMET currently expects to record a $10 million pre-tax charge in the
fourth quarter of 1998 related to the announced closure of a leased facility in
Nevada and other changes in its European and North American operations in
response to reduced demand levels, including possible additional temporary or
permanent facility closures and layoffs.
The titanium industry is experiencing reduced demand for aerospace
and industrial products due to high levels of inventory reportedly held by
customers, actual and anticipated declines in the number of aircraft
forecasted to be produced, especially wide-body aircraft, and
continuing weakness of Asian and other economies. As a result, TIMET
currently expects that its shipments in 1999 will be below anticipated 1998
levels, particularly in the first half of 1999. In addition, TIMET
expects its average selling prices in 1999 will be between 5% and 10% lower
than its 1998 average selling prices.
Valhi periodically evaluates the net carrying value of its long-term
assets, including its investment in Tremont, to determine if there has been any
decline in value below their carrying amounts that is other than temporary and
would, therefore, require a write-down which would be accounted for as a
realized loss. At September 30, 1998, the NYSE price of $42.25 per Tremont
share indicated an aggregate NYSE market value of Valhi's investment in Tremont
common stock of approximately $131 million, or $46 million less than Valhi's
$177 million net carrying value of its investment in Tremont at that date. The
NYSE market price was $36.94 per Tremont share as of October 30, 1998, which
price indicated an aggregate NYSE market value at that date of $114 million or
approximately $63 million less than Valhi's net carrying value of its investment
in Tremont at September 30, 1998. The Company believes NYSE stock prices
(particularly in the case of companies such as Tremont that have a major
shareholder and are not widely followed or traded) are not necessarily
indicative of a company's enterprise value or the value that could be realized
if the company were sold. After considering what it believes to be all relevant
factors including, among other things, the NYSE market prices of Tremont's
holdings of NL and TIMET, the relatively short time period during which
Tremont's NYSE price has been less than the Company's per share net investment
in Tremont, the recent decline in stock prices in general as evidenced by the
Dow Jones and other stock price indices and Tremont's (and hence NL's and
TIMET's) operating results, financial position, estimated asset values and
prospects, the Company concluded that there had been no other than temporary
decline in value of the Company's investment in Tremont below its net carrying
value at September 30, 1998.
As discussed above, Tremont's major assets are its investments in NL (TiO2)
and TIMET (titanium metals). It is possible, should the TiO2 or titanium metals
industries in general, or NL or TIMET specifically, encounter a prolonged
recessionary environment, or suffer other unforeseen adverse events, that the
value of Valhi's investment in Tremont could decline to a level which would
result in a write-down of the Company's investment in Tremont. Valhi will
continue to monitor and evaluate the value of its investment in Tremont based
on, among other things, the financial condition and outlook for Tremont. In the
event Valhi determines that any decline in value of its investment in Tremont
below its net carrying values has occurred which is other than temporary, Valhi
would report an appropriate write-down at that time.
Waste Control Specialists. Waste Control Specialists reported a loss of
$9.6 million during the first nine months of 1998 compared to a loss of $8.9
million during the first nine months of 1997. Waste Control Specialists
reported net sales of $6.9 million in the first nine months of 1998 compared to
$2.4 million in the first nine months of 1997. Operating losses in both periods
include expenditures in connection with the pursuit of permits covering the
processing, treatment, storage and disposal of low-level and mixed radioactive
waste.
OTHER
Gains on disposal of business unit and reduction in interest in CompX. See
Notes 12 and 13, respectively. The pre-tax gain on disposal of NL's specialty
chemicals business unit differs from the amount separately-reported by NL due to
the write-off of a portion of the Company's purchase accounting adjustments
related to the net assets sold, including an allocated portion of goodwill
associated with the Company's investment in NL.
General corporate items. As expected, general corporate interest and
dividend income decreased in the third quarter and first nine months of 1998
compared to the same periods in 1997 due primarily to a lower amount of dividend
distributions received from The Amalgamated Sugar Company LLC. Dividend
distributions from the LLC are dependent in part upon the LLC's results of
operations, and the Company received no dividend distributions from the LLC in
the third quarter of 1998 compared to $6.4 million received in the same period
in 1997 due to a decline in the LLC's operating profits. The growers who supply
the LLC with sugarbeets are also members of the Snake River Sugar Company
agricultural cooperative which controls the LLC. Such growers recently agreed
to a $5 million reduction in the aggregate price they will receive for supplying
the LLC with sugarbeets which will dollar-for-dollar increase the LLC's 1998
operating profits. The Company currently expects that dividend distributions
received from the LLC in the fourth quarter of 1998 will be somewhat lower than
the $6.4 million received in the fourth quarter of 1997. General corporate
interest and dividend income in the fourth quarter of 1998 is expected to
continue to be lower than the fourth quarter of 1997 due principally to the
expected lower level of LLC distributions received as well as a lower level of
funds available for investment.
Securities transactions in both 1997 and 1998 relate to the disposition of
a portion of the shares of Halliburton Company common stock (and its predecessor
Dresser Industries, Inc.) 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. Any additional exchanges in 1998 or thereafter
would similarly result in additional securities transaction gains.
Net general corporate expenses in the first quarter of 1997 include NL's
$30 million pre-tax charge related to adoption of a new accounting standard
regarding environmental remediation liabilities, and in the second quarter of
1998 include an aggregate $32 million pre-tax charge related to the June 1998
settlements of two shareholder derivative lawsuits in which Valhi was the
defendant. Such charges are included in selling, general and administrative
expenses. NL's $20 million of proceeds from the disposal of its specialty
chemicals business unit related to its agreement not to compete in the
rheological products business will be recognized as a component of general
corporate income (expense) ratably over the five-year non-compete period,
including $2.7 million recognized in the first nine months of 1998 ($1 million
in the third quarter). See Note 10. Under the terms of NL's proposed purchase
of certain TiO2 operations from ICI, NL would pay a $30 million fee in return
for the cancellation of certain chloride-process TiO2 technology rights that NL
had previously licensed to Tioxide in 1993. Such fee would be recorded as a
general corporate expense upon the successful completion of the transaction.
Interest expense. Interest expense decreased in 1998 compared to 1997 due
primarily to a lower average level of outstanding indebtedness (primarily
Valhi's LYONs, Valcor Senior Notes and indebtedness related to NL's specialty
chemicals business unit which was prepaid in January 1998). Interest expense is
expected to continue to be lower in the fourth quarter of 1998 compared to the
fourth quarter of 1997 due to the lower levels of indebtedness referred to
above, as well as a reduction in interest expense resulting from NL's October
1998 redemption of its Senior Secured Discount Notes.
Provision for income taxes. The principal reasons for the difference
between the Company's effective income tax rates and the U.S. federal statutory
income tax rates are explained in Note 9. Income tax rates vary by jurisdiction
(country and/or state), and relative changes in the geographic mix of the
Company's pre-tax earnings can result in fluctuations in the effective income
tax rate. Also, certain subsidiaries, including NL and, beginning in March
1998, CompX, are not members of the consolidated U.S. tax group, and the Company
provides incremental income taxes on such earnings. In addition, in the first
nine months of 1998 NL reduced its deferred income tax valuation allowance by
$50 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, and the provision for income taxes in the third
quarter of 1998 includes an $8 million tax benefit resulting from a refund of
prior-year German dividend withholding taxes received by NL.
Minority interest, discontinued operations and extraordinary item. See
Notes 11, 14 and 1, respectively. The Company will report an extraordinary loss
in the fourth quarter of 1998 resulting from NL's redemption of its remaining
Senior Secured Discount Notes at a price of 106% of their principal amount.
YEAR 2000 ISSUE
General. As a result of certain computer programs being written using two
digits rather than four to define the applicable year, certain computer programs
that have date sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in normal business activities.
NL. NL is in the process of evaluating and upgrading its computer systems,
both information technology ("IT") systems and non-IT systems involving embedded
chip technology, and software applications to ensure that the systems function
properly beginning January 1, 2000. To achieve its Year 2000 compliance plan,
NL is utilizing internal and external resources to identify, correct or
reprogram, and test its systems.
NL has conducted an inventory of its IT systems worldwide and is currently
testing the systems and applications that have been corrected or reprogrammed
for Year 2000 compliance. NL has completed a preliminary inventory of its non-
IT systems and is in the process of validating the inventory and correcting or
replacing date-deficient systems. NL uses a number of packaged software
products that have been upgraded to a Year 2000 compliant version in the normal
course of business. Excluding the cost of these software upgrades, NL's cost of
becoming Year 2000 compliant is expected to be approximately $2 million, of
which about one-third has been spent through September 30, 1998. NL expects its
major IT systems will be Year 2000 compliant by March 1999, and expects its non-
IT systems will be Year 2000 compliant by September 1999.
As part of its Year 2000 compliance plan, NL is seeking confirmation from
its major software and hardware vendors and primary suppliers to confirm that
they are developing and implementing plans to become, or that they have become,
Year 2000 compliant. Confirmations received by NL to-date indicate that they
generally are in the process of becoming Year 2000 compliant by December 31,
1999. The major software vendors used by NL have already delivered Year 2000
compliant software. NL plans to seek confirmation from its major customers to
ensure they are Year 2000 compliant or are developing and implementing plans to
become Year 2000 compliant.
NL is developing a contingency plan to deal with potential Year 2000 Issues
related to business interruption that may occur on January 1, 2000 or
thereafter. NL's plan is expected to be completed in the second quarter of
1999.
Although NL expects its systems to be Year 2000 compliant before December
31, 1999, it cannot predict the outcome or success of the Year 2000 compliance
programs of its vendors, suppliers, and customers. NL also cannot predict
whether its major software vendors, who continue to test for Year 2000
compliance, will find additional problems that would result in unplanned
upgrades of their applications after December 31, 1999. As a result of these
uncertainties, NL cannot predict the impact on its financial condition, results
of operation or cash flows resulting from noncompliant Year 2000 systems that NL
directly or indirectly relies upon. Should NL's Year 2000 compliance plan not
be successful or be delayed beyond January 2000, the consequences to NL could be
far-reaching and material, including an inability to produce TiO2 at its
manufacturing facilities, which could lead to an indeterminate amount of lost
revenue. Other potential negative consequences could include manufacturing
equipment malfunction, impeded communications or power supplies, or slower
transaction processing and financial reporting.
CompX. CompX has recently installed information systems upgrades for both
its U.S. and Canadian facilities which contained, among many other features,
software compatibility with the Year 2000 Issue. CompX does not currently
anticipate spending significant additional funds to address software
compatibility with the Year 2000 Issue with respect to its own internal systems.
As part of its Year 2000 compliance plan, CompX is seeking confirmation
from its major software and hardware vendors and primary suppliers to confirm
that they are developing and implementing plans to become, or that they have
become, Year 2000 compliant. Confirmations received by CompX to-date indicate
that they generally are in the process of becoming Year 2000 compliant by
December 31, 1999. The major software vendors used by CompX have already
delivered Year 2000 compliant software. CompX plans to seek confirmation from
its major customers to ensure they are Year 2000 compliant or are developing and
implementing plans to become Year 2000 compliant.
CompX is developing a contingency plan to deal with potential Year 2000
Issues related to business interruption that may occur on January 1, 2000 or
thereafter. CompX's plan is expected to be completed in the second quarter of
1999.
Although CompX expects its systems to be Year 2000 compliant before
December 31, 1999, it cannot predict the outcome or success of the Year 2000
compliance programs of its vendors, suppliers, and customers. CompX also cannot
predict whether its major software vendors, who continue to test for Year 2000
compliance, will find additional problems that would result in unplanned
upgrades of their applications after December 31, 1999. As a result of these
uncertainties, CompX cannot predict the impact on its financial condition,
results of operations or cash flows resulting from noncompliant Year 2000
systems that CompX directly or indirectly relies upon. Should CompX's Year 2000
compliance plan not be successful or be delayed beyond January 2000, the
consequences to CompX could be far-reaching and material, including an inability
to produce products at its manufacturing facilities, which could lead to an
indeterminate amount of lost revenue. Other potential negative consequences
could include impeded communications or power supplies, or slower transaction
processing and financial reporting.
TIMET. Many of TIMET's information systems have been or are being replaced
in connection with its implementation of SAP, which is Year 2000 compliant.
TIMET, with the help of outside specialists and consultants, has (i)
substantially completed an initial assessment of potential Year 2000 issues in
its manufacturing and communications systems, as well as in those information
systems that will not be replaced by SAP, (ii) is in process of determining and
impementing remedial actions and (iii) will develop a contingency plan in the
event internal or external Year 2000 issues are not resolved. Excluding costs
related to SAP, TIMET has expended approximately $1 million on Year 2000 issues
through September 1998 and currently expects to incur an additional $5 million
to $6 million during the remainder of 1998 and 1999, principally related to
embedded system technology. TIMET has also begun an evaluation of potential
Year 2000 exposures relating to key suppliers and customers.
Although TIMET believes its key information systems will be Year 2000
compliant before the end of 1999, it cannot yet predict the outcome of success
of the Year 2000 compliance programs related to its embedded manufacturing
systems or those systems of its suppliers and customers. TIMET also cannot
predict whether it will find additional problems that would result in unplanned
upgrades of applications after December 31, 1999. As a result of these
uncertainties, TIMET cannot predict the impact on its financial condition,
results of operations or cash flows of noncompliant Year 2000 systems that TIMET
directly or indirectly relies upon. Should TIMET's Year 2000 compliance plan
not be successful or be delayed beyond January 2000, the consequences to TIMET
could be far-reaching and material, including an inability to produce titanium
metal products at its manufacturing facilities, which could lead to an
indeterminate amount of lost revenue. Other potential negative consequences
could include impeded communications or power supplies, or slower transaction
processing and financial reporting.
Waste Control Specialists. Waste Control Specialists' information system
is currently not Year 2000 compliant. However, Waste Control Specialists is in
the process of obtaining a complete new information system which is expected to,
among other things, be Year 2000 compliant. The cost of such new information
system is not expected to be material to Waste Control Specialists and the new
system is expected to be in place by the end of March 1999. Waste Control
Specialists is in the process of evaluating any potential Year 2000 issues with
respect to embedded chip technology associated with the equipment at its
disposal facility; however, because such facility was constructed in the past
few years, Waste Control Specialists does not expect such equipment to present
any significant Year 2000 compliance issues. Waste Control Specialists is also
in the process of contacting its significant suppliers and customers to confirm
they are developing and implementing plans to become, or that they have become,
Year 2000 compliant. Waste Control Specialists expects to have its evaluation
of embedded chip technology and Year 2000 compliance issues at significant
suppliers and customers completed by the end of the first quarter of 1999, and
any required remedial actions completed prior to the end of 1999. Assuming
Waste Control Specialists does not encounter a significant Year 2000 compliance
issue with respect to the equipment at its disposal facility, Waste Control
Specialists does not expect its costs associated with Year 2000 compliance will
be material.
Although Waste Control Specialists believes its information systems and
equipment at its disposal facility will be Year 2000 compliant before December
31, 1999, it cannot predict the outcome or success of the Year 2000 compliance
programs at its significant suppliers and customers. As a result, Waste Control
Specialists cannot predict the impact on its financial position, results of
operations or cash flows resulting from noncompliant Year 2000 systems that
Waste Control Specialists directly or indirectly relies upon. Should Waste
Control Specialists' Year 2000 compliance program not be successful or delayed
beyond January 2000, the consequences to Waste Control Specialists could be far-
reaching and material, including an inability to operate the disposal facility,
which could lead to an indeterminate amount of lost revenue. Other potential
negative consequences could include impeded communications or power supplies or
slower transaction processing and financial reporting.
Other. Valhi believes its corporate information systems are Year 2000
compliant, and Tremont does not believe it has any significant Year 2000 issues
at its parent company level. However, for the reasons discussed above with
respect to its subsidiaries and affiliates, Valhi cannot predict the impact on
its consolidated financial position, results of operations or cash flows
resulting from noncompliant Year 2000 systems that Valhi, it subsidiaries and
affiliates directly or indirectly rely upon. The consequences to the Company
could be far-reaching and material, including the loss of an indeterminate
amount of revenue. Other potential negative consequences could include
manufacturing equipment malfunction, impeded communications or power supplies or
slower transaction processing and financial reporting.
The dates on which these plans to complete any necessary Year 2000
modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no assurance that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
EUROPEAN MONETARY CONVERSION
Beginning January 1, 1999, 11 of the 15 members of the European Union
("EU"), including Germany, Belgium, the Netherlands and France, are scheduled to
establish fixed conversion exchange rates between their existing sovereign
currencies and the European currency unit ("euro"). Such members have agreed to
adopt the euro as their common legal currency on that date. The remaining four
EU members (including the United Kingdom) may convert their sovereign currencies
to the euro at a later date. Certain European countries, such are Norway, are
not members of the EU and their sovereign currencies will remain intact. Each
national government will retain authority to establish their own tax and fiscal
spending policies and public debt levels, although such public debt will be
issued in, or re-denominated into, the euro. However, monetary policies,
including money supply and official euro interest rates, will be established by
a new European Central Bank. Following introduction of the euro, the
participating countries' national currencies are scheduled to remain legal
tender as denominations of the euro from January 1, 1999 through January 1,
2002, although the exchange rates between the euro and such currencies will be
fixed.
NL. NL conducts substantial operations in Europe, principally in Germany,
Belgium, the Netherlands, France and Norway. The national currency in which
such operations are located are such operation's functional currency. The
functional currency of the German, Belgian, Dutch and French operations will
convert from their respective sovereign currencies to the euro over a two-year
period beginning in 1999. The euro conversion may impact NL's operations
including, among other things, changes in product pricing decisions necessitated
by cross-border price transparencies. Such changes in product pricing decisions
could impact both sales prices and manufacturing costs, and consequently
favorably or unfavorably impact reported results of operations. The pursuit by
the participating EU members of a single monetary policy through the European
Central Bank could favorably or unfavorably impact the countries' respective
economic growth and, accordingly, the regional demand for NL's products.
NL has begun to assess and evaluate the impact of the euro conversion on
its business. Such evaluation is still in process, but is expected to be
completed by the end of the year. NL expects to spend and charge to expense
less than $1 million in its evaluation and conversion costs, a portion of which
has been spent through September 30, 1998. NL has a significant amount of
outstanding indebtedness denominated in the Deutsche Mark, and such debt will
become denominated in the euro effective January 1, 1999. Modification of
certain NL information systems to handle euro-denominated transactions may be
required, although such modifications are not expected to be extensive.
Because of the inherent uncertainty of the ultimate affect of the euro
conversion, NL cannot accurately predict the impact of the euro conversion on
its respective results of operations, financial position or liquidity.
TIMET. TIMET also has operations and assets located in Europe, principally
in the United Kingdom. The United Kingdom is not adopting the euro, although
certain of TIMET's transactions currently denominated in various other European
currencies are expected to be denominated in the euro beginning in 1999.
Approximately one-half of TIMET's European sales are denominated in currencies
other than the U.S. dollar, principally the United Kingdom pound sterling along
with other major European currencies. The U.S. dollar value of TIMET's foreign
sales and operating costs are subject to currency exchange rate fluctuations
that can impact reported earnings and may affect the comparability of period-to-
period operating results. Certain purchases of raw materials for TIMET's
European operations, principally titanium sponge, are denominated in U.S.
dollars while labor and other production costs are primarily denominated in
local currencies. Modifications of certain of TIMET's systems to handle euro-
denominated transactions will be required, although such modifications are not
expected to be extensive, and TIMET does not expect the impact of the conversion
to the euro will be material.
LIQUIDITY AND CAPITAL RESOURCES:
Cash flows from operating activities. Trends in cash flows from operating
annual activities (excluding the impact of significant asset dispositions and
relative changes in assets and liabilities) are generally similar to trends in
the Company's earnings. Changes in assets and liabilities generally result from
the timing of production, sales, purchases and income tax payments.
Cash flows from investing and financing activities. During the first nine
months of 1998, (i) Valhi purchased 3.1 million shares of Tremont Corporation
for an aggregate cost of $173 million, (ii) Valhi contributed an additional $10
million to Waste Control Specialists' equity, (iii) Valhi purchased $14 million
of additional shares of NL common stock, $6 million of additional shares of
CompX and $4 million of certain marketable securities and (iv) CompX purchased a
lock competitor for $33 million. In addition, in January 1998 NL sold its
specialty chemicals business unit conducted by Rheox for $465 million cash
consideration (before fees and expenses), including $20 million attributable to
a five-year agreement by NL not to compete in the rheological products business.
Net repayments of indebtedness in the first nine months of 1998 include the
prepayment and termination of the Rheox bank credit facility and the joint
venture term loan and NL's open-market purchases of approximately $65 million
accreted value of its Senior Secured Discount Notes and approximately $6 million
principal amount of its Senior Secured Notes pursuant to the tender offer
discussed below. In accordance with the terms of the DM credit facility, NL
also prepaid DM 81 million ($44 million when paid) of the DM term loan, of which
DM 49 million fully satisfied the September 1998 scheduled term loan payment and
DM 32 million reduced the March 1999 scheduled term loan payment. A portion of
the funds for such prepayment of the DM credit facility was provided by a DM 35
million ($19 million when borrowed) increase in outstanding borrowings under
NL's short-term non-U.S. credit facilities. In the second quarter of 1998, NL
repaid DM 20 million ($11 million when paid) of the outstanding balance of the
DM revolving credit facility. In October 1998, NL redeemed its remaining
outstanding Senior Secured Discount Notes.
At September 30, 1998, unused credit available under existing credit
facilities approximated $206 million, which was comprised of $100 million
available to CompX under its new revolving senior credit facility discussed
below, $91 million available to NL under non-U.S. credit facilities and $15
million available to Valhi. In November 1998, Valhi replaced its existing $15
million revolving credit facility with a new one-year $50 million revolving
facility collateralized by shares of NL common stock held by Valhi.
In March 1998, CompX completed an initial public offering of shares of its
common stock for net proceeds to CompX of approximately $110.4 million. CompX
used $75 million of such net proceeds to repay outstanding borrowings under its
new bank credit facility, $50 million of which were incurred to repay certain
intercompany indebtedness owed by CompX to Valcor and $25 million of which was
used to fund the acquisition of a lock competitor.
In January 1998, the Company's board of directors authorized the Company to
purchase up to 2 million shares of its common stock in open market or privately-
negotiated transactions over an unspecified period of time. As of September 30,
1998, the Company had purchased approximately 383,000 shares for an aggregate of
$3.7 million pursuant to such authorization.
CHEMICALS - NL INDUSTRIES
Pricing within the TiO2 industry is cyclical, and changes in industry
economic conditions can significantly impact NL's earnings and operating cash
flows. Average TiO2 selling prices began a downward trend in the last half of
1995, and continued to decline through the first quarter of 1997. NL's average
TiO2 prices began to increase during the second quarter of 1997 and continued to
increase throughout the remainder of 1997 and the first nine months of 1998.
In January 1998, NL sold its specialty chemicals business unit conducted by
Rheox for $465 million cash consideration (before fees and expenses), including
$20 million attributable to a five-year agreement by NL not to compete in the
rheological products business. A portion of the $380 million net-of-tax
proceeds have been used by NL to prepay certain indebtedness. The remaining net
proceeds are available for NL's general corporate purposes, subject to
compliance with the terms of the indentures governing its publicly-traded debt.
Under the terms of such indentures, NL was required to make an offer to
purchase a pro rata portion of such notes, at par value for the 11.75% Senior
Secured Notes and at accreted value for the 13% Senior Secured Discount Notes,
to the extent that a specified amount of the net proceeds from the disposal of
its specialty chemicals business unit are not used to either permanently paydown
certain indebtedness of NL or its subsidiaries or invest in additional
productive assets (including additional TiO2 production capacity), both as
defined in the indentures, within nine months of the disposition. While NL was
not yet required to execute a tender offer related to the disposal of its
specialty chemicals business unit, in May 1998 NL initiated a tender offer to
purchase on a pro-rata basis up to $181.6 million aggregate principal amount of
Senior Secured Notes and accreted value of Senior Secured Discount Notes, at par
or accreted value, respectively, in satisfaction of the covenant contained in
the indentures. Pursuant to its terms, the tender offer expired in June 1998,
and NL purchased approximately $6 million principal amount of Senior Secured
Notes, and a nominal amount of Senior Secured Discount Notes, which had been
properly tendered. NL also made open market purchases of its Senior Secured
Discount Notes in 1998, and in October 1998 NL redeemed the remaining Senior
Secured Discount Notes at a price of 106% of their principal amount.
NL expects to obtain an aggregate of $250 million in new bank financing to
complete its purchase of certain of Tioxide's TiO2 operations discussed above.
Certain of NL's U.S. and non-U.S. tax returns are being examined and tax
authorities have or may propose tax deficiencies, including non-income related
items and interest. NL previously reached an agreement with the German tax
authorities and paid certain tax deficiencies of approximately DM 44 million
($28 million when paid), including interest, which resolved certain significant
tax contingencies for years through 1990. In the third quarter of 1998, NL
received a DM 14 million ($8 million when received) refund of 1990 of German
dividend withholding taxes. The German tax authorities were required to refund
such amounts based on a recent German Supreme Court decision in favor of another
taxpayer. NL's refund resulted in a reduction of the previously-reached
settlement amount referred to above from the DM 44 million to DM 30 million for
years through 1990. No further withholding tax refunds are expected.
Certain other significant German tax contingencies aggregating an estimated
DM 172 million ($102 million at September 30, 1998) through 1997 remain
outstanding and are in litigation. Of these, one primary issue represents
disputed amounts aggregating DM 160 million ($95 million) for the years through
1997. NL has received tax assessments for a substantial portion of these
amounts. No payments of tax or interest deficiencies related to these
assessments are expected until the litigation is resolved. During 1997, a
German tax court proceeding involving a tax issue substantially the same as this
issue was decided in favor of the taxpayer. The German tax authorities have
appealed the decision to the German Supreme Court. NL believes that the
decision by the German Supreme Court will be rendered within a year and will
likely determine the outcome of NL's primary dispute with the German tax
authorities. Although NL believes that it will ultimately prevail in this
matter, NL has granted a DM 94 million ($56 million) lien on its Nordenham,
Germany TiO2 plant in favor of the City of Leverkusen, and a DM 5 million lien
in favor of the German federal tax authorities. If NL does not prevail, these
contingencies will increase NL's tax liability for 1990 and each year
thereafter, and NL would seek to negotiate payment over a period of time.
In addition, during 1997 NL reached an agreement with the German tax
authorities regarding certain other issues (issues not in litigation) for the
years 1991 through 1994, and agreed to pay additional tax deficiencies of DM 9
million ($5 million), most of which was paid in the third quarter of 1998.
During 1997, NL received a tax assessment from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($7 million at
September 30, 1998) relating to 1994. NL has appealed this assessment and has
commenced litigation proceedings. Although NL believes it will ultimately
prevail, NL has granted a NOK 51 million lien on its Norwegian TiO2 plant in
favor of the Norwegian tax authorities.
No assurance can be given that these tax matters will be resolved in NL's
favor in view of the inherent uncertainties involved in court proceedings. NL
believes that it has 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, or both,
in a number of legal proceedings associated with environmental matters,
including waste disposal sites, mining locations and facilities currently or
previously owned, operated or used by NL, certain of which are on the U.S. EPA's
Superfund National Priorities List or similar state lists. On a quarterly
basis, NL evaluates the potential range of its liability at sites where it has
been named as a PRP or defendant. NL believes it has provided adequate accruals
($128 million at September 30, 1998) for reasonably estimable costs of such
matters, but NL's ultimate liability may be affected by a number of factors,
including changes in remedial alternatives and costs and the allocation of such
costs among PRPs. It is not possible to estimate the range of costs for certain
sites. The upper end of the range of reasonably possible costs to NL for sites
for which it is possible to estimate costs is approximately $160 million. NL's
estimates of such liabilities have not been discounted to present value, and NL
has not recognized any potential insurance recoveries. No assurance can be
given that actual costs will not exceed accrued amounts or the upper end of the
range for sites for which estimates have been made and no assurance can be given
that costs will not be incurred with respect to sites as to which no estimate
presently can be made. NL is also a defendant in a number of legal proceedings
seeking damages for personal injury and property damage arising from the sale of
lead pigments and lead-based paints. NL has not accrued any amounts for the
pending lead pigment and lead-based paint litigation. There is no assurance
that NL will not incur future liability in respect of this pending litigation in
view of the inherent uncertainties involved in court and jury rulings in pending
and possible future cases. However, based on, among other things, the results
of such litigation to date, NL believes that the pending lead pigment and lead-
based paint litigation is without merit. Liability that may result, if any,
cannot reasonably be estimated. In addition, various legislation and
administrative regulations have, from time to time, been enacted or proposed
that seek to impose various obligations on present and former manufacturers of
lead pigment and lead-based paint with respect to asserted health concerns
associated with the use of such products and to effectively overturn court
decisions in which NL and other pigment manufacturers have been successful.
Examples of such proposed legislation include bills which would permit civil
liability for damages on the basis of market share, rather than requiring
plaintiffs to prove that the defendant's product caused the alleged damage. NL
currently believes the disposition of all claims and disputes, individually or
in the aggregate, should not have a material adverse effect on its consolidated
financial position, results of operations or liquidity. There can be no
assurance that additional matters of these types will not arise in the future.
NL periodically evaluates its liquidity requirements, alternative uses of
capital, capital needs and availability of resources in view of, among other
things, its capital resources, debt service and capital expenditure requirements
and estimated future operating cash flows. As a result of this process, NL has
in the past and may in the future seek to reduce, refinance, repurchase or
restructure indebtedness, raise additional capital, issue additional securities,
modify its dividend policy, restructure ownership interests, sell interests in
subsidiaries or other assets, or take a combination of such steps or other steps
to manage its liquidity and capital resources. In the normal course of its
business, NL may review opportunities for the acquisition, divestiture, joint
venture or other business combinations in the chemicals industry. In the event
of any such transaction, NL may consider using its available cash, issuing its
equity securities or refinancing or increasing its indebtedness to the extent
permitted by the agreements governing NL's existing debt. In this regard, the
Indentures governing NL's publicly-traded debt contain provisions which limit
the ability of NL and its subsidiaries to incur additional indebtedness or hold
noncontrolling interests in business units.
COMPONENT PRODUCTS - COMPX INTERNATIONAL
In February 1998, CompX entered into a new $100 million revolving senior
credit facility (nil outstanding at September 30, 1998) and used a portion of
the net proceeds to repay a $50 million demand note to Valcor which CompX had
distributed to Valcor in December 1997. The new credit facility is unsecured
and is due in 2003. Borrowings are available for CompX's general corporate
purposes, including potential acquisitions. The new credit facility contains
provisions which, among other things, require the maintenance of minimum levels
of net worth, require the maintenance of certain financial ratios, limit
dividends and additional indebtedness and contain other provisions and
restrictive covenants customary in lending transactions of this type. In March
1998, CompX completed the acquisition of a lock competitor for approximately $33
million cash consideration, using available cash on hand and $25 million of
borrowings under the new credit facility.
Also, in March 1998, CompX completed an initial public offering of shares
of its common stock. The net proceeds to CompX were approximately $110.4
million. Of such net proceeds, $75 million was used to completely repay the
outstanding balance of CompX's new $100 million credit facility discussed above.
CompX believes that the net proceeds to CompX from the offering, after repayment
of borrowings under the new credit facility, together with cash generated from
operations and borrowing availability under the new credit facility will be
sufficient to meet CompX's liquidity needs for working capital, capital
expenditures, debt service and future acquisitions for the foreseeable future.
TREMONT CORPORATION
Tremont is primarily a holding company which, at September 30, 1998, owned
approximately 33% of TIMET and 19% of NL. At September 30, 1998, Tremont
reported total assets and stockholders' equity of approximately $285 million and
$200 million, respectively. Tremont's total assets at such date include its
investments in TIMET ($148 million) and NL ($89 million), which Tremont accounts
for by the equity method, and $4 million in cash and cash equivalents; Tremont's
total liabilities at such date include accrued OPEB cost ($22 million) and
deferred income taxes ($34 million). At September 30, 1998, the market value of
the 10.3 million shares of TIMET and the 9.9 million shares of NL held by
Tremont was approximately $145 million and $191 million, respectively. Tremont
also owns the right to acquire 1.5 million additional TIMET shares from a third-
party for $12 million, and such TIMET shares have a September 30, 1998 market
value of $21 million.
In October 1998, Tremont entered into a revolving advance agreement with
Contran. Through October 31, 1998, Tremont had borrowed $6 million from Contran
under such facility, primarily to fund Tremont's purchases of additional shares
of NL common stock. Absent additional purchases of NL or TIMET common stock,
Tremont does not currently expect it will borrow significant additional funds
from Contran. Tremont is exploring possible financing alternatives to replace
its borrowings from Contran.
In 1997, Tremont's board of directors authorized Tremont to purchase up to
2 million shares of its common stock in open market or privately-negotiated
transactions over an unspecified period of time. As of September 30, 1998,
Tremont had acquired 1.2 million shares under such authorization. To the extent
Tremont acquires additional shares of its common stock, the Company's ownership
interest in Tremont would increase as a result of the fewer number of Tremont
shares outstanding.
Based upon certain technical provisions of the Investment Company Act of
1940 (the "1940 Act"), Tremont might arguably be deemed to be an "investment
company" under the 1940 Act, despite the fact that Tremont does not now engage,
nor has it engaged or intended to engage, in the business of investing,
reinvesting, owning, holding or trading of securities. Tremont has sought an
order from the Securities and Exchange Commission that Tremont is primarily
engaged, through TIMET and NL, in a non-investment company business and, in the
interim, has taken the steps necessary to give itself the benefits of a
temporary exemption under the 1940 Act.
Tremont periodically evaluates its liquidity requirements, capital needs
and availability of resources in view of, among other things, its alternative
uses of capital, its debt service requirements, the cost of debt and equity
capital and estimated future operating cash flows. As a result of this process,
Tremont has in the past and may in the future seek to raise additional capital,
modify its dividend policy, restructure ownership interests of subsidiaries and
affiliates, incur indebtedness, purchase shares of its common stock, consider
the sale of interests in subsidiaries, affiliates, marketable securities or
other assets, or take a combination of such steps or other steps to increase or
manage liquidity and capital resources. In the normal course of business,
Tremont may investigate, evaluate, discuss and engage in acquisition, joint
venture and other business combination opportunities. In the event of any
future acquisition or joint venture opportunities, Tremont may consider using
available cash, issuing equity securities or incurring indebtedness.
GENERAL CORPORATE - VALHI
Valhi's operations are conducted primarily through subsidiaries and
affiliates (NL Industries, CompX, Tremont and Waste Control Specialists).
Accordingly, Valhi's long-term ability to meet its parent company level
corporate obligations is dependent in large measure on the receipt of dividends
or other distributions from its subsidiaries. NL, which paid dividends in the
first three quarters of 1996, suspended its dividend in the fourth quarter of
1996. Suspension of NL's dividend did not materially adversely impact Valhi's
financial position or liquidity. Starting in the second quarter of 1998, NL
resumed regular quarterly dividends at a rate of $.03 per NL share. At that
rate, and based on the 30.1 million NL shares held by Valhi at September 30,
1998, Valhi would receive aggregate annual dividends from NL of approximately
$3.6 million. Tremont currently pays a quarterly dividend of $.07 per share, and
Valhi began to receive quarterly dividends from Tremont in the third quarter of
1998. At that rate, and based upon the 3.1 million Tremont shares owned by
Valhi at September 30, 1998, Valhi would receive aggregate annual dividends from
Tremont of approximately $865,000. Various credit agreements to which certain
subsidiaries or affiliates are parties contain customary limitations on the
payment of dividends, typically a percentage of net income or cash flow;
however, such restrictions have not significantly impacted Valhi's ability to
service its parent company level obligations. Valhi has not guaranteed any
indebtedness of its subsidiaries or affiliates. At September 30, 1998, Valhi
had $5 million of parent level cash and cash equivalents, including $1 million
held by Valcor which could be distributed to Valhi.
Valhi's LYONs do not require current cash debt service. At September 30,
1998, 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 September 30, 1998, assuming exchanges of all of
the outstanding LYONs for Halliburton stock at such date, was approximately
$23.6 million. Valhi continues to receive regular quarterly Halliburton
dividends (currently $.125 per share) on the escrowed shares. At September 30,
1998, the LYONs had an accreted value equivalent to approximately $30.55 per
Halliburton share, and the market price of the Halliburton common stock was
$28.75 per share (October 30, 1998 market price of Halliburton - $36 per share).
In April 1998, Valhi contributed $10 million to Waste Control Specialists'
equity, thereby increasing its membership interest to 64%. Approximately $7
million of such equity contribution was used by Waste Control Specialists to
reduce the outstanding balance of its revolving borrowings from the Company.
Also in April 1998, the maturity of the Company's $10 million revolving loan to
Waste Control Specialists was extended one year to December 31, 1999.
The aggregate distributions Valhi expects to receive from The Amalgamated
Sugar Company LLC in calendar 1998, which are dependent in part upon the future
operations of the LLC, are less than Valhi's 1998 debt service requirements
under its $250 million loans from Snake River. Certain covenants contained in
Snake River's third-party senior debt limit the amount of debt service payments
(principal and interest) which Snake River can remit to Valhi under Valhi's $80
million loan to Snake River, and such loan is subordinated to Snake River's
third-party senior debt. Due to these covenants, Snake River has not made any
principal or interest payments on the $80 million loan in the first nine months
of 1998, and the Company does not currently expect that Snake River will remit a
significant amount of principal or interest during the remainder of the year.
However, such noncollection is not expected to have a material adverse effect on
the Company's liquidity, and the Company believes both the accrued and unpaid
interest as well as the $80 million principal amount outstanding at September
30, 1998 will ultimately be collected.
The Company routinely compares its liquidity requirements and alternative
uses of capital against the estimated future cash flows to be received from its
subsidiaries, and the estimated sales value of those units. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, refinance or restructure indebtedness, repurchase
indebtedness in the market or otherwise, modify its dividend policy, consider
the sale of interests in subsidiaries, affiliates, business units, marketable
securities or other assets, or take a combination of such steps or other steps,
to increase liquidity, reduce indebtedness and fund future activities. Such
activities have in the past and may in the future involve related companies.
The Company and related entities routinely evaluate acquisitions of
interests in, or combinations with, companies, including related companies,
perceived by management to be undervalued in the marketplace. These companies
may or may not be engaged in businesses related to the Company's current
businesses. The Company intends to consider such acquisition activities in the
future and, in connection with this activity, may consider issuing additional
equity securities and increasing the indebtedness of the Company, its
subsidiaries and related companies. From time to time, the Company and related
entities also evaluate the restructuring of ownership interests among their
respective subsidiaries and related companies. In this regard, the Indentures
governing the publicly-traded debt of NL contain provisions which limit the
ability of NL and its subsidiaries to incur additional indebtedness or hold
noncontrolling interests in business units.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Reference is made to the 1997 Annual Report and prior 1998 periodic reports
for descriptions of certain legal proceedings.
State of Illinois v. NL Industries, Inc., et al. (No. 88-CH-11618). In
October 1998, the Supreme Court of Illinois declined the State's petition to
review previously-reported decisions in favor of NL.
DeLeon v. Exide Corp. and NL Industries, Inc., (No. DV98-02669-B). In
August 1998, the plaintiffs dismissed this previously-reported case without
prejudice.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 -Financial Data Schedule for the nine-month period ended September
30, 1998.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended September 30, 1998.
July 23, 1998 - Reported Items 5 and 7.
August 28, 1998 - Reported Items 5 and 7.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALHI, INC.
(Registrant)
Date November 13, 1998 By /s/ Bobby D. O'Brien
Bobby D. O'Brien
Vice President and Treasurer
(Principal Financial Officer)
Date November 13, 1998 By /s/ Gregory M. Swalwell
Gregory M. Swalwell
Vice President and Controller,
(Principal Accounting Officer)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALHI, INC.
(Registrant)
Date November 13, 1998 By
Bobby D. O'Brien
Vice President and Treasurer
(Principal Financial Officer)
Date November 13, 1998 By
Gregory M. Swalwell
Vice President and Controller
(Principal Accounting Officer)
5
9-MOS
DEC-31-1998
JAN-01-1998
SEP-30-1998
376,868
0
185,172
3,086
208,239
812,940
671,118
151,034
2,373,530
485,382
639,787
0
0
1,255
577,185
2,373,530
808,939
808,939
563,772
563,772
0
9
71,889
462,604
184,908
215,699
0
(2,747)
0
212,952
1.85
1.84
