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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
{ X } ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] - FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
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: (214) 233-1700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
Common stock New York Stock Exchange
($.01 par value per share) Pacific Stock Exchange
9.25% Liquid Yield Option Notes, New York Stock Exchange
due October 20, 2007
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None.
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO
THIS FORM 10-K. { X }
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
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AS OF FEBRUARY 28, 1994, 114,973,814 SHARES OF COMMON STOCK WERE OUTSTANDING.
THE AGGREGATE MARKET VALUE OF THE 10.8 MILLION SHARES OF VOTING STOCK HELD BY
NONAFFILIATES OF VALHI, INC. AS OF SUCH DATE APPROXIMATED $65 MILLION.
DOCUMENTS INCORPORATED BY REFERENCE
THE INFORMATION REQUIRED BY PART III IS INCORPORATED BY REFERENCE FROM THE
REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE FILED WITH THE COMMISSION
PURSUANT TO REGULATION 14A NOT LATER THAN 120 DAYS AFTER THE END OF THE FISCAL
YEAR COVERED BY THIS REPORT.
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PART I
ITEM 1. BUSINESS
GENERAL:
Valhi, Inc., based in Dallas, Texas, is a diversified industrial
management company. Information regarding Valhi's consolidated business
segments and unconsolidated affiliates which Valhi may be deemed to control,
and the companies conducting such operations, is set forth below. Business and
geographic segment financial information is included in Note 2 to the Company's
Consolidated Financial Statements, which information is incorporated herein by
reference.
CONSOLIDATED OPERATIONS (100%-OWNED)
Refined Sugar Amalgamated is the second-largest U.S. refiner and
The Amalgamated Sugar Company processor of sugarbeets, with annual production of
approximately 1 1/2 billion pounds of sugar.
Forest Products Medite is the world's second-largest producer of medium
Medite Corporation density fiberboard ("MDF"), an environmentally efficient
engineered wood product serving as an effective
alternative to products traditionally produced from the
declining supply of timber from environmentally
sensitive forests. Medite also owns 167,000 acres of
timberland in Oregon.
Fast Food Sybra is the second-largest franchisee of Arby's
Sybra, Inc. restaurants with approximately 160 restaurants clustered
in four regions.
Hardware Products National Cabinet Lock manufactures low and medium
National Cabinet Lock, Inc. security locks, computer keyboard support arms and
drawer slides for furniture and other markets.
UNCONSOLIDATED AFFILIATES
Chemicals NL is the world's fourth-largest producer of titanium
NL Industries, Inc. dioxide pigments, which are used in paints, plastics,
(49%-owned by Valhi) paper, fibers and other "quality-of-life" products, and
is also a producer of rheological additives.
Titanium Metals Titanium Metals Corporation, a 75%-owned Tremont
Tremont Corporation subsidiary, is the largest integrated U.S. producer of titanium
(48%-owned by Valhi) metal products for aerospace and industrial markets. Tremont
also holds 18% of NL's outstanding common stock.
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Valhi, a Delaware corporation, is the successor of the 1987 merger of
The Amalgamated Sugar Company and LLC Corporation. Contran Corporation holds,
directly or through subsidiaries, approximately 90% of Valhi's outstanding
common stock. All of Contran's outstanding voting stock is held by trusts
established for the benefit of the children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is the sole trustee. Mr. Simmons is Chairman of
the Board and Chief Executive Officer of Contran, Valhi and Valcor, Chairman of
the Board of NL and a director of Tremont, and may be deemed to control each of
such companies.
A summary corporate organization chart for the Company is set forth
below. Valcor, Inc. is an intermediate parent company formed in 1993 to
segregate certain subsidiaries and enable the Company to obtain lower-cost,
long-term debt.
{Summary corporate organization chart showing Valhi's 100% ownership of Valcor
and Amalgamated, Valcor's 100% ownership of Medite, Sybra and National Cabinet
Lock, Medite's 100% ownership of Medite of Europe (Ireland) and National
Cabinet Lock's 100% ownership of Waterloo Furniture Components (Canada). Chart
also shows Valhi's ownership of NL (49%) and Tremont (48%) along with Tremont's
18% ownership of NL. Footnote to the chart discloses Valhi's 3% ownership of
Dresser Industries, Inc. common stock.}
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REFINED SUGAR:
Products and operations. Amalgamated, headquartered in Ogden, Utah,
is the second-largest U.S. beet sugar producer with approximately 10% of United
States annual sugar production. Refined sugar accounts for approximately 90%
of Amalgamated's annual sales. Animal feed in the forms of beet pulp and
molasses, by-products of sugarbeet processing, accounts for most of its
remaining sales. Each spring, Amalgamated contracts with approximately 1,700
individual farmers to plant a specified number of acres of sugarbeets and to
deliver the sugarbeets to Amalgamated upon harvest in the fall. Amalgamated's
sugarbeet processing, which consists of extracting sugar from the sugarbeets
and refining the sugar, begins upon harvest and usually lasts until February.
Approximately one-fourth of the sugarbeet crop is initially processed into a
thick syrup, which is stored in Amalgamated's facilities and subsequently
processed into refined sugar. Refined sugar is sold throughout the year while
by-products are sold primarily in the first and fourth calendar quarters.
Amalgamated's profitability is determined primarily by the quantity and quality
of the sugarbeets processed, Amalgamated's efficiency in extracting and
refining sugar, and the sales price of refined sugar.
Amalgamated's four factories operate at approximately full capacity
during the annual sugarbeet processing campaigns, and sugar production from the
past five crops has averaged over 1.4 billion pounds per year. Due principally
to record-high sugar content of the beets, sugar production from the crop
harvested in the fall of 1993 is expected to establish a new record for the
fourth consecutive year. The price paid to growers for sugarbeets is a
function of Amalgamated's average sales price for refined sugar during the
contract settlement year, which runs from October through September, and of the
sugar content of the sugarbeets.
The cost of transporting sugarbeets to Amalgamated's factories
generally limits the geographic area from which sugarbeets are purchased. The
anticipated price of sugar and the price of competing crops influence the
number of acres of sugarbeets planted. The available sugarbeet acreage in
Amalgamated's geographic area of operations exceeds Amalgamated's processing
capacity.
Amalgamated sells sugar primarily in the North Central and
Intermountain Northwest regions of the United States. Approximately 80% of
sugar sales are to industrial sugar users and approximately 20% are to
wholesalers or retailers in consumer-sized packages. As is customary in the
sugar industry, Amalgamated sells sugar to its customers under contract for
future delivery, generally within one to six months. Amalgamated does not
otherwise engage in the purchase or sale of sugar futures contracts.
Beet pulp and molasses, by-products of the sugar extraction process,
constitute approximately 10% of Amalgamated's sales and are sold primarily to
animal feeders in the U.S. Intermountain Northwest region and Japan. The
quantity of by-products available for sale is determined principally by the
size of the sugarbeet crop. By-product sales prices are influenced by the
prices of competing animal feeds and have no direct relation to refined sugar
prices.
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Strategy. Amalgamated's primary strategic focus is to improve its
efficiency in extracting and refining sugar in order to increase sugar
production, to reduce unit production costs and to maintain market share.
Amalgamated's recent capital investments, and those planned for the next
several years, have emphasized extraction and other productivity improvement
projects.
Competitors and competition. Sugar production in the United States
has increased slightly in recent years, and the U.S. sugar industry currently
produces over 80% of the country's sugar needs from domestically-grown
sugarbeets and sugarcane. The remainder of the country's sugar supply is
imported, principally as raw sugar that is processed into refined sugar by
coastal refiners. There is no difference between domestically-produced sugar,
either from sugarbeets or sugarcane, and that produced from imported raw sugar.
Amalgamated competes with virtually all processors of either domestically-grown
sugar crops or imported raw sugar. Major competitors in Amalgamated's
geographic sales area include the C&H, Domino, Imperial Holly, Savannah Foods,
Spreckels, United Sugar and Western sugar companies. Because refined sugar is
a commodity product, Amalgamated has little ability to independently establish
selling prices.
Total domestic sugar consumption has increased slightly during the
past few years after declining during the early 1980's as a result of increased
consumption of high fructose corn syrup and non-caloric sweeteners such as
aspartame. According to published sources, the percentage of total United
States caloric sweetener use attributable to refined sugar has averaged about
45% during the last five years and per capita consumption of refined sugar in
1993 is estimated at 65 pounds, as compared to actual consumption of 64.5
pounds in 1990, 63.4 pounds in 1985 and 83.6 pounds in 1980.
Amalgamated does not believe it is dependent upon one or a few
customers; however, major food processors are substantial customers and
represent an important portion of sales. Amalgamated's ten largest customers
accounted for slightly more than one-third of its sales in each of the past
three years, with the largest customer accounting for 5% to 8% of sales in each
year.
Governmental sugar price support program. The Food, Agriculture,
Conservation and Trade Act of 1990 (the "1990 Farm Bill"), as amended by the
Omnibus Budget Reconciliation Act of 1993, continues, through the 1997 crop
year ending in September 1998, the sugar price support program for
domestically-grown sugarcane and sugarbeets established by the Agriculture and
Food Act of 1981. Under such program, Amalgamated is able to obtain, from the
federal government, nonrecourse loans on its refined sugar inventories at loan
rates based upon a raw sugar support price of no less than 18 cents per pound.
The effective net government loan rate applicable to Amalgamated's 1993 crop
sugar is 20.75 cents per pound. The 1990 Farm Bill also implemented marketing
assessments on domestically-produced refined beet sugar and
domestically-produced raw cane sugar. The marketing assessment cost is shared
by the processors and the growers, and results in a net cost to Amalgamated of
about 0.077 cents per pound, or approximately $1 million per year.
The 1990 Farm Bill continues the provision that the sugar price
support loan program is to be operated at no cost to the federal government,
which requires the government to take actions to maintain the market prices of
raw and refined sugar above the price support loan levels in order to prevent
defaults on the
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nonrecourse loans extended under the program. Currently, the government
imposes quotas and duties on imported sugar to restrict supply and to help
maintain domestic market prices. The 1990 Farm Bill guarantees a minimum
annual import quota of 1.25 million short tons (1.1 million metric tons) of raw
sugar. In addition, the United States Department of Agriculture can impose
marketing allotments on domestic sugarcane and sugarbeet processors to limit
the amount of raw and refined sugar which each domestic processor may market.
For the first time in over 20 years, marketing allotments were imposed
effective June 30, 1993 for the crop year ended September 30, 1993.
Amalgamated's allotment equated to approximately 95% of its production from
that crop. See also Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Research and development. Amalgamated maintains research and
development programs emphasizing processing technology and its annual research
and development expense has been slightly under $600,000 in each of the past
three years. Amalgamated has developed various proprietary technologies
related to sugar processing and employs these process improvements to reduce
its operating costs. Some of these techniques apply to fructose and cane
refinery operations as well as sugarbeet operations.
Amalgamated presently holds nine domestic patents on certain of its
proprietary technology, which patents have an average remaining term of
approximately four years. The loss of any of such patents would not have a
material adverse effect on Amalgamated.
Employees. Amalgamated employs approximately 2,200 persons at the
height of the production season, of which approximately 1,400 are year-round
employees. Amalgamated's three-year labor agreement with the American
Federation of Grain Millers, which represents production employees through
local unions, expires July 1996. Amalgamated believes its labor relations are
satisfactory.
Energy. Amalgamated's primary fuel is coal, but it can utilize other
fuels. The supply of coal is provided under a long-term contract expiring
February 1998, subject to extension at Amalgamated's option for three five-year
periods. Energy is an important element in the processing of sugarbeets, and
the use of coal has historically resulted in lower production costs than if
oil, natural gas or electricity were Amalgamated's primary energy source.
Properties. Amalgamated owns four sugar processing factories, located
in Paul, Twin Falls and Nampa, Idaho and Nyssa, Oregon, and also owns its
general office facilities in Ogden, Utah, four distribution terminals in four
states, and six storage facilities in two states.
Environmental matters. Amalgamated believes that it is currently in
substantial compliance with existing permits relating to its facilities;
however, federal and state environmental compliance requirements are becoming
more stringent in certain respects and are expected to result in expenditures
in excess of the relatively nominal amounts spent in recent years.
Amalgamated's capital budget for 1994 includes over $5 million in the area of
environmental protection and improvement, principally related to air and water
treatment facilities at certain of its factories.
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FOREST PRODUCTS:
Products, operations and properties. Medite, headquartered in
Medford, Oregon, produces MDF (an engineered wood product) at three plants in
the United States and Republic or Ireland. Medite owns 167,000 acres of
timberland in Oregon and also produces solid wood products, including logs,
lumber, veneer and wood chips. MDF is a reconstituted wood panel product that
serves as a lower-cost alternative to solid wood in a variety of applications,
including furniture, cabinetry and joinery and architectural applications.
Lumber is used in residential and commercial construction, veneer is used in
the production of plywood and laminated veneer lumber ("LVL"), and wood chips
are a basic raw material for the paper and MDF industries. Certain sizes and
species of logs harvested by Medite that are not used in its manufacturing
operations are sold to other mills in Southern Oregon.
Medite, with annual MDF production capacity of 490,000 cubic meters,
is the world's second-largest producer of MDF. Medite's MDF production was
about 95% of its aggregate capacity in each of 1993 and 1992, up from about 90%
in 1991. Medite has commenced an expansion of its Irish MDF production
facilities which will increase its Irish production capacity by about 75% and
its worldwide capacity by about 25%.
Medite sells MDF principally under the trademarks of Medite and Medex.
Development of new products focused on meeting customer needs has expanded the
Company's MDF product line to include the following items:
PRODUCT APPLICATION
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Medite Basic MDF panel product
Medex Moisture resistant - exterior grade
Medite 313 Moisture resistant - interior grade
Medite FR Class 1 fire retardant panel product
Medite II Formaldehyde free - sensitive interior applications
The Company believes Medite is the world's best known trademark for
MDF, that Medex is the world's only current exterior grade MDF, and that Medite
is the leading producer of Class 1 flame retardant MDF. Medex is designed
primarily for outdoor applications that take a heavy environmental toll on
standard wood products; Medite 313 is designed for use in high-humidity
interior environments such as kitchens; Medite FR was developed specifically
for use where a Class 1 flame retardant board is required under building
regulations; and Medite II is used in areas with zero formaldehyde tolerance,
such as hospitals and schools. Medite owns and operates MDF plants in Medford,
Oregon and Las Vegas, New Mexico; its MDF plant in Clonmel, Republic of
Ireland, is owned and operated by Medite of Europe Limited, a wholly-owned
subsidiary of Medite.
Medite's access to adequate and reliable wood fiber raw material
supplies is a key aspect of its MDF operations. Medite/Europe has a long-term
timber contract with the Irish State Forestry Company that provides for
sufficient logs to supply the wood fiber needs of the Clonmel MDF plant,
although Medite/Europe
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also currently utilizes lower-cost sawmill residues from local Irish suppliers
for a portion of its fiber requirements. Wood chips, shavings and sawdust used
as raw materials in the Oregon MDF plant have been provided principally by
Medite's solid wood plants but are also generally available from other sources.
Wood chips for the New Mexico MDF plant have historically been available from
several sources within a 150-mile radius of the plant, although, due to
decreased production by certain suppliers, Medite has continued to expand its
supplier base to encompass a wider area. Other raw materials for MDF,
principally resins and glues, are available from a variety of suppliers.
Medite conducts substantial logging operations and owns approximately
167,000 acres of timberland, including 77,000 acres added since Medite was
acquired by Valhi in 1984. Medite's timberlands contain approximately 645
million board feet ("MMBF") of generally second-growth merchantable timber,
with the dominant species being Douglas Fir. The average annual timber growth
rate is approximately 4%. Medite's timber holdings are within close proximity
to its Oregon production facilities and are in relatively accessible terrain.
Based on reported U.S. Government sales of comparable timber, the Company
believes that Medite's timber and timberlands have a fair market value
substantially in excess of their December 31, 1993 carrying value of $52
million.
In June 1992, a fire destroyed Medite's veneer and chipping plant in
Rogue River, Oregon. Replacement chipping operations resumed in July 1993 and
replacement veneer operations resumed in January 1994. The new Rogue River
facilities are designed to process the smaller second-growth timber expected to
be available from company-owned timberlands on a longer-term basis. Veneer
from this plant will serve the LVL industry as well as traditional plywood
customers. Medite also owns and operates a stud lumber mill in White City,
Oregon, which primarily produces 2x4 studs. As a result of the closure of its
plywood operations in January 1993, Medite has a 105 acre site in Medford,
Oregon which is held for sale.
Strategy. Medite's primary strategic focus is to continue expansion
in the growing market for MDF with particular emphasis on higher margin
specialty products and to increase its presence in Europe and Mexico. Expanded
MDF production capabilities will generally be directed to those regions
providing attractive long-term availability of wood fiber. As discussed above,
Medite has commenced an expansion of its Irish MDF plant. Medite also is
placing emphasis on greater penetration of the growing market for MDF in
Mexico, which readily can be served by Medite's plant in Las Vegas, New Mexico.
In the U.S., where Medite anticipates further escalation of the cost of
traditional sources of wood fiber, Medite is introducing alternative sources
such as hardwoods and recycled wood products.
Medite actively manages its fee timberlands in Oregon, which are a
valuable resource as the shortage of Pacific Northwest public timber available
for harvest is expected to continue for the foreseeable future. In this
regard, Medite has adjusted its solid wood manufacturing operations to more
closely parallel the timber available from company-owned lands on a longer-term
basis, has increased its emphasis on the sale of logs, closed marginal
manufacturing operations and has adopted a more sustained yield approach to
harvesting timber from company-owned lands.
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Distribution and sale of products. MDF produced in Ireland by
Medite/Europe is sold primarily to wholesalers and distributors of building
products in European Union ("EU") countries, with the largest market being the
United Kingdom. U.S.-produced products are sold primarily to wholesalers of
building materials and are concentrated primarily in western states, with U.S.
exports principally to Pacific Rim countries and Mexico. Logs are sold
primarily to other Oregon mills. Medite's operations are not dependent upon
one or a few customers, the loss of which would have a material adverse effect
on this business segment. Medite's ten largest customers accounted for about
one-fourth of its sales in each of the past three years. In 1993, the ten
largest customers included eight companies in the U.S., one in Europe and one
in the Far East. Five of the ten largest customers in 1993 were primarily MDF
customers. Logging operations are seasonal due to inclement weather conditions
during winter and spring months, however the production and sale of products is
not particularly seasonal in nature.
Markets for engineered wood products such as MDF are broader, more
varied and less cyclical than those for traditional solid wood forest products.
Sales of traditional forest products in the U.S. are largely dependent upon the
strength of the housing industry, which historically has been cyclical in
nature.
Competition. The forest products industry is highly competitive, with
price being a principal competitive factor. Transportation costs are also
significant and generally limit the geographic market in which products are
sold.
Medite's MDF operations compete in the U.S. principally with a number
of producers of MDF and other composite board products, and in the Pacific Rim
with Australian, New Zealand and other U.S. manufacturers. Principal MDF
competitors in the U.S. include Plum Creek, Sierra Pine, Louisiana Pacific
Corp. and Wilamette Industries. In Europe, Medite competes principally with
other EU producers, including the world's largest MDF producer, the Glunz
Group. The cost of shipping products is significant and Medite may operate at
a competitive disadvantage to certain other producers who are located closer to
certain key Northern European markets. In addition, some of Medite's
competitors may possess greater financial resources, including in some cases
the financial support of the governments of the countries in which such
competitors are located. Due to periodic declines in the value of the U.S.
dollar relative to other currencies, Medite's Irish operations have also
experienced periodic increases in competition from U.S. producers.
According to industry sources, demand for MDF has increased at an
average annual rate of about 15% over the last five years, with estimated
worldwide consumption in 1993 double that of 1988. Medite believes demand will
continue to grow at slightly lower rates in the foreseeable future and that
demand for specialty MDF products will grow at a faster rate than for standard
MDF products. Medite continues to emphasize marketing of its higher margin
specialty MDF products, which accounted for approximately 20% of Medite's MDF
sales dollars in 1993.
Medite's solid wood operations compete primarily with numerous other
producers in the Pacific Northwest. The Pacific Northwest forest products
industry experiences competition from Canadian imports and, to a lesser extent,
from producers in southern states.
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Environmental matters. Medite conducts an extensive forest management
program with respect to company-owned timberlands, including selective harvest,
reforestation and fertilization activities. Medite believes that its
operations are in substantial compliance with existing permits relating to its
facilities and does not anticipate spending significant amounts for
facilities-related environmental matters in the near future.
Trademarks and patents. Patents held for MDF products and production
processes are believed to be important to Medite's MDF business activities. The
Company's major MDF trademarks, Medite and Medex, are protected by registration
in the United States and certain other countries with respect to the
manufacture and sale of its products. Medite also has a non-exclusive
world-wide license relating to application of resins in the manufacture of
Medex.
Employees. As of December 31, 1993, Medite employed approximately 670
persons, including 490 in the U.S. and 180 in Europe. Approximately one-fourth
of U.S. employees and two-thirds of non-U.S. employees are represented by
various labor unions. Employees of Medite's Oregon MDF plant are covered by a
five-year collective bargaining agreement through September 1997, and
employees at the Rogue River facility are covered under a three-year agreement
through May 1996. Employees of Medite's Irish plant are covered by a
collective bargaining agreement through March 1994. Negotiations are underway
for a new three-year agreement and Medite believes it will be able to enter
into a satisfactory new labor agreement with the union at the Irish plant.
Medite believes that its labor relations are satisfactory.
Governmental regulation. Medite's timber operations are subject to a
variety of Oregon and, in some cases, federal laws and regulations dealing with
timber harvesting, reforestation, endangered species, and air and water
quality. These regulations generally require Medite to obtain operating
permits and, in some cases, to file timber harvesting plans that must be
approved by the Oregon Department of Forestry prior to the harvesting of
timber. Medite does not expect that compliance with such existing laws and
regulations will have a material adverse effect on Medite's timber harvesting
practices. The U.S. Fish and Wildlife Service has designated the Northern
Spotted Owl as a threatened species under the Endangered Species Act ("ESA").
Generally, habitat for Northern Spotted Owls is found in old-growth timber
stands, compared to Medite's generally second-growth timber. Consequently,
Medite believes the designation of the Northern Spotted Owl under the ESA will
not have a material adverse effect on its timber harvesting practices. There
can be no assurance, however, that future legislation, governmental regulations
or judicial or administrative decisions will not adversely affect Medite or its
ability to harvest and sell logs or timber in the manner currently
contemplated.
The Federal Timber Contract Payment Modification Act of 1986 contains
certain restrictions on the volume of timber that may be offered for sale
pursuant to government contracts, and the volume of timber being offered for
competitive bidding in Medite's area of operations has been significantly
limited due to current government forest management plans, including the effect
of court-imposed restrictions resulting from application of the ESA and
litigation initiated by environmental groups.
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Risk of loss from fire or other casualties. Medite assumes
substantially all risks of loss from fire and other casualties on its
timberlands, as do the owners of most other timber tracts in the United States.
Medite is a participant with state agencies and other timberland owners in
cooperative fire fighting and aerial fire surveillance programs. The extensive
roads on Medite's acreage also serve as fire breaks and facilitate
implementation of fire control techniques and utilization of fire fighting
equipment. Medite's various timber tracts are also somewhat geographically
dispersed, which also reduces the possibility of significant fire damage. The
only forest fire on Medite's timberlands of any significance during the past
five years occurred in July 1992 and resulted in damage to approximately 1,200
acres, which were salvaged with minimal loss. Consistent with the past
practices of Medite and the owners of most other timber tracts in the United
States, Medite does not intend to maintain fire insurance in respect of
standing timber.
FAST FOOD:
Products and operations. Sybra, based in Atlanta, Georgia, operates
approximately 160 Arby's restaurants clustered in four regions pursuant to
licenses with Arby's, Inc. According to information provided by Arby's, Sybra
is the second-largest franchisee in the Arby's restaurant system based upon the
number of restaurants operated and gross sales. Arby's is a well-established
fast food restaurant chain and features a menu that highlights roast beef
sandwiches along with a variety of chicken and deli sandwiches, potato products
and soft drinks. Arby's represents a niche segment of the fast food restaurant
industry. Arby's recent national advertising campaign slogans include "Arby's
is Different(C)" and "Different is Good(C)". New product development is
important to the continued success of a restaurant system, and Sybra has
introduced several new menu items in recent years including chicken, submarine
and alternative roast beef sandwiches, curly fried potatoes and ice cream
desserts. Total sandwich category items accounted for over 60% of Sybra's
total sales during the past few years, and roast beef sandwiches currently
account for approximately two-thirds of Sybra's sandwich sales.
During the past three years, substantially all of the new restaurants
opened were free-standing stores as will be all of the new stores planned for
1994. Sybra also continuously evaluates its individual stores and closes
unprofitable stores when considered appropriate.
Sybra's 160 Arby's restaurants at the end of 1993 represent a net
increase of 101 stores from the 59 Arby's restaurants Sybra operated when it
was acquired in 1979 by a predecessor of Valhi. Sybra has also remodeled over
40 stores during the past five years. Sybra currently expects a net increase
in restaurants operated of two to five stores in 1994, as it plans to open six
to ten new restaurants within its existing regions and to close four or five
stores. The first new restaurant in 1994 opened in late February, and four
existing stores were closed in January.
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Strategy. Given the extremely competitive environment in which Sybra
operates, Sybra will (i) continue its strong emphasis on operational details;
(ii) routinely review the profit contribution of each restaurant with a view
toward closing those stores which do not meet expectations; and, (iii) continue
to follow its "clustering" concept in opening new stores in order to capitalize
on the economies of scale realized in management and advertising as a result of
geographic proximity. Sybra's exclusive Arby's development rights in the
Dallas/Ft. Worth, Texas and Tampa, Florida areas, discussed below, provide
future growth opportunities consistent with Sybra's store clustering concept.
New stores are likely to be free-standing restaurants of Sybra's smaller
design, which the Company has found generally to yield a greater rate of
return. Sybra also plans to continue to increase market share in the fast food
industry in its geographic markets through periodic promotions including the
introduction of innovative menu items to complement its main product offerings.
Properties. The following table summarizes by region the number of
Arby's restaurants operated by Sybra at the end of the last three years.
DECEMBER 31,
------------------------
1991 1992 1993
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Southwestern Region - Texas 57 58 56
Northern Region:
Michigan 49 49 49
Illinois/Wisconsin 3 3 3
Eastern Region:
Pennsylvania 22 22 23
Maryland/Virginia 10 9 9
Southeastern Region - Florida 17 19 20
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158 160 160
=== === ===
Of the 160 stores operated at the end of 1993, 115 were free-standing
stores and the remaining 45 are located within regional shopping malls or strip
shopping centers. Sybra leases 116 locations and owns the remainder. Lease
terms vary with most leases being on a long-term basis and providing for
contingent rents based on sales in addition to base monthly rents. At the end
of 1993, the remaining term of individual store leases averaged six years and
ranged up to 16 years. Approximately 90% of the leases of free-standing
locations contain purchase and/or various renewal options at fair market
values. Approximately 90% of the mall locations operate under leases which
expire in the next five years and do not provide for renewal options. In most
cases, Sybra expects that in the normal course of business leases can be
renewed or replaced by other leases. The four stores closed in January 1994
were leased mall units. Contingent rentals based upon various percentages of
gross sales of individual restaurants were less than 10% of Sybra's total rent
expense in each of the past three years. Sybra also leases corporate and
regional office space in five states.
- 11 -
13
Sybra has a Consolidated Development Agreement ("CDA") with Arby's,
Inc., which replaced several prior Area Development Agreements. Under the CDA,
Sybra has exclusive development rights within certain counties in the
Dallas/Fort Worth and Tampa areas and is required to open an aggregate of 31
stores in its existing markets during the five year term (1993 - 1997) of the
CDA. At December 31, 1993, Sybra had opened three stores pursuant to the CDA.
Sybra currently anticipates that its expansion program will enable it to retain
its exclusive Dallas/Ft. Worth and Tampa development rights over the term of
the CDA. Sybra does not have any other territorial or development agreements
which would prohibit others from operating an Arby's restaurant in the general
geographic markets in which Sybra now operates.
Food products and supplies. Sybra and other Arby's franchisees are
members of ARCOP, Inc., a non-profit cooperative purchasing organization.
ARCOP facilitates negotiations of national contracts for food and distribution,
taking advantage of the larger purchasing requirements of the member
franchisees. Since Arby's franchisees are not required to purchase any food
products or supplies from Arby's, Inc., ARCOP facilitates control over food and
supplies costs and avoids franchisor conflicts of interest.
License terms and royalty fees. The 27-year relationship between
Sybra and Arby's, Inc. is governed principally by licenses relating to each
restaurant location. Generally, such franchise agreements require that Sybra
comply with certain requirements as to business operations and facility
maintenance. Currently, Sybra pays an initial franchise fee of $25,000 and a
royalty rate of 4% of sales for a standard 20-year license. Because some of
Sybra's licenses were issued at times when license terms were perpetual and
lower royalty rates were in effect, 45% of Sybra's franchise agreements have no
fixed termination date and royalties for all locations aggregated 2.6% to 2.7%
of sales in each of the past three years. Sybra's average royalty rate is
expected to increase over time as new stores are opened or existing 20-year
licenses are renewed at then-prevailing royalty rates. The first of Sybra's
20-year licenses expires in 2003.
In 1993, an investment group purchased a controlling interest in
Triarc Company (formerly DWG Corporation), the parent company of Arby's, Inc.
Sybra believes that the change in ownership of Triarc is a positive development
for the Arby's system.
Advertising and marketing. For the past several years, Sybra has
directed about 7 1/2% of its total restaurant sales toward marketing. All
franchisees of Arby's, Inc. must belong to AFA Service Corporation ("AFA"), a
non-profit association of Arby's restaurant operators, and must contribute a
specified portion (up to 1.2%) of their gross revenues as dues to AFA. In
return, AFA provides franchisees creative materials such as television and
radio commercials, ad mats for newspapers, point-of-purchase graphics and other
advertising materials. Although Arby's, Inc., as an operator of Arby's
restaurants, is a member of AFA, the direction and management of AFA is
principally controlled by the member franchisees. Sybra and other franchisees
currently contribute .7% of their gross revenues to AFA. In addition to the
AFA contribution, Sybra devotes approximately 3% of its restaurant sales to
coupon sales promotions, including the direct cost of discounted food, and
newspaper and direct mail inserts, and approximately 3 1/2% of its restaurant
sales to local advertising, including outdoor advertising and electronic media.
- 12 -
14
Competition and seasonality. The fast food industry is extremely
competitive and subject to pressures from major business cycles and competition
from many established and new restaurant concepts. According to industry data,
there is a significant disparity in the revenues and number of restaurants
operated by the largest restaurant systems and the Arby's system. As a result,
some organizations and franchised restaurant systems have significantly greater
resources for advertising and marketing than the Arby's restaurant system or
Sybra, which is an important competitive factor. Sybra's response to these
competitive factors has been to cluster its stores in certain geographic areas
where it can achieve economies of scale in advertising and other activities.
Operating results of Sybra's restaurants have historically been
affected by both retail shopping patterns and weather conditions. Accordingly,
Sybra historically has experienced its most favorable results during the fourth
calendar quarter (which includes the holiday shopping season) and its least
favorable results during the first calendar quarter (which includes winter
weather, which can be adverse in certain markets).
Employees. As of December 31, 1993, Sybra had approximately 4,000
employees, of which 3,400 were part-time employees. Approximately 3,900
employees work in Sybra's restaurants and the remainder work in its corporate
or regional offices. Sybra's employees are not covered by collective
bargaining agreements, and Sybra believes that its relationship with its
employees is satisfactory.
Governmental regulation. Various federal, state and local laws affect
Sybra's restaurant business, including laws and regulations relating to health,
sanitation, employment and safety standards and local zoning ordinances. Sybra
has not experienced and does not anticipate unusual difficulties in complying
with these regulations. Sybra does not expect that remedial costs, if any,
related to compliance with the Americans with Disabilities Act will be
material. Sybra is subject to the Federal Fair Labor Standards Act, which
governs minimum wages, overtime and other working conditions. A significant
portion of Sybra's restaurant employees work on a part-time basis and are paid
at rates related to the minimum wage rate. Further increases in the minimum
wage rate (last increased in April 1991) and any mandatory medical insurance
benefits to part-time employees, both of which are favored by the Clinton
Administration, would increase Sybra's labor costs. Although Sybra's
competitors would probably experience similar increases, there can be no
assurance that Sybra will be able to increase sales prices to offset future
increases, if any, in these costs.
HARDWARE PRODUCTS:
Products, operations and properties. National Cabinet Lock,
headquartered in Mauldin, South Carolina, manufactures low and medium- security
locks, drawer slides, computer keyboard support arms and other components for
furniture and a variety of other applications. Lock products accounted for
approximately 40% of National Cabinet Lock's sales in 1993 with the other
products constituting approximately 60%. National Cabinet Lock believes its
products compete in relatively well-defined niche markets. The Company also
believes that it is the second- largest U.S. cabinet lock producer, that it is
the largest Canadian producer of drawer slides and that it is the largest
supplier of computer keyboard support arms to the North American office
furniture manufacturing market.
- 13 -
15
Locks are manufactured, assembled and packaged by National Cabinet
Lock in Mauldin, South Carolina, and by a subsidiary in Mississauga, Ontario,
Canada. Waterloo Furniture Components Limited, another Canadian subsidiary,
produces drawer slides and computer keyboard support arms for distributor and
industrial markets at a plant located in Kitchener, Ontario, Canada. The
Kitchener and Mauldin plants are owned, and the Mississauga facility is leased
through 1997. National Cabinet Lock markets its products primarily through its
own sales organization as well as select manufacturers' representatives.
Purchased components, including zinc castings, are the principal raw
materials used in the manufacture of latching and security products. Strip
steel is the major raw material used in the manufacture of hardware and stamped
metal products. These raw materials are purchased from several suppliers and
are readily available.
Strategy. National Cabinet Lock will seek to maintain its relatively
high margins through improved manufacturing efficiency and through development
of specialty, higher margin products engineered to customer specification and
to capitalize on future opportunities that may emerge to enter into longer-term
contracts with niche original equipment manufacturers. National Cabinet Lock
will also seek to expand its established market positions by emphasizing
customer service, promoting its distribution programs and seeking greater
penetration of the replacement lock market.
Competition and customer base. Competition in National Cabinet Lock's
markets is based on product features, customer service, quality, distribution
channels and consumer brand preferences. Approximately 30% of National
Cabinet Lock's lock sales are made through its STOCK LOCKS distribution
program, a program the Company believes offers a competitive advantage because
delivery generally is made within 72 hours. Most of National Cabinet Lock's
remaining sales are to original equipment manufacturers' specifications. The
Company's major competitors include Chicago Lock, Hudson Lock and Fort Lock
(locks), Accuride and Hettich/Grant (drawer slides) and Weber Knapp and Jacmorr
(computer keyboard support arms). National Cabinet Lock also competes with a
large number of other manufacturers, and the variety of relatively small
competitors generally makes significant price increases difficult. National
Cabinet Lock does not believe it is dependent upon one or a few customers,
however, select furniture manufacturers and a government agency lock purchaser
are important customers. National Cabinet Lock's ten largest customers
accounted for about one-third of its sales in each of the past three years,
with the largest customer less than 10% in each year. In 1993, seven of the
ten largest customers were located in the U.S. with three in Canada. Of such
customers, nine were primarily purchasers of Canadian-produced products and one
was a U.S. lock customer.
Patents and trademarks. National Cabinet Lock holds a number of
patents relating to its hardware products operations, none of which by itself
is considered significant, and owns a number of trademarks, including National
Cabinet Lock and STOCK LOCKS, which the Company believes are well recognized in
the hardware products industry.
- 14 -
16
Employees. As of December 31, 1993, National Cabinet Lock employed
approximately 600 persons, of which 230 were in the United States and 370 were
in Canada. Approximately 60% of Canadian employees are covered by a three-year
collective bargaining agreement expiring in February 1997. National Cabinet
Lock believes that its labor relations are satisfactory.
Environmental matters. National Cabinet Lock's operations are subject
to various federal, state, provincial and local provisions regulating the
discharge of materials into the environment and otherwise relating to the
protection of the environment. National Cabinet Lock does not believe future
expenditures to comply with these regulations will be material.
OTHER:
Foreign operations. The Company has substantial operations and assets
located outside the United States, primarily in Canada (National Cabinet Lock)
and Ireland (Medite). Foreign operations are subject to, among other things,
currency exchange rate fluctuations and the Company's results of operations
have in the past been both favorably and unfavorably affected by fluctuations
in currency exchange rates. Medite/Europe maintains a multi-currency revolving
credit agreement to mitigate exchange rate risk on receivables and has also
entered into certain forward contracts to mitigate exchange rate risk on
certain equipment purchase commitments related to the expansion of its MDF
plant. See Note 20 to the Company's Consolidated Financial Statements.
The Company's unconsolidated affiliates also have substantial foreign
operations, as discussed elsewhere herein.
Environmental matters. The Company has been subject to environmental
regulatory enforcement or litigation under various statues, including the
Comprehensive Environmental Response, Compensation and Liability Act, as
amended by the Superfund Amendments and Reauthorization Act ("CERCLA"), arising
out of past disposal practices. In some cases the Company has voluntarily
undertaken cleanup activities at various sites, while in some cases the Company
has been named as a potentially responsible party ("PRP") pursuant to CERCLA or
state counterparts to CERCLA. Typically these proceedings seek cleanup costs,
damages for personal injury or property damage, or both. While the Company may
be jointly and severally liable for such costs, in most cases the Company is
only one of a number of PRPs who are also jointly and severally liable. The
extent of CERCLA or other similar liability cannot be determined until a
remedial investigation and feasibility study is complete, the applicable
environmental authority issues a record of decision and costs are allocated
among PRPs.
The Company has been named as a PRP pursuant to CERCLA at one
Superfund site in Indiana and has also undertaken a voluntary cleanup program
approved by state authorities at another Indiana site, both of which involve
operations no longer conducted by the Company. The total estimated cost for
cleanup and remediation at the Indiana Superfund site is $43.5 million, of
which the Company's share is currently estimated to be approximately $2
million. The Company's estimated cost to complete the voluntary cleanup
program at the other Indiana site, which involves both surface and groundwater
remediation, is relatively nominal. The Company believes it has adequately
provided accruals for reasonably estimable costs for CERCLA matters and other
environmental liabilities. At December 31,
- 15 -
17
1993, the Company had accrued $2.3 million in respect of such matters, which
accrual does not reflect any amounts which the Company could recover from
insurers or other third parties and is near the Company's estimate of the upper
end of range of possible costs. No assurance can be given that actual costs
will not exceed accrued amounts or the upper end of the range. The imposition
of more stringent standards or requirements under environmental laws or
regulations, new developments or changes respecting site cleanup costs or
allocation of such costs among PRPs or a determination that the Company is
potentially responsible for the release of hazardous substances at other sites
could result in expenditures in excess of amounts currently estimated by the
Company to be required for such matters. Furthermore, there can be no
assurance that additional environmental matters related to current or former
operations will not arise in the future.
Other environmental matters relating to the Company's consolidated
business segments and to its unconsolidated affiliates are discussed in the
respective business sections elsewhere herein.
Acquisition and restructuring activities. 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
unconsolidated affiliates, 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, modify its
dividend policy, consider the sale of interests in subsidiaries or
unconsolidated 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. From time to
time, the Company also evaluates the restructuring of ownership interests among
its subsidiaries and related companies and expects to continue this activity in
the future.
The Company and other entities that may be deemed to be controlled by
or affiliated with Mr. Harold C. Simmons 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. In a number of instances, the Company has actively managed the
businesses acquired with a focus on maximizing return-on-investment through
cost reductions, capital expenditures, improved operating efficiencies,
selective marketing to address market niches, disposition of marginal
operations, use of leverage, and redeployment of capital to more productive
assets. In other instances, the Company has disposed of the acquired interest
in a company prior to gaining control. The Company intends to consider such
activities in the future and may, in connection with such activities, consider
issuing additional equity securities and increasing the indebtedness of Valhi,
its subsidiaries and related companies.
Other. Through June 1989, Valmont Insurance Company, a wholly-owned
captive insurance subsidiary of Valhi, reinsured workers' compensation and
employers' liability, auto liability, and comprehensive general liability risks
of Valhi and certain affiliates. Through April 1989, Valmont assumed certain
third-party reinsurance business, primarily property, marine and casualty risks
from insurance subsidiaries of other industrial firms, and a small amount of
U.S. quota share property and casualty risks. Valmont currently writes certain
- 16 -
18
miscellaneous direct coverages of Valhi and affiliates. All of Valmont's
third-party reinsurance risks are on a runoff basis.
The Company, through a general partnership, has an interest in certain
medical-related research and development activities pursuant to sponsored
research agreements. See Note 19 to the Company's Consolidated Financial
Statements.
UNCONSOLIDATED AFFILIATES - NL INDUSTRIES, INC. AND TREMONT CORPORATION:
NL and Tremont file periodic reports with the Securities and Exchange
Commission (the "Commission") pursuant to the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). The following information with respect to NL
(Commission file number 1-640) and Tremont (Commission file number 1-10126) has
been summarized from such reports, which contain more detailed information
concerning the respective businesses, results of operations and financial
condition of NL and Tremont.
At the end of 1993, the net carrying value of the Company's investment
in NL was $60 million ($2.43 per share) and in Tremont was $15 million ($4.17
per share).
NL INDUSTRIES
General. NL, headquartered in Houston, Texas, is an international
producer and marketer of titanium dioxide pigments ("TiO2") through its
wholly-owned subsidiary, Kronos, Inc. NL also produces specialty chemicals,
primarily rheological additives, through its wholly-owned subsidiary, Rheox,
Inc. Kronos is the world's fourth-largest TiO2 producer, with an estimated 11%
share of the worldwide market. Approximately one-half of Kronos' 1993 sales
volume was in Europe, where Kronos is the second-largest producer of TiO2. In
1993, Kronos accounted for 87% of NL's sales and 58% of its operating income.
TiO2 products and operations. Titanium dioxide pigments are chemical
products used for imparting whiteness, brightness and opacity to a wide range
of products, including paints, paper, plastics, fibers and ceramics. TiO2 is
considered to be a "quality-of-life" product with demand affected by the gross
domestic product in various regions of the world. Demand, supply and pricing
of TiO2 have historically been cyclical and the last cyclical peak for TiO2
prices occurred in early 1990. While TiO2 prices are currently approximately
one-third below those of the last cyclical peak, NL believes the TiO2 industry
has significant long-term potential. However, NL expects that the TiO2
industry will continue to operate at lower capacity utilization levels over the
next few years relative to the high utilization levels prevalent during the
late 1980's, primarily because of the slow recovery from the worldwide
recession and the impact of capacity additions since the late 1980's. The
economic recovery has been particularly slow in Europe, where a significant
portion of Kronos' TiO2 manufacturing facilities are located. Kronos has an
estimated 17% share of European TiO2 sales and an estimated 9% share of the
U.S. market. Consumption per capita in the United States and Western Europe
far exceeds that in other areas of the world and these regions are expected to
continue to be the largest geographic markets for pigment consumption.
However, if the economies in Eastern Europe, the Far East and China continue to
develop, a significant market for TiO2
- 17 -
19
could emerge in those countries. Kronos believes it is well positioned to
participate in the Eastern European market.
NL currently produces over 40 different TiO2 grades, sold under the
Kronos and Titanox trademarks, which provide a variety of performance
properties to meet customers' specific requirements. Major TiO2 customers
include international paint, paper and plastics manufacturers. NL believes
that there are no effective substitutes for TiO2. However, extenders such as
kaolin clays, calcium carbonate and polymeric opacifiers are used in a number
of Kronos' markets. Generally, extenders are used to reduce to some extent the
utilization of higher cost TiO2. The use of extenders has not significantly
affected TiO2 consumption over the past decade because extenders generally
have, to date, failed to match the performance characteristics of TiO2. NL
believes that the use of extenders will not materially alter the growth of the
TiO2 business in the foreseeable future.
Kronos and its predecessors have produced and marketed TiO2 in North
America and Europe for over 70 years. As a result, Kronos believes that it has
developed considerable expertise and efficiency in the manufacture, sale,
shipment and service of its products in domestic and international markets. By
volume, about one-half of Kronos' 1993 TiO2 sales were to Europe, with
approximately two-fifths to North America and the balance to export markets.
Kronos' international operations are conducted through Kronos International,
Inc. ("KII"), a German-based holding company NL formed in 1989 to manage and
coordinate NL's manufacturing operations in Europe and Canada and its sales and
marketing activities in over 100 countries. NL believes the KII structure
allows it to capitalize on expertise and technology developed in Germany over a
60-year period.
Kronos is also engaged in the mining and sale of ilmenite ores (a raw
material used in the sulfate pigment production process), and the manufacture
and sale of iron-based water treatment chemicals (derived from co-products of
the pigment production processes). Water treatment chemicals are used as
treatment and conditioning agents for industrial effluents and municipal
wastewater and in the manufacture of iron pigments.
TiO2 manufacturing process, properties and raw materials. TiO2 is
manufactured by Kronos using either the chloride and sulfate pigment production
processes. Although most end-use applications can use pigments produced by
either process, chloride process pigments are generally preferred in certain
segments of the coatings and plastics applications, and sulfate process
pigments are generally preferred for paper, fibers and ceramics applications.
Due to environmental factors and customer considerations, the proportion of
TiO2 industry sales represented by the chloride process pigments has increased
relative to sulfate process pigments. About two-thirds of Kronos' current
production capacity is based on an efficient chloride process technology.
Kronos currently has four TiO2 plants in Europe (Leverkusen and
Nordenham, Germany; Langerbrugge, Belgium; and Fredrikstad, Norway), a plant in
Varennes, Quebec, Canada and, through the manufacturing joint venture discussed
below, a one-half interest in a plant in Lake Charles, Louisiana which
commenced production in 1992. Prior to October 1993, Kronos owned all of the
Louisiana plant. Kronos' principal German operating subsidiary leases the land
under its Leverkusen production facility pursuant to a lease expiring in 2050.
The Leverkusen plant, with approximately one-third of Kronos' current TiO2
production
- 18 -
20
capacity, is located within the lessor's extensive manufacturing complex, and
Kronos is the only unrelated party so situated. Under a separate supplies and
services agreement, which expired in 1991 and to which an extension through
2011 has been agreed to in principle, the lessor provides some raw materials,
auxiliary and operating materials and utilities services necessary to operate
the Leverkusen plant. Both the lease and supplies and services agreement
restrict NL's ability to transfer ownership or use of the Leverkusen plant.
Kronos also has a governmental concession through 2007 to operate its ilmenite
mine in Norway.
Kronos produced approximately 352,000 metric tons of TiO2 in 1993,
compared to 358,000 metric tons in 1992 and 293,000 metric tons in 1991. The
increase in production during 1992 was primarily at Kronos' chloride process
plants, including Lake Charles, and Kronos achieved record production levels of
chloride process pigments in 1992 through improved operational efficiencies.
In response to weakened demand, production rates were reduced in late 1992 and
during 1993 in order to reduce inventory levels. Kronos believes its annual
attainable production capacity is approximately 380,000 metric tons, including
its one-half interest in the Louisiana plant. NL believes such capacity is
sufficient to provide Kronos with the capability to meet current market
requirements and continue its worldwide presence in future years.
The primary raw materials used in the TiO2 chloride production process
are chlorine, coke and titanium-containing feedstock derived from beach sand
ilmenite and rutile. Chlorine and coke are available from a number of
suppliers. Titanium-containing feedstock suitable for use in the chloride
process is available from a limited number of suppliers around the world,
principally in Australia, Africa, India and the United States. Kronos
purchases slag refined from beach sand ilmenite from Richards Bay Iron and
Titanium (Proprietary) Ltd. (South Africa), approximately 50% of which is owned
by Q.I.T. Fer et Titane Inc. ("QIT"), an indirect subsidiary of RTZ Corp.
Natural rutile ore is purchased from a number of sources.
The primary raw materials used in the TiO2 sulfate production process
are sulfuric acid and titanium-containing feedstock derived primarily from rock
and beach sand ilmenite. Sulfuric acid is available from a number of
suppliers. Titanium-containing feedstock suitable for use in the sulfate
process is available from a limited number of suppliers around the world.
Currently, the principal active sources are located in Norway, Canada,
Australia, India and South Africa. As one of the few vertically-integrated
producers of sulfate process pigments, Kronos operates a rock ilmenite mine
near Hauge i Dalane, Norway, which provided all of Kronos' feedstock for its
European sulfate process pigment plants in 1993. Kronos' mine is also a major
commercial source of rock ilmenite for other sulfate process producers in
Europe, and NL believes the mine supplies almost 40% of aggregate European
demand, including NL, for sulfate feedstock. Kronos also purchases sulfate
grade ilmenite slag under contracts negotiated annually with QIT and Tinfos
Titanium and Iron K/S.
Kronos believes the availability of titanium-containing feedstock for
both the chloride and sulfate processes is adequate in the near- term; however
tightening supplies for the chlorine process may be encountered in the late
1990's. Kronos does not anticipate experiencing any interruptions of its raw
material supplies.
- 19 -
21
TiO2 manufacturing joint venture. In October 1993, Kronos formed a
manufacturing joint venture with Tioxide Group, Ltd., a wholly- owned
subsidiary of Imperial Chemicals Industries PLC. The joint venture, which is
equally owned by subsidiaries of Kronos and Tioxide, owns and operates the
Louisiana chloride process TiO2 plant formerly owned by Kronos. Under the
terms of the joint venture and related agreements, Kronos contributed the plant
to the joint venture, Tioxide paid an aggregate of approximately $205 million,
including its tranche of the joint venture debt, and Kronos and certain of its
subsidiaries exchanged proprietary chloride process and product technologies
with Tioxide and certain of its affiliates. Production from the plant is being
shared equally by Kronos and Tioxide pursuant to separate offtake agreements.
The manufacturing joint venture is intended to be operated on a break-even
basis, and accordingly Kronos' transfer price for its share of the TiO2
produced is equal to its share of the joint venture's operating expenses (fixed
and variable costs of production and interest expense). Kronos' share of the
fixed and variable production costs are reported as cost of sales as the
related TiO2 acquired from the joint venture is sold, and its share of the
joint venture's interest expense is reported as a component of NL's
consolidated interest expense.
A supervisory committee, composed of two members appointed by each
partner, directs the business and affairs of the joint venture, including
production and output decisions. Two general managers, one appointed and
compensated by each partner, manage the day-to-day operations of the joint
venture acting under the direction of the supervisory committee.
Specialty chemicals operations. Rheological additives produced by
Rheox control the flow and levelling characteristics of a variety of products,
including paints, inks, lubricants, sealants, adhesives and cosmetics.
Organoclay rheological additives are clays which have been chemically reacted
with organic chemicals and compounds. Rheox produces rheological additives for
both solvent-based and water-based systems. Rheox believes that it is the
world's largest producer of rheological additives for solvent-based systems,
supplying approximately 40% of the worldwide market, and is also a supplier for
rheological additives used in water-based systems. Rheological additives for
solvent-based systems accounted for approximately 90% of Rheox's sales in 1993,
with the remainder principally rheological additives for water-based systems.
Rheox has introduced a number of new products during the past three years, many
of which are for water-based systems, which currently represent a larger
portion of the market than solvent-based systems and which Rheox believes, in
the long term, will account for an increasing portion of the market. Rheox
also focused on product development for environmental applications with new
products introduced for de-inking recycled paper and soil stabilization at
contaminated sites. Rheox's plants are in Charleston, West Virginia, Newberry
Springs, California, St. Louis, Missouri, Livingston, Scotland and Nordenham,
Germany.
The primary raw materials utilized in the production of rheological
additives are bentonite clays, hectorite clays, quaternary amines, polyethylene
waxes and castor oil derivatives. Bentonite clays are currently purchased
under a three-year contract, renewable through 2004, with a subsidiary of
Dresser, which has significant bentonite reserves in Wyoming. This contract
assures Rheox the right to purchase its anticipated requirements of bentonite
clays for the foreseeable future and Dresser's reserves are believed to be
sufficient for such purpose. Hectorite clays are mined from company-owned
reserves in Newberry Springs, California, which NL believes are adequate to
supply its needs for the
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22
foreseeable future. The Newberry Springs ore body contains the largest known
commercial deposit of hectorite clays in the world. Quaternary amines are
purchased primarily from a joint venture company 50%-owned by Rheox and are
also generally available on the open market from a number of suppliers. Castor
oil-based rheological additives are purchased from sources in the United States
and abroad. Rheox has a supply contract with a manufacturer of these products,
which may not be terminated without 180 days notice by either party.
Competition. The TiO2 industry is highly competitive. During the
late 1980's worldwide demand approximated available supply and the major
producers, including Kronos, were operating at or near available capacity. In
the past few years, supply has exceeded demand, in part due to new chloride
process capacity coming on-stream. Relative supply/demand relationships, which
had a favorable impact on industry-wide prices during the late 1980's, have had
a negative impact since prices peaked in early 1990. Worldwide capacity
additions in the TiO2 market are slow to develop because of the significant
capital expenditures and substantial lead time (typically three to five years
in NL's experience) for, among other things, planning, obtaining environmental
approvals and construction.
Kronos competes primarily on the basis of price, product quality and
technical service, and the availability of high performance pigment grades.
Although certain TiO2 grades are considered specialty pigments, the majority of
grades and substantially all of Kronos' production are considered commodity
pigments with price generally being a most significant competitive factor.
Kronos has an estimated worldwide TiO2 market share of 11% (17% in Europe and
9% in the U.S), and believes that it is the leading marketer of TiO2 in a
number of countries, including Germany and Canada. Kronos' principal
competitors are E.I. du Pont de Nemours & Co.; Tioxide; Hanson PLC (SCM
Chemicals); Kemira Oy; Bayer AG and Ishihara Sangyo Kaisha, Ltd. These six
competitors have estimated individual worldwide market shares ranging from 5%
to 21%, and an aggregate estimated 65% share. Du Pont has over one-half of
total U.S. TiO2 production capacity and is Kronos' principal North American
competitor.
Kronos has substantially completed a major environmental protection
and improvement program commenced in the early 1980's to replace or modify its
European TiO2 production facilities for compliance with various environmental
laws by the respective effective dates. All of Kronos' European plants now use
either the low-waste yielding chloride process, or the sulfate process with
reprocessing or neutralization of waste acid. Kronos has commenced
construction of a $25 million waste acid neutralization/synthetic gypsum
manufacturing facility for its Canadian sulfate process TiO2 plant, which is
expected to be completed in mid-1994. Although these upgrades increased
operating costs, they are expected to reduce future capital expenditures that
Kronos would otherwise need to incur as environmental standards are increased.
NL believes that certain competitors have not upgraded their facilities and are
expected to do so in the future or be forced to curtail production due to lack
of environmental compliance.
Competition in the specialty chemicals industry is generally
concentrated in the areas of product uniqueness, quality and availability,
technical service, knowledge of end-use applications and price. Rheox's
principal competitors for rheological additives for solvent-based systems are
LaPorte PLC, Sud Chemie AG and Akzo NV. Principal competitors for water-based
systems are Rohm and Haas
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23
Company, Hercules Incorporated, The Dow Chemical Company and Union Carbide
Corporation.
Research and development. NL's annual expenditures for research and
development and technical support programs have averaged approximately $10
million during the past three years, with Kronos accounting for about
three-fourths of the annual totals. Research and development activities
related to TiO2 are conducted principally at the Leverkusen, Germany facility.
Such activities are directed primarily towards improving both the chloride and
sulfate production processes, improving product quality and strengthening
Kronos' competitive position by developing new pigment applications.
Activities relating to rheological additives are conducted primarily in the
United States and directed towards the development of new products for
water-based systems, environmental applications and new end-use applications
for existing product lines.
Patents and trademarks. Patents held for products and production
processes are believed to be important to NL and contribute to the continuing
business activities of Kronos and Rheox. NL continually seeks patent
protection for its technical developments, principally in the United States,
Canada and Europe, and from time to time enters into licensing arrangements
with third parties. In connection with the formation of the manufacturing
joint venture with Tioxide, Kronos and certain of its subsidiaries exchanged
proprietary chloride process and product technologies with Tioxide and certain
of its affiliates. Use by each recipient of the other's technology in Europe
is restricted until October 1996. NL's major trademarks, including Kronos,
Titanox and Rheox, are protected by registration in the United States and
elsewhere with respect to those products it manufactures and sells.
Foreign operations. NL's chemical businesses have operated in
international markets since the 1920's. Most of Kronos' current production
capacity is located in Europe and Canada and about one-third of Rheox's sales
in the past three years have been attributable to European production.
Approximately three-quarters of NL's 1993 consolidated sales were attributable
to non-U.S. customers, including over 10% attributable to customers in areas
other than Europe and Canada.
Political and economic uncertainties in certain of the countries in
which NL operates may expose NL to risk of loss. NL does not believe that
there is currently any likelihood of material loss through political or
economic instability, seizure, nationalization or similar event. NL cannot
predict, however, whether events of this type in the future could have a
material effect on its operations. NL's manufacturing and mining operations
are also subject to extensive and diverse environmental regulation in each of
the foreign countries in which they operate. See "Regulatory and environmental
matters."
Customer base and seasonality. NL believes that neither its aggregate
sales nor those of any of its principal product groups are concentrated in or
materially dependent upon any single customer or small group of customers.
Neither NL's business as a whole nor that of any of its principal product
groups is seasonal to any significant extent. Due in part to the increase in
paint production in the spring to meet spring and summer painting season
demand, TiO2 sales are generally higher in the second and third calendar
quarters than in the first and fourth calendar quarters. Sales of rheological
additives are
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24
influenced by the worldwide industrial protective coatings industry, where
second calendar quarter sales are generally the strongest.
Employees. As of December 31, 1993, NL employed approximately 3,200
persons (excluding the joint venture employees), with 400 employees in the
United States and 2,800 at sites outside the United States. Hourly employees
in production facilities worldwide are represented by a variety of labor
unions, with labor agreements having various expiration dates. NL believes its
labor relations are satisfactory.
Regulatory and environmental matters. Certain of NL's businesses are
and have been engaged in the handling, manufacture or use of substances or
compounds that may be considered toxic or hazardous within the meaning of
applicable environmental laws. As with other companies engaged in similar
businesses, certain past and current operations and products of NL have the
potential to cause environmental or other damage. NL has implemented and
continues to implement various policies and programs in an effort to minimize
these risks. NL's policy is to achieve compliance with applicable
environmental laws and regulations at all of its facilities and to strive to
improve environmental performance. It is possible that future developments,
such as stricter requirements of environmental laws and enforcement policies
thereunder, could affect NL's production, handling, use, storage,
transportation, sale or disposal of such substances.
NL's U.S. manufacturing operations are governed by federal
environmental and worker health and safety laws and regulations, principally
the Resource Conservation and Recovery Act, the Occupational Safety and Health
Act, the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act, the
Toxic Substances Control Act, and CERCLA, as well as the state counterparts of
these statutes. NL believes that all of its U.S. plants and the Louisiana
plant owned and operated by the joint venture are in substantial compliance
with applicable requirements of these laws. From time to time, NL facilities
may be subject to environmental regulatory enforcement under such statutes.
Resolution of such matters typically involves the establishment of compliance
programs. Occasionally, resolution may result in the payment of penalties, but
to date such penalties have not involved amounts having a material adverse
effect on NL's consolidated financial position, results of operations or
liquidity.
NL's European and Canadian production facilities operate in an
environmental regulatory framework in which governmental authorities typically
are granted broad discretionary powers which allow them to issue operating
permits required for the plants to operate. NL believes all of its European
plants are in substantial compliance with applicable environmental laws.
While the laws regulating operations of industrial facilities in
Europe vary from country to country, a common regulatory denominator is
provided by the EU. Germany, Belgium and the United Kingdom, members of the EU,
follow the initiatives of the EU; Norway, although not a member, generally
patterns its environmental regulatory actions after the EU. Kronos believes it
is in substantial compliance with agreements reached with European
environmental authorities and with an EU directive to control the effluents
produced by TiO2 production facilities. Rheox believes it is in substantial
compliance with environmental regulations in Germany and the United Kingdom.
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25
In order to reduce sulfur dioxide emissions into the atmosphere,
Kronos is installing off-gas desulfurization systems at its German plants at an
estimated cost of approximately $24 million. The manufacturing joint venture
is installing an off-gas desulfurization system at its Louisiana plant at an
estimated cost of $15 million. The German systems are expected to be completed
in 1996 and the Louisiana system is scheduled for completion in 1995.
Kronos' ilmenite mine near Hauge i Dalane had a permit for the
offshore disposal of tailings through February 1994. In February 1994, Kronos
completed a $15 million onshore disposal system to replace the offshore
disposal of tailings. Onshore disposal will result in a modest increase in the
mine's operating costs.
The Quebec provincial government is an environmental regulatory body
with authority over Kronos' Canadian TiO2 production facilities, which
currently consist of plants utilizing both the chloride and sulfate process
technologies. The provincial government regulates discharges into the St.
Lawrence River. In May 1992, the Quebec provincial government extended Kronos'
right to discharge effluents from its Canadian sulfate process TiO2 plant into
the St. Lawrence River until June 1994, at which time Kronos' new $25 million
waste acid neutralization facility is expected to be completed. In January
1993, the Quebec provincial government granted a permit to Kronos to construct
the facility and established the future permit parameters, which Kronos will be
required to meet upon completion of the facility.
Notwithstanding the above-described agreement, in March 1993 Kronos'
Canadian subsidiary and two of its directors were charged by the Canadian
federal government with five violations of the Canadian Fisheries Act relating
to discharges into the St. Lawrence River from the Varennes sulfate TiO2
production facility. The penalty for these violations, if proven, could be up
to Canadian $15 million. Additional charges, if brought, could involve
additional penalties. NL has moved to dismiss the case on constitutional
grounds, and believes that this charge is inconsistent with the extension
granted by provincial authorities referred to above.
NL's future capital expenditures related to its ongoing environmental
protection and improvement programs, including those described above, are
currently expected to be approximately $75 million, including $30 million in
1994.
NL has been named as a defendant, PRP, or both, pursuant to CERCLA and
similar state laws in approximately 80 governmental enforcement and private
actions associated with waste disposal sites and facilities currently or
previously owned, operated or used by NL, many of which are on the U.S.
Environmental Protection Agency's Superfund National Priority List or similar
state lists. These proceedings seek cleanup costs, damages for personal injury
or property damage, or both. Certain of these proceedings involve claims for
substantial amounts. Although NL may be jointly and severally liable for such
costs, in most cases, it is only one of a number of PRPs who are also jointly
and severally liable. In addition to the matters noted above, certain current
and former facilities of NL, including several divested secondary lead smelter
and former mining locations, are the subject of environmental investigations or
litigation arising out of industrial waste disposal practices and mining
activities.
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The extent of NL's CERCLA liability cannot be determined until the
Remedial Investigation and Feasibility Study is complete, the U.S. EPA issues
a record of decision and costs are allocated among PRPs. The extent of
liability under analogous state cleanup statutes and for common law equivalents
are subject to similar uncertainties. NL believes it has provided adequate
accruals for reasonably estimable costs of such matters. At December 31, 1993,
NL had accrued $70 million in respect of those environmental matters which are
reasonably estimable. NL determines the amount of accrual on a quarterly basis
by analyzing and estimating the range of possible costs to NL. Such costs
include, among other things, remedial investigations, monitoring, studies,
clean-up, removal and remediation. It is not possible to estimate the range of
costs for certain sites. NL has estimated that the upper end of the range of
reasonably possible costs to NL for sites for which it is possible to estimate
costs is approximately $105 million. 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. The imposition of more stringent standards or requirements under
environmental laws or regulations, new developments or changes respecting site
cleanup costs or allocation of such costs among PRPs, or a determination that
NL is potentially responsible for the release of hazardous substances at other
sites could result in expenditures in excess of amounts currently estimated by
NL to be required for such matters. Further, there can be no assurance that
additional environmental matters will not arise in the future.
NL was formerly involved in the manufacture of lead pigments for use
in paint and lead-based paint. NL has been named as a defendant or third party
defendant in various legal proceedings alleging that NL and other manufacturers
are responsible for personal injury and property damage allegedly associated
with the use of lead pigments. NL is vigorously defending such litigation.
Considering NL's previous involvement in the lead pigment and lead-based paint
business, there can be no assurance that additional similar litigation will not
be filed. In addition, various legislation and administrative regulations
have, from time to time, been enacted or proposed at the state, local and
federal levels that seek to (i) 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 (ii)
effectively overturn court decisions in which NL and other pigment
manufacturers have been successful. One such bill that would subject lead
pigment manufacturers to civil liability for damages caused by lead- based
paint on the basis of market share, and extends certain statutes of
limitations, passed the Massachusetts House of Representatives in 1993. The
same bill has been re-introduced in the Massachusetts legislature in 1994. No
legislation or regulations have been enacted to date which are expected to have
a material adverse effect on NL's consolidated financial position, results of
operations or liquidity. NL has not accrued any amounts for the pending lead
pigment litigation. Although no assurance can be given that NL will not incur
future liability in respect of this litigation, based on, among other things,
the results of such litigation to date, NL believes that the pending lead
pigment litigation is without merit. Any liability that may result is not
reasonably capable of estimation by NL.
NL has filed declaratory judgment actions against various insurance
carriers seeking costs of defense and indemnity coverage for certain of its
environmental and lead pigment litigation. To date, one court has granted NL's
motion for
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summary judgment and ordered an insurance carrier to pay to NL the reasonable
costs of defending certain of NL's lead pigment cases. The courts have not
made any rulings on defense costs or indemnity coverage with respect to NL's
pending environmental litigation or on indemnity coverage in the lead pigment
litigation. No trial dates have been set. Other than the rulings to date, the
issue of whether insurance coverage for defense costs or indemnity, or both,
will be found to exist depends upon a variety of factors, and there can be no
assurance that such insurance coverage will exist in other cases. NL has not
included amounts in any accruals in anticipation of insurance coverage for lead
pigment or environmental litigation.
TREMONT CORPORATION
General. Tremont, based in Denver, Colorado, conducts its titanium
metals operations through its 75%-owned subsidiary, Titanium Metals Corporation
("TIMET"), an integrated producer of titanium metal products. TIMET is
presently one of the four major U.S producers of titanium metal products and
has an estimated one-third share of the U.S. market. Tremont also holds 9.1
million NL shares, or 18% of NL's outstanding common stock, and reports its
interest in NL by the equity method.
Products, operations, and properties. Titanium has a unique
combination of strength, light weight, stability at high temperatures and
resistance to corrosion, which makes it highly desirable for certain
applications. The aerospace industry (including airframe and engine
construction) has historically accounted for approximately three-fourths of
U.S. titanium mill products consumption. Consequently, the activity in the
highly cyclical aerospace industry has a significant effect on the overall
sales and profitability of the titanium industry. The titanium metals business
continues to be significantly and adversely affected by, among other things,
weak demand within the military and commercial aerospace markets and excess
worldwide production capacity. Adverse selling price pressures have been
exacerbated by the increasing availability of relatively inexpensive titanium
scrap, sponge and mill products principally from Russia and other countries of
the former Soviet Union (the Commonwealth of Independent States or "CIS").
Tremont expects that TIMET's and the industry's production levels and shipments
over the next few years will remain substantially lower than the peak levels of
the late 1980's and 1990.
TIMET's titanium products are used in a wide variety of commercial and
industrial applications, including commercial and military aircraft, chemical
processing equipment, power generation facilities, medical applications and
sports equipment. Titanium sponge, so called because of its appearance, is the
elemental form of titanium metal used in processed titanium products and is
produced by TIMET at its Nevada plant, described below. Titanium ingot results
from melting sponge and/or scrap, often with various other alloying elements,
while titanium wrought products are forged, rolled and/or extruded from ingot
and/or cast slab. TIMET sends certain products to outside vendors for further
processing, including hot rolling of titanium strip. Over 90% of TIMET's sales
in the past three years were generated from the sale of titanium ingot and
wrought products.
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TIMET owns and operates a 22 million pound (10,000 metric ton) annual
rated capacity vacuum distillation process ("VDP") titanium sponge production
facility in Henderson, Nevada. The VDP plant commenced production in early
1993 and has received substantially all necessary aerospace qualifications.
TIMET expects to operate the VDP plant at approximately 60% of capacity during
1994. In December 1993, Union Titanium Sponge Corporation ("UTSC"), a
consortium of Japanese companies that provided the advanced technology and a
majority of the financing for the VDP plant, converted its $75 million of TIMET
debentures into 25% of TIMET's outstanding voting common stock. UTSC has the
right to acquire up to approximately 20% of TIMET's annual production capacity
of VDP sponge at agreed-upon and formula-determined prices. TIMET also has a
32 million pound (14,500 metric ton) annual capacity titanium sponge plant at
its Henderson site which utilizes the older Kroll-leach production process.
TIMET expects to temporarily close this plant in 1994 and expects that it will
remain closed until market conditions significantly improve.
The titanium sponge produced at Henderson is used as the basic raw
material for a 28 million pound (12,700 metric ton) annual capacity ingot
facility also at the Nevada plant. Titanium wrought products are produced at
TIMET's forging and rolling facility in Toronto, Ohio, which receives titanium
ingots from the Nevada plant and titanium slab from 50%-owned Titanium Hearth
Technologies ("THT"). Wrought products are also produced at TIMET's finishing
facility in Morristown, Tennessee. TIMET has operated below production
capacity during the past three years in response to lower demand levels. In
1993, the Nevada plant operated at about 50% of capacity, down from about 80%
of capacity in 1992, while the Ohio and Tennessee facilities operated at 70%
and 60%, respectively, of capacity in 1993, which approximated 1992 levels.
THT, a TIMET and Axel Johnson Metals, Inc. joint venture formed in
1992, owns and operates a 12 million pound (5,400 metric ton) annual capacity
cold hearth melting furnace formerly owned by Axel Johnson. TIMET has
committed to have THT perform a substantial percentage of TIMET's requirements
for melting certain titanium products. THT also provides melting services to
unrelated parties.
In March 1993, TIMET and Compagnie Europeenne du Zirconium ("CEZUS"),
a French company, executed a series of agreements by which, following a
transition period of approximately two years, TIMET expects to acquire CEZUS'
titanium business and CEZUS would become an exclusive TIMET subcontractor,
primarily for titanium melting and forging, pursuant to a long-term agreement.
Any such acquisition is subject to, among other things, approval of the French
Ministry of Finance. As part of the agreements, TIMET will generally be
entitled to receive, or be obligated to pay (subject to certain limitations),
50% of the net income or loss of CEZUS's titanium business in 1994.
TIMET has three service centers in the U.S. and two in Europe which
maintain supplies of mill products for customer sales in their respective
regions. Most of these service centers are located near major customers and
have secondary shearing, cutting and machining capabilities to tailor mill
products to meet customers' specifications. TIMET believes its service center
network provides a competitive advantage.
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Raw materials. The primary raw materials used in the production of
titanium sponge are titanium-containing rutile ore, chlorine, magnesium and
coke. Chlorine, magnesium and coke are generally available from a number of
suppliers. Titanium-containing rutile ore is currently available from a
limited number of suppliers around the world, and substantially all of TIMET's
rutile ore is currently purchased from Australian suppliers. While TIMET
believes the availability of titanium-containing rutile ore is adequate in the
near-term, tightening supplies may be encountered in the late 1990's. TIMET
does not anticipate experiencing any interruptions of its raw material
supplies. Various alloying elements used in the production of titanium ingot
are available from a number of suppliers.
Market and customer base. A majority of TIMET's sales in 1993 were to
customers in the aerospace industry. TIMET expects that a majority of its 1994
sales will be to this sector but that industrial markets will represent an
increasing portion of its sales over the next few years. TIMET's long-term
goal is to transition from a dependence on aerospace markets to a closer
balance between aerospace and industrial markets, in part because TIMET does
not expect a return in government defense aerospace spending to prior levels
and does not expect commercial aerospace spending to increase substantially
over the next few years. TIMET does, however, expect a long-term increase in
demand for new commercial aircraft, a significant portion of which is expected
to be met by wide-body aircraft which use more titanium than narrow-body
aircraft. Sales to industrial markets of titanium plate, strip and tube, which
currently account for approximately 45% of TIMET's sales, are improving as the
utility, desalination, and certain other industries increase capital spending.
TIMET's five largest customers accounted for an aggregate of approximately 20%
to 25% of its sales in each of the past three years.
Competition. The worldwide titanium metals industry is highly
competitive. TIMET competes primarily on the basis of price, quality of
products, technical support and the availability of products to meet customers'
delivery schedules. TIMET believes that the trademark TIMET, which is
protected by registration in the U.S. and other countries, is significant to
its business.
Over 70% of TIMET's sales in the past three years were to customers in
the U.S. where its principal competitors are Oregon Metallurgical Corporation
("Oremet"), RMI Titanium Company and Teledyne Allvac. TIMET estimates its
share of U.S. sponge production capacity at the end of 1993 approximated 75%,
including 40% related to its older Kroll-leach process plant. TIMET, Oremet,
RMI and Teledyne Allvac represent an estimated aggregate 80% of U.S. sales of
titanium mill products, and TIMET believes it has the largest share of these
producers.
TIMET competes with a number of non-integrated producers that produce
titanium products from sponge, ingot and slab purchased from outside vendors
(including TIMET and THT), and to a lesser extent with foreign integrated
producers located primarily in Japan and Europe. While the mill product
production of Japanese and European titanium producers is approximately
one-half that of the U.S. titanium producers, they are significant competitors
in international markets. Until recently, imports of foreign titanium products
into the U.S. have not been significant, however, imports of titanium sponge
and scrap, principally from the CIS, increased during 1991 and 1992 and
substantially increased in 1993. TIMET purchased a considerable volume of CIS
sponge in 1993 for use in producing certain industrial products.
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Historically, Russia and other members of the CIS have not been
significant competitors as their titanium products were largely consumed
internally. However, TIMET believes these producers are likely to become more
significant competitors in the future. Although accurate information regarding
the CIS's titanium industry is not readily available, TIMET believes the CIS's
sponge production capacity and actual 1993 production may be as much as
one-half of aggregate worldwide levels. The CIS is also known to have
significant melting and wrought product production capacity. Although imports
of CIS sponge have increased in recent years, TIMET believes the majority of
the sponge produced in the CIS continues to be consumed internally.
In September 1993, President Clinton issued an Executive Proclamation
granting to Russia the status of "beneficiary developing country" under the
U.S. trade laws. This had the effect of eliminating or reducing the tariffs on
many products imported from Russia, including the elimination of tariffs on
most wrought titanium products (excluding titanium ingot, slab and billet). A
petition filed by a group of U.S. titanium producers (including TIMET) to
reverse this action is currently pending. At present, there is no duty on
titanium scrap from Russia, while titanium sponge from Russia (as well as from
the other CIS sponge-exporting states, Ukraine and Kazakhstan) carries both
regular and antidumping duties. TIMET understands the Ukraine sponge plant was
temporarily closed in late 1993. The level of this antidumping duty is
currently under review by the Department of Commerce at the request of TIMET
and the other integrated U.S. titanium producer.
Entry as an integrated titanium producer would require significant
capital investment and substantial technical expertise. However, producers of
other metal products, such as steel and aluminum, maintain forging, rolling and
finishing facilities which could be modified to produce titanium products.
Titanium mill products also compete with certain stainless steels and nickel
alloy mill products in industrial applications.
Research and development. TIMET's annual research and development
expenditures have averaged $2 million during the past three years and are
directed primarily towards improving process technology, developing new alloys,
enhancing the performance of TIMET's products in current applications and
searching for new uses of titanium products.
Employees. At December 31, 1993, TIMET employed approximately 1,050
persons in the U.S. (down from 1,150 at the end of 1992) and 20 persons in
Europe. Substantially all of TIMET's production and maintenance workers at its
facilities in Nevada and Ohio are represented by the United Steel Workers of
America. A strike of approximately 400 union workers at the Nevada facility
commenced in October 1993 at the expiration of their contract. TIMET has
unilaterally implemented its last contract proposal that includes modest wage
increases, enhanced profit sharing opportunities and pension improvements over
the life of the contract along with changes in TIMET's medical program and work
rules. The union work stoppage has not materially impacted TIMET's production
activities, as production is continuing during the strike utilizing salaried
personnel and outside contract labor. The Ohio union contract, as extended in
January 1994, expires in July 1994. During this period TIMET and the union
will negotiate towards a new agreement and evaluate possible relocations of
certain work and/or equipment to other TIMET locations or outside vendors.
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Regulatory and environmental matters. Tremont's operations conducted
through TIMET are governed by environmental and worker safety laws and
regulations. TIMET maintains procedures designed to ensure compliance with
such laws, including those relating to raw material and product storage,
atmospheric emissions, effluent discharge, waste disposal and environmental
reporting and recordkeeping. In the area of environmental protection and
compliance, TIMET's annual capital expenditures averaged over $1 million during
the past three years, and its 1994 capital budget provides for such capital
expenditures of less than $1 million.
TIMET is and has been engaged in the handling, manufacture or use of
substances or compounds that may be considered toxic or hazardous within the
meaning of environmental and worker safety laws and regulations. In addition,
in connection with TIMET's operation in Nevada, it handles substantial
quantities of a material regulated as an extremely hazardous substance under
the emergency planning and community right- to-know requirements of CERCLA.
Although TIMET's policy is to comply with all such applicable laws, some risk
of environmental and other damage is inherent in TIMET's operations and
products, as it is with other companies engaged in similar businesses.
Moreover, it is possible that future developments, such as implementation of
stricter requirements under the environmental laws, worker safety laws, and
enforcement policies thereunder, could bring into question the production,
handling, use, storage, transportation, sale or disposal of TIMET's products
and their by-products. Such developments could result in additional, presently
unquantifiable, costs or liabilities to TIMET.
TIMET's foreign operations are similarly subject to foreign laws
respecting environmental and worker safety matters, which laws are generally
less stringent than their U.S. counterparts and which have not had, and are not
presently expected to have, a material adverse effect on TIMET.
TIMET holds 32% of the outstanding common stock of Basic Investments,
Inc. ("BII"). BII and its subsidiaries, including Basic Management, Inc.
("BMI"), provide utility services to, and owns property adjacent to, TIMET's
plant at Henderson, Nevada (the "BMI Complex"). The other principal owners of
BII, including Kerr McGee Chemical Corporation, Chemstar Lime Company and
Pioneer Chlor Alkali Company, Inc., also operate facilities in the BMI Complex.
Each of such companies, along with certain other companies that previously
operated facilities in the BMI Complex, have executed an agreement with the
Nevada Division of Environmental Protection ("NDEP") providing for a phased
assessment of the environmental condition of the BMI Complex and each of the
individual company sites. Phase I reports have been submitted to the NDEP.
Negotiations between the NDEP and the BMI Complex companies over the scope of
any necessary sampling and analysis, and the allocation of the costs therefor,
are ongoing at this time. TIMET has accrued anticipated expenses in connection
with the ongoing investigation. While no determination has been made with
respect to the need for, or scope of, any environmental remediation at this
site, there can be no assurance that TIMET will not incur some liability for
any remediation costs which may result.
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In 1993, Tremont entered into a settlement agreement with the Arkansas
Division of Pollution Control and Ecology in connection with certain alleged
water discharge permit violations at an abandoned barite mining property in
Arkansas. The settlement agreement, among other things, requires Tremont to
undertake a remediation/reclamation program during 1994 at an approximate cost
of $1 million.
In 1993, TIMET discovered an anomaly in certain alloyed titanium
material manufactured by TIMET for shipment to a jet engine manufacturer,
resulting from tungsten-contaminated master alloy sold to TIMET by a
third-party vendor and used as a alloying addition to its titanium material.
The engine manufacturer has taken the precaution of requiring the inspection,
and, in certain cases, the remelting, reprocessing and reinspection, of all
titanium material that might have been manufactured using potentially
contaminated master alloy from this vendor (which also includes titanium
produced by another major U.S. titanium manufacturer that purchased master
alloy from the same supplier). TIMET has accrued its estimate of out-of-pocket
expenses in connection with this on-going investigation. TIMET believes that
any liability for costs or damages incurred by TIMET and/or its customers in
this matter should ultimately rest with the supplier of the defective master
alloy. TIMET maintains substantial general liability insurance coverage
against claims of this nature that it currently believes would cover most of
any such claims in the event it were unable to recover from the master alloy
supplier.
Other. BII is actively engaged in efforts to develop for commercial,
industrial and residential purposes approximately 3,000 acres of land
surrounding the BMI Complex in Henderson, a suburb of Las Vegas. Any such
development by BII would be in conjunction with TIMET and the other BII
stockholders who hold water rights necessary for any development of such lands.
The use of the water rights for this purpose is subject to governmental
approval, which approval Tremont understands BII expects to receive during the
first half of 1994. TIMET is also pursuing the possible commercial development
of approximately 80 acres of unused land surrounding its Nevada plant, either
independently or as a part of BII's land development activities.
Indirect wholly-owned captive insurance subsidiaries of Tremont
(collectively, "TRE Insurance") reinsured certain comprehensive general
liability, auto liability, workers' compensation and employers' liability risks
of NL (which then included both Tremont and Baroid) through June 1988, and also
participated in various third party reinsurance treaties through December 1988.
TRE Insurance's reinsurance business is on a runoff basis. NL, Baroid (now a
Dresser subsidiary) and TRE Insurance are parties to insurance sharing
agreements whereby NL and Baroid will reimburse TRE Insurance with respect to
certain loss payments and reserves established by TRE Insurance that (i) arise
out of claims against NL and Baroid and (ii) are subject to payment by TRE
Insurance under certain reinsurance contracts. Also, TRE Insurance will credit
NL and Baroid with respect to certain underwriting profits or recoveries, if
any, that TRE Insurance receives from independent reinsurers that relate to NL
and Baroid.
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ITEM 2. PROPERTIES
Valhi leases approximately 34,000 square feet of office space for its
principal executive offices in a building located at 5430 LBJ Freeway, Dallas,
Texas, 75240-2697.
The principal properties used in the operations of the Company, NL and
Tremont are described in the applicable business sections of Item 1 -
"Business." The Company, NL and Tremont believe that their facilities are
adequate and suitable for their respective uses.
ITEM 3. LEGAL PROCEEDINGS
The Company, NL and Tremont are involved in various legal proceedings.
Information called for by this Item, except for information regarding certain
of NL's and Tremont's legal proceedings that has been summarized, is included
in Note 20 to the Company's Consolidated Financial Statements, which
information is incorporated herein by reference.
Information called for by this Item regarding NL's legal proceedings
that has been summarized in Note 20 to the Company's Consolidated Financial
Statements is included in Item 3 of NL's Annual Report on Form 10-K for the
year ended December 31, 1993 included as Exhibit 99.1 of this Annual Report on
Form 10-K, and is incorporated herein by reference.
Information called for by this Item regarding certain of Tremont's
legal proceedings that has been summarized in Note 20 to the Company's
Consolidated Financial Statements is included in Note 17 (Legal proceedings -
Tremont and consolidated subsidiaries) to Tremont's Consolidated Financial
Statements included in Item 8 of Tremont's Annual Report on Form 10-K for the
year ended December 31, 1993 included as Exhibit 99.2 of this Annual Report on
Form 10-K, and is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended December 31, 1993.
- 32 -
34
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Valhi's common stock is listed and traded on the New York and Pacific
Stock Exchanges (symbol: VHI). As of February 28, 1994, there were
approximately 6,500 holders of record of Valhi common stock. The following
table sets forth the high and low sales prices for Valhi common stock for the
years indicated, according to the New York Stock Exchange Composite Tape, and
dividends paid during such periods. On February 28, 1994 the closing price of
Valhi common stock according to the NYSE Composite Tape was $6.
DIVIDENDS
HIGH LOW PAID
------ ------ ---------
Year ended December 31, 1992
First Quarter $7 $5 3/8 $.05
Second Quarter 7 1/8 5 1/8 .05
Third Quarter 6 1/4 4 3/8 .05
Fourth Quarter 5 3/8 4 1/4 .05
Year ended December 31, 1993
First Quarter $6 1/2 $4 7/8 $.05
Second Quarter 5 1/4 3 3/4 -
Third Quarter 5 3/4 4 -
Fourth Quarter 5 3/8 4 1/2 -
On March 10, 1994, the Company declared a cash dividend of $.02 per
common share, payable March 31, 1994 to holders of record on March 24, 1994,
and adopted a policy which provides for regular quarterly dividends of $.02 per
common share. However, declaration and payment of dividends and the amount
thereof will be dependent upon the Company's results of operations, financial
condition, cash requirements for its businesses, contractual requirements and
restrictions and other factors deemed relevant by the Board of Directors.
There are currently no contractual restrictions on the ability of Valhi to
declare or pay dividends.
- 33 -
35
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1989 1990 1991 1992 1993
---- ---- ---- ---- ----
(IN MILLIONS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Net sales:
Refined sugar $ 413.4 $ 410.9 $ 439.7 $ 459.2 $ 430.8
Forest products 217.7 197.4 179.7 194.8 174.3
Fast food 93.5 103.6 101.5 103.8 111.6
Hardware products 55.0 52.6 44.8 54.0 64.4
-------- -------- -------- -------- --------
$ 779.6 $ 764.5 $ 765.7 $ 811.8 $ 781.1
======== ======== ======== ======== ========
Operating income:
Refined sugar $ 37.6 $ 48.0 $ 42.0 $ 37.8 $ 37.5
Forest products 34.5 22.8 8.0 22.0 26.3
Fast food 10.4 8.6 7.8 8.5 9.7
Hardware products 7.1 9.0 7.9 10.7 17.5
-------- -------- -------- -------- --------
$ 89.6 $ 88.4 $ 65.7 $ 79.0 $ 91.0
======== ======== ======== ======== ========
Equity in earnings (losses) of
affiliates:
NL Industries $ 104.6 $ 43.2 $ (19.3) $ (32.1) $ (44.7)
Tremont Corporation .4 9.7 (.4) (16.6) (15.1)
Provision for market value impairment - - - (22.0) (84.0)
-------- -------- -------- -------- --------
$ 105.0 $ 52.9 $ (19.7) $ (70.7) $ (143.8)
======== ======== ======== ======== ========
Income (loss) before extraordinary items $ 102.3 $ 73.7 $ 20.0 $ (22.2) $ (64.1)
Extraordinary items 1.1 .9 4.8 (6.3) (15.4)
Cumulative effect of changes in
accounting principles - - - (69.8) .4
-------- -------- -------- -------- --------
Net income (loss) $ 103.4 $ 74.6 $ 24.8 $ (98.3) $ (79.1)
======== ======== ======== ======== ========
PER SHARE DATA:
Income (loss) before extraordinary items $ .90 $ .65 $ .18 $ (.19) $ (.56)
Extraordinary items .01 .01 .04 (.06) (.13)
Cumulative effect of changes in
accounting principles - - - (.61) -
-------- -------- -------- -------- --------
Net income (loss) $ .91 $ .66 $ .22 $ (.86) $ (.69)
======== ======== ======== ======== ========
Cash dividends declared $ .25 $ .20 $ .20 $ .20 $ .05
======== ======== ======== ======== ========
Weighted average common shares
outstanding 114.0 113.3 113.5 113.9 114.1
BALANCE SHEET DATA (at year end):
Current assets $ 339.4 $ 362.4 $ 496.5 $ 504.6 $ 394.4
Investment in affiliates 690.0 709.6 410.6 248.4 74.9
Total assets 1,300.5 1,344.8 1,177.1 1,077.0 903.9
Current liabilities 361.8 421.2 378.1 489.0 364.8
Long-term debt 619.1 584.2 352.7 288.7 302.5
Stockholders' equity 287.4 294.6 385.5 259.1 207.5
- 34 -
36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
GENERAL
The results of operations of the Company's consolidated business
segments, general corporate and other items, as well as the Company's equity in
losses of NL and Tremont, are discussed below. Consolidated operating income
and margins increased in both 1992 and 1993, and interest expense declined in
each of the past two years as both average borrowing levels and interest rates
were reduced. The following table expresses income of consolidated companies
before income taxes as a percentage of total sales. Segment operating income
is expressed as a percentage of the respective segment's sales.
YEARS ENDED DECEMBER 31,
-------------------------------
1991 1992 1993
---- ---- ----
Net sales:
Refined sugar 57.4% 56.6% 55.2%
Forest products 23.5 24.0 22.3
Fast food 13.3 12.8 14.3
Hardware products 5.8 6.6 8.2
----- ----- -----
Total net sales 100.0% 100.0% 100.0%
===== ===== =====
Segment operating income:
Refined sugar 9.6% 8.2% 8.7%
Forest products 4.5% 11.3% 15.1%
Fast food 7.7% 8.2% 8.6%
Hardware products 17.6% 19.8% 27.2%
Total operating income 8.6% 9.7% 11.6%
General corporate items:
Business unit dispositions, net - .4 -
Securities transactions 8.2 .3 .1
Interest and dividend income .8 1.1 .7
General expenses (1.0) (.9) (1.1)
Other, net .5 - (.1)
Interest expense (9.4) (6.3) (4.9)
----- ----- -----
Income of consolidated companies before
income taxes 7.7% 4.3% 6.3%
===== ===== =====
The Company's results for the past three years were also impacted by
significant nonoperating transactions. The Company reported significant losses
attributable to NL and Tremont in each of the past three years, including
impairment charges for other than temporary declines in the market value of
Tremont stock ($22 million in 1992) and NL stock ($84 million in 1993). In
1991, the Company reported a $64 million gain from securities transactions as a
result of its sale of Baroid common stock, and both 1992 and 1993 included
extraordinary losses related to prepayments of indebtedness.
- 35 -
37
Changes in accounting methods by the Company, NL and Tremont for
postretirement benefits other than pensions ("OPEB") and income taxes in 1992
resulted in a $70 million charge to earnings, of which about $64 million
related to NL and Tremont. In 1993, a change in accounting for marketable
securities resulted in a $42 million increase in stockholders' equity,
substantially all of which related to the Company's remaining Baroid (now
Dresser) common stock, and which was recorded as a direct credit to equity.
The Company's business plan for 1994 reflects profitable operations
for its consolidated companies, and reflects continuing but reduced losses
attributable to its equity in NL and Tremont.
REFINED SUGAR
YEARS ENDED DECEMBER 31, % CHANGE
--------------------------------- ----------------------
1991 1992 1993 1991-92 1992-93
---- ---- ---- ------- -------
(IN MILLIONS)
Net sales:
Refined sugar $397.6 $417.0 $396.6 + 5% - 5%
By-products and other 42.1 42.2 34.2 + 0% -19%
------ ------ ------
$439.7 $459.2 $430.8 + 4% - 6%
====== ====== ======
Operating income $ 42.0 $ 37.8 $ 37.5 -10% - 1%
====== ====== ======
Operating income margin 9.6% 8.2% 8.7%
Percentage change in:
Sugar sales volume +10% - 2%
Average sugar selling
price - 5% - 3%
During 1993, average refined sugar selling prices declined for the
third year in a row, principally as a result of an oversupply of sugar
resulting from increases in allowable imports and increases in domestic
production. Sugar sales volume in 1993 was lower than in 1992 in large part as
a result of marketing allotments imposed by the United States Department of
Agriculture on domestic sugarcane and sugarbeet processors, which allotments
limited the amount of sugar which each processor could market for the crop year
ended September 30, 1993. Amalgamated's allotment equated to approximately 95%
of its production from the 1992 crop and, accordingly, resulted in a larger
than normal carryover of refined sugar inventory into the new crop year. The
marketing allotments, imposed in June, had a positive impact on prices in the
third quarter of 1993. Prices weakened during the fourth quarter following
expiration of the allotments. The Company believes that sugar import quota
levels are too high for current domestic production levels. As a result,
absent import quota reductions or imposition of marketing allotments on
domestic producers, the pressure on selling prices will likely continue.
Due primarily to a projected record high sugar content of the beets,
Amalgamated's sugar production from the crop harvested in the fall of 1993 is
currently expected to establish a new record for the fourth consecutive year.
Refined sugar inventories were significantly higher at December 31, 1993 than
one year ago due to the carryover effects of the 1993 marketing allotments, as
well as the size of this year's crop. Absent any marketing allotment
restrictions,
- 36 -
38
these combined factors are expected to result in an increase in 1994 refined
sugar sales volume over 1993 levels. Amalgamated currently expects contracted
acreage for the 1994 crop will approximate that harvested in 1993.
Refined sugar historically represents approximately 90% of
Amalgamated's annual sales. Fluctuations in the volume of by-products sold,
generally sold principally in the first and fourth calendar quarters,
approximate those of refined sugar. The selling prices of by-products are
affected by the prices of competing animal feeds and are, therefore,
independent of the price of sugar. Average selling prices of dried pulp, the
principal by-product, were 11% lower in 1993 than in 1992.
Sugarbeet purchase cost is the largest cost component of producing
refined sugar and the price Amalgamated pays for sugarbeets is, under the terms
of its contracts with sugarbeet growers, a function of the average selling
price of Amalgamated's refined sugar. As a result, changes in sugar selling
prices impact sugarbeet purchase costs as well as revenues. Processing costs
per hundredweight of refined sugar were higher in 1992 than in either 1991 or
1993 due in part to relatively adverse weather conditions during the sugarbeet
processing campaign. Processing costs per hundredweight for the current crop
are expected to be slightly higher than last year in part due to a new
three-year labor contract which extends through July 1996. This labor contract
provides for wage increases averaging approximately 3% per year and for
increased employee deductibles and co-payments for medical insurance. The
largest component of Amalgamated's selling, general and administrative expenses
is the freight cost of sugar and by-products delivered to customers.
Consequently, such expenses vary significantly with the volume of refined sugar
and by-products sold.
Amalgamated's cost of sales is determined under the last-in, first-out
accounting method. In periods of declining sugar prices, such as during much
of the past three years, LIFO operating income will be higher than on a FIFO
basis. Supplemental information comparing refined sugar segment operating
income and margins computed on a LIFO basis and on a FIFO basis is presented
below.
YEARS ENDED DECEMBER 31, % CHANGE
------------------------------ ----------------------
1991 1992 1993 1991-92 1992-93
---- ---- ---- ------- -------
(IN MILLIONS)
Operating income:
LIFO accounting method $42.0 $37.8 $37.5 -10% -1%
FIFO accounting method 39.8 32.2 31.9 -19% -1%
Operating income margin:
LIFO accounting method 9.6% 8.2% 8.7%
FIFO accounting method 9.0% 7.0% 7.4%
- 37 -
39
FOREST PRODUCTS
Medite's operations are grouped into two components: MDF (an
engineered wood product) and solid wood (logs, lumber and other wood products).
YEARS ENDED DECEMBER 31, % CHANGE
------------------------------- ----------------------
1991 1992 1993 1991-92 1992-93
---- ---- ---- ------- -------
(IN MILLIONS)
Net sales:
Medium density fiberboard $ 98.0 $111.6 $112.1 + 14% + 0%
Solid wood products 85.5 85.4 63.7 - 0% -25%
Eliminations (3.8) (2.2) (1.5)
------ ------ ------
$179.7 $194.8 $174.3 + 8% -11%
====== ====== ======
Operating income:
Medium density fiberboard $ 1.6 $ 12.1 $ 13.9 +649% +15%
Solid wood products 6.4 9.9 12.4 + 56% +26%
------ ------ ------
$ 8.0 $ 22.0 $ 26.3 +176% +20%
====== ====== ======
Operating income margins:
Medium density fiberboard 1.6% 10.8% 12.4%
Solid wood products 7.4% 11.6% 19.5%
Medium density fiberboard. Medite's worldwide MDF sales volume
increased 3% in 1993, setting a new volume record for the second consecutive
year. Volume in the second half of 1993 was stronger than in the first half of
the year while in 1992 the reverse was true. The improvements in volume
reflect, in Medite's opinion, increased demand for engineered wood products.
Sales of specialty MDF products have continued to increase, with these
higher-margin sales representing 20% of MDF sales dollars (12% of MDF volume)
in 1993 compared to 14% and 7%, respectively, in 1992 and 12% and 6%,
respectively, in 1991. Overall MDF average selling prices, in billing currency
terms, were favorably impacted in 1993 by product price increases and the
higher percentage of specialty product sales. These increases were more than
offset by adverse effects of currency fluctuations and, in U.S. dollar terms,
worldwide average selling prices were 2% lower than in 1992.
The improvements in MDF sales and operating income in 1992 resulted
from an 8% increase in volume and higher average selling prices. Fluctuations
in the value of the U.S. dollar relative to other currencies had a generally
positive impact on 1992 average selling prices, in U.S. dollar terms, although
a significant decline in the value of the pound sterling had a negative impact
late in the year. Sales of higher- margin specialty grades of MDF increased,
as noted above. Volume comparisons in 1992 were aided by the extremely low
volume in the first quarter of 1991, in part as a result of the Persian Gulf
War, and sales resulting from the reduction of inventories during 1992 which
were higher than normal in Europe at the end of 1991. Medite had determined to
build inventories during the later part of 1991 in anticipation of improved
demand and pricing in 1992. MDF operating income was also favorably impacted
in 1992 by increased production volume and improved operational efficiency at
the New Mexico MDF plant.
- 38 -
40
Medite is operating at a high rate of capacity and while its total MDF
volume is not expected to increase significantly prior to completion of the
Irish plant expansion in 1995, Medite plans to continue to pursue further
penetration of higher-margin specialty MDF markets in 1994.
Solid wood products. Solid wood operations for the past three years
are not, in certain respects, directly comparable due to the closure of
Medite's plywood operations in January 1993 and the destruction by fire of its
Rogue River, Oregon chipping and veneer plant in June 1992, as discussed below.
Excluding plywood and veneer operations, solid wood sales increased 48% in 1993
compared to 1992.
Medite's solid wood products are principally commodity-type products
with selling prices significantly influenced by relative industry supply and
demand factors. Average selling prices of solid wood products increased
significantly in 1993 over 1992 levels (lumber up 29%; logs up 46%) due
primarily to the combined effects of the continuing Pacific Northwest timber
shortage, closure of certain competitor operations and increased demand for
building products. These factors also increased Medite's timber costs, as
discussed below. The increase in average selling prices of logs in 1993, as
well as a significant increase in log volume, was also impacted by Medite's
decision to sell higher-quality logs rather than using such logs in plywood
manufacturing operations, which were closed in January 1993. Solid wood sales
declined slightly in 1992 compared to 1991 due to the net effects of increases
in product line average selling prices of 12% to 19%, an 18% decrease in total
volume and changes in product mix, including lower wood chip sales. The Rogue
River fire contributed to the volume decline and product mix changes in 1992.
The average unit cost of logs used in Medite's solid wood operations
increased about 25% in 1993 following a 28% increase in 1992. These cost
increases were due primarily to increases in the cost of timber from government
and other sources, offset in part by the favorable impact of planned reductions
in LIFO log and other inventory levels, which were being reduced as a result of
the closure of the plywood operations. The favorable impact on operating
income from the reduction of LIFO inventories was $.8 million in 1991, $1.9
million in 1992 and $.5 million in 1993.
The current Pacific Northwest timber shortage, and the resulting high
cost of public and other purchased timber, is expected to continue for the
foreseeable future. In response, Medite has reduced its longer-term need for
government timber by closing marginal production facilities (including its
plywood operations), increasing its emphasis on the direct sale of logs,
reducing the rate of harvest of its fee timber and adopting a more sustained
yield approach to harvesting timber from company-owned lands. Medite believes
that, over the longer term, approximately 40% of the log requirements for its
solid wood operations will be obtained from its own lands. The percentage of
logs obtained from company-owned lands in 1993 (20%), and expected in 1994
(10%), is unusually low due to the harvest of timber under government contracts
that expire in 1994. The combined net effects of this relatively low
percentage of lower-cost fee timber and a substantial reduction in the volume
of logs sold is expected to negatively impact solid wood operating income
comparisons in 1994.
- 39 -
41
Medite's Rogue River veneer operations contributed about $19 million
to 1991 solid wood sales and $10 million to 1992 sales before the fire.
Replacement chipping operations resumed in July 1993 and new veneer operations
resumed in January 1994. The new veneer operations are designed to process the
smaller, second-growth timber expected to be available from company-owned
timberlands on a longer-term sustainable basis. Recognition of business
interruption insurance helped, to some extent, to offset the loss of Rogue
River earnings in late 1992 and part of 1993. Business interruption insurance,
received in 1992 and recognized as a component of operating income from July
1992 through August 1993 ($3.7 million in 1992 and $1.9 million in 1993), was
allocated to each month that the various operations were originally expected to
be down based upon estimates of the expected operating profit of the Rogue
River operations during such periods. Such estimates of lost operating
earnings were based upon selling prices in effect at the time they were
prepared in 1992 and the expected reconstruction schedule at that time. Medite
believes that business interruption insurance did not fully compensate for the
aggregate dollar amount of operating earnings that Rogue River would have
generated had it been operating because industry price levels were higher than
those inherent in the insurance estimates and because operations did not resume
as soon as originally expected. Inclusion of business interruption insurance
in the results of operations did, however, have a significant favorable,
non-recurring effect on the aggregate solid wood operating income margins
during the July 1992 - August 1993 period as this income had no associated
cost.
Medite closed its plywood operations principally as a result of
increased wood costs (the full effect of which could not be passed through in
increased selling prices) and the relative shortage of public timber to supply
the large diameter logs required to match the plywood plant's manufacturing
capabilities. Plywood operations accounted for approximately $2 million of
solid wood sales in 1993 before the closure compared to $36 million in 1992 and
$31 million in 1991. As a result of improvement in market conditions late in
the year, Medite's plywood operations were approximately break-even during 1992
after losing approximately $2 million in 1991.
Reductions in overhead and administrative costs due to the reduced
scale of manufacturing operations and overall cost containment programs also
favorably impacted 1993 solid wood operating income. Costs in 1991 were, in
certain respects, not directly comparable to 1992 and 1993 as a result of
adopting SFAS Nos. 109 (income taxes) and 106 (OPEB), which increased costs due
primarily to additional depreciation and depletion resulting from adjustment of
assets acquired in prior business combinations originally recorded net-of-tax,
and an offsetting cost decrease in depletion resulting from lower depletion
rates on company-owned timber, as depletion rates were revised due to a change
in estimate of remaining standing timber based upon a cruise of Medite's timber
holdings.
- 40 -
42
FAST FOOD
YEARS ENDED DECEMBER 31, % CHANGE
---------------------------------- ----------------------
1991 1992 1993 1991-92 1992-93
---- ---- ---- ------- -------
(IN MILLIONS)
Net sales $101.5 $103.8 $111.6 +2% + 7%
Operating income 7.8 8.5 9.7 +9% +13%
Operating income margin 7.7% 8.2% 8.6%
Arby's units operated:
At end of year 158 160 160 +1% -
Average during the year 155 158 159 +2% + 1%
Sales in 1993 established a new record for Sybra, and operating income
was a near-record, as comparable store sales increased 6%. Customer traffic
increased in part due to certain promotional sandwiches positioned as
limited-time only products in certain regions and marketed to price-driven
consumers with various levels of advertising support. Improving general
economic conditions also contributed to the increase in comparable store sales
in 1993.
Extensive menu-price discounting caused by the continued high level of
competition in the fast food industry and weak economic conditions impacted
Sybra's results during much of 1991 and 1992. As a result of a 4% increase in
comparable store sales during the fourth quarter, comparable store sales for
1992 were only nominally below 1991 levels. Stable food product costs and
higher average transactions contributed to the improvement in operating income
in 1992.
As a result of the strengthening in sales beginning in September 1992,
and the resulting 16 consecutive months of increases in comparable store sales
through December 1993 following declines in 18 of the previous 20 months going
back to the beginning of 1991, comparative increases may not be as favorable
during 1994 as those of 1993. In addition, winter weather in certain of
Sybra's markets during early 1994 was much more severe than in the comparable
period of 1993. Sybra continues to seek opportunities to broaden its menu and
expand high volume service hours.
HARDWARE PRODUCTS
YEARS ENDED DECEMBER 31, % CHANGE
--------------------------------- ----------------------
1991 1992 1993 1991-92 1992-93
---- ---- ---- ------- -------
(IN MILLIONS)
Net sales $44.8 $54.0 $64.4 +21% +19%
Operating income 7.9 10.7 17.5 +36% +63%
Operating income margin 17.6% 19.8% 27.2%
Hardware products reported record sales and operating income in 1993.
Sales, operating income and margins improved in both 1993 and 1992 due
primarily to increased volumes in the three major product lines. In 1993, lock
sales dollars were up 24%, drawer slides were up 10% and computer keyboard
support arms were up 38% following increases of 33%, 21% and 16%, respectively,
in 1992. A
- 41 -
43
lock contract with a U.S. Government agency obtained in 1992 and extended
through much of 1993, along with a new contract with the same agency covering
May 1993 through 1994 at higher than prior contract volume levels, contributed
significantly to the lock volume increase. The operations acquired in June
1992 from a Canadian competitor, which complemented the existing drawer slide
and lock product lines, also contributed to volume increases in both 1992 and
1993.
Almost two-thirds of National Cabinet Lock's sales are generated by
its Canadian operations. About 60% of the Canadian-produced sales are
denominated in U.S. dollars while substantially all of the related costs are
incurred in Canadian dollars. As a result, fluctuations in the value of the
U.S. dollar relative to the Canadian dollar favorably impacted operating
results in both 1993 and 1992 compared to the respective prior year.
National Cabinet Lock currently expects more modest growth in 1994
than in the prior two years in part due to production capacity considerations.
Capital spending in 1994 emphasizes capacity increases.
BUSINESS UNIT DISPOSITIONS
See Note 4 to the Company's Consolidated Financial Statements.
GENERAL CORPORATE
Securities transactions - Securities transactions in 1991 relate
principally to the sale of Baroid common stock and in 1992 and 1993 relate to
U.S. Treasury securities. As described in Note 1 to the Company's Consolidated
Financial Statements, the Company adopted the accounting for certain marketable
debt and equity securities prescribed by SFAS No. 115 effective December 31,
1993. Accordingly, timing of recognition of gains and losses related to
marketable securities beginning in 1994 will, in certain respects, be different
than in prior years.
Other general corporate income (expense)
YEARS ENDED DECEMBER 31, INCREASE (DECREASE)
------------------------------- ---------------------
1991 1992 1993 1991-92 1992-93
---- ---- ---- ------- -------
(IN MILLIONS)
Interest and dividend income $ 6.0 $ 9.3 $ 5.2 $ 3.3 $(4.1)
General expenses (7.6) (7.4) (8.9) .2 (1.5)
Other, net 4.2 .3 (1.1) (3.9) (1.4)
------ ----- ----- ----- -----
$ 2.6 $ 2.2 $(4.8) $ (.4) $(7.0)
====== ===== ===== ===== =====
Interest and dividend income fluctuates based on levels of investments
and yields thereon. The average balance of funds available for temporary
investment was higher in 1992 than in either 1991 or 1993 while yields
generally declined in both 1992 and 1993. The increase in general corporate
expenses in 1993 resulted in large part from lower net charges to affiliates.
Other, net in 1991 includes $3.3 million of income related to the Company's
equity in undistributed earnings of Baroid prior to May 1991. A $1.5 million
provision for additional environmental remediation expenses relating to certain
operations no longer conducted by the Company was a principal reason for the
increase in other expenses, net in 1993.
- 42 -
44
INTEREST EXPENSE
Interest expense declined $20.7 million (29%) in 1992 and further
declined $12.9 million (25%) in 1993 as a result of lower average indebtedness
levels and lower interest rates. The lower average interest rates resulted in
part from the prepayment of Valhi 12 1/2% Senior Subordinated Notes from the
proceeds of lower-rate borrowings.
At December 31, 1993, about one-half of the Company's aggregate
long-term debt and credit facilities, including unused amounts, have variable
interest rates and the remainder (principally Valhi's 9.25% LYONs, Valcor's 9
5/8% Senior Notes and a portion of Medite's Timber Credit Agreement term loan)
have fixed rates. No periodic interest payments are required on the deferred
coupon LYONs, resulting in cash interest payments lower than accrual basis
interest expense.
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 14 to the Company's Consolidated Financial Statements.
The Company's provision for income tax benefits in both 1992 and 1993
includes deferred tax benefits in excess of taxes currently payable. At
December 31, 1993, the Company had net deferred tax assets of approximately $24
million resulting primarily from amounts related to the excess of tax basis
over book basis of investments in subsidiaries and affiliates that are not
members of the Company's consolidated tax group. The Company has, among other
things, significant appreciated assets and the ability to generate significant
taxable capital gains should it need to offset any capital losses reported for
tax purposes.
EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
See Notes 16 and 18, respectively, to the Company's Consolidated
Financial Statements.
- 43 -
45
UNCONSOLIDATED AFFILIATES - NL AND TREMONT
The Company's interests in NL and Tremont are reported by the equity
method. The information included below related to the financial position,
results of operations and liquidity and capital resources of NL and Tremont has
been summarized from the reports filed with the Commission by NL and Tremont,
which reports contain more detailed information concerning such companies,
including complete financial statements prepared on their historical bases of
accounting.
Valhi's equity in earnings (losses) of NL and Tremont is different
than its percentage ownership in their separately-reported earnings due to
amortization of basis differences arising from purchase accounting adjustments
made by the Company in conjunction with the acquisition of its interests in NL
and Tremont. Amortization of such basis differences generally reduces
earnings, or increases losses, attributable to affiliates, as reported by
Valhi. In 1993, aggregate basis difference amortization expense was reduced by
approximately $7 million as a result of enacted changes in certain income tax
rates, principally a reduction in German rates. Substantially all of such
favorable impact, which is not of a normal recurring nature, relates to NL.
The Company periodically evaluates the net carrying value of its
long-term assets, including its investments in NL and Tremont, to determine if
there has been any decline in value below their respective net carrying values
that is considered to be other than temporary and would, therefore, require a
write-down accounted for as a realized loss. As a result of this process,
Valhi recorded a $22 million writedown of its investment in Tremont in 1992 and
each of Valhi and Tremont recorded writedowns of their respective investments
in NL in 1993, resulting in an $84 million pre-tax charge to Valhi. While the
accounting rules may require an investment in a security accounted for by the
equity method to be written down if the market value of that security declines,
they do not permit a writeup if the market value subsequently recovers. The
Company's per share net carrying value of NL at December 31, 1993 was $2.43,
compared to quoted market values of $4.50 at that date and $8.875 at February
28, 1994. The Company's per share net carrying value of Tremont at December
31, 1993 was $4.17, compared to quoted market values of $6.875 at that date and
$7.875 at February 28, 1994.
- 44 -
46
NL Industries. NL's chemical operations are conducted through its
wholly-owned subsidiaries Kronos, Inc. (TiO2) and Rheox, Inc. (specialty
chemicals). NL is highly leveraged and has reported significant losses in the
past three years. The future profitability of NL is dependent upon, among
other things, improved pricing for TiO2, NL's principal product. Selling
prices for TiO2 are significantly influenced by industry supply and demand. In
the fourth quarter of 1993, TiO2 prices increased slightly in certain markets.
Based on, among other things, NL's current near-term outlook for its TiO2
business, NL expects its results for 1994, while improved from 1993, will still
result in a net loss for the year. Accordingly, Valhi expects to report a loss
attributable to its equity in NL in 1994.
YEARS ENDED DECEMBER 31, CHANGE
----------------------------------- ----------------------
1991 1992 1993 1991-92 1992-93
---- ---- ---- ------- -------
(IN MILLIONS)
Net sales:
Kronos $ 732.1 $ 784.6 $ 697.0 + 7% -11%
Rheox 108.2 108.9 108.3 + 1% - 1%
------- ------- -------
$ 840.3 $ 893.5 $ 805.3 + 6% -10%
======= ======= =======
Operating income:
Kronos $ 110.8 $ 81.9 $ 36.1 -26% -56%
Rheox 28.2 28.8 26.3 + 2% - 9%
------- ------- -------
139.0 110.7 62.4 -20% -44%
==== ====
General corporate items:
Interest and dividends 40.5 14.2 4.1
Securities transactions (53.1) (6.0) 4.4
Expenses, net (45.0) (43.4) (41.6)
Interest expense (100.4) (118.5) (99.1)
------- ------- -------
(19.0) (43.0) (69.8) $(24.0) $(26.8)
Income taxes (3.9) (.5) (12.7)
Minority interest (1.1) (1.1) (.7)
------- ------- -------
Loss before extraordinary
items and cumulative
effect of changes in
accounting principles $ (24.0) $ (44.6) $ (83.2) $(20.6) $(38.6)
======= ======= ======= ====== ======
Valhi's equity in NL's
losses, including
amortization of basis
differences (*) $ (19.3) $ (32.1) $ (44.7) $(12.8) $(12.6)
======= ======= ======= ====== ======
(*) Excludes Valhi's $84 million impairment provision for an other than
temporary decline in the market value of NL common stock in 1993.
Such impairment provision is separately disclosed in Note 2 to the
Company's Consolidated Financial Statements.
- 45 -
47
The worldwide TiO2 industry continues to be adversely affected by,
among other things, production capacity in excess of current demand. Largely
as a result thereof, TiO2 selling prices continued to decline during most of
1993 and Kronos' operating income and margins significantly declined.
Recessionary economic conditions in Europe and changes in the relative values
of European currencies were principal additional factors influencing current
demand and pricing levels during 1993. In billing currency terms, Kronos' 1993
average TiO2 selling prices were approximately 8% lower than in 1992 and were
6% lower in 1992 than in 1991. A significant amount of sales are denominated
in currencies other than the U.S. dollar, and fluctuations in the value of the
U.S. dollar relative to other currencies further decreased 1993 sales by $45
million compared to 1992 and increased 1992 sales by $22 million compared to
1991. Average TiO2 prices at the end of 1993 were approximately 5% below
year-end 1992 levels and approximately one-third below those of the last
cyclical peak in early 1990. While TiO2 prices are significantly below prior
year levels, most of the 1993 decline occurred in the first half of the year as
average prices declined only slightly during the third quarter and increased
slightly during the fourth quarter.
TiO2 sales volume of 346,000 metric tons in 1993 increased 3% compared
to 1992, as increases in North American sales volume more than offset weakened
demand in Europe. In response to weakened demand, and in order to reduce
inventories, Kronos made further reductions in its TiO2 production rates during
1993. TiO2 sales volume increased 11% in 1992, primarily in U.S. and European
markets. Approximately one-half of Kronos' 1993 TiO2 sales, by volume, were
attributable to markets in Europe with about two-fifths attributable to North
America and the balance to export markets.
As a result of continued cost reduction and containment efforts,
Kronos' raw material and production costs increased only slightly in 1993
compared to year-ago levels. Start-up costs at the chloride process plant in
Lake Charles, Louisiana, which commenced production during the first half of
1992, unfavorably impacted operating income in 1992. Kronos' 1992 operating
income was also impacted by slightly lower unit production costs resulting from
its continued emphasis on costs reduction efforts and increased production
volumes. Kronos' water treatment chemicals business, which utilizes TiO2
co-products, contributed more to operating income in 1992 than in either 1991
or 1993.
Demand, supply and pricing of TiO2 have historically been cyclical
and, as noted above, the last cyclical peak for TiO2 prices occurred in early
1990. Kronos believes that its operating income and margins for 1994 will be
higher than in 1993 due principally to slightly higher sales and production
volumes and the favorable effect of the joint venture with Tioxide, discussed
below. However, NL expects that the TiO2 industry will continue to operate at
lower capacity utilization levels over the next few years relative to the high
utilization levels prevalent during the late 1980's, primarily because of the
slow recovery from worldwide recession and the impact of capacity additions
since the late 1980's. The economic recovery has been particularly slow in
Europe, where a significant portion of Kronos' TiO2 manufacturing facilities
are located.
- 46 -
48
During the current period of depressed TiO2 prices, NL has operated
with a strategy to maintain its competitive position. During the past three
years, Kronos has increased its estimated worldwide market share from 10% to
11%. Kronos has implemented a cost reduction and control program which
favorably impacted Kronos' operating results, and Kronos has continued its
environmental improvement efforts. In October 1993, NL formed a manufacturing
joint venture with Tioxide and refinanced certain debt which, among other
things, increased NL's liquidity, reduced its aggregate debt level and extended
its debt maturities. See also "Liquidity and Capital Resources."
The manufacturing joint venture, which is equally owned by
subsidiaries of Kronos and Tioxide, owns and operates the Louisiana chloride
process TiO2 plant formerly owned by Kronos. Under the terms of the joint
venture and related agreements, Kronos contributed the plant to the joint
venture, Tioxide paid an aggregate of approximately $205 million, including its
tranche of the joint venture debt, and Kronos and certain subsidiaries
exchanged proprietary chloride process and product technologies with Tioxide
and certain of its affiliates. Of the total consideration paid by Tioxide, $30
million was attributable to the exchange of technologies and is being reported
as a component of operating income ratably over three years from October 1993.
Production from the plant is being shared equally by Kronos and Tioxide
pursuant to separate offtake agreements. The formation of the joint venture
resulted in a 12% decrease in Kronos' total TiO2 production capacity, however
Kronos' remaining capacity is about 10% higher than Kronos' 1993 sales volume.
Rheox's aggregate operating results have been relatively consistent
during the past three years. Changes in currency exchange rates had a negative
effect in 1993 and a positive effect in 1992 compared to the respective prior
year, and operating costs generally increased during both years.
NL has substantial operations and assets located outside the United
States. Foreign operations are subject to currency exchange rate fluctuations
and NL's results of operations have in the past been both favorably and
unfavorably affected by the fluctuations in currency exchange rates. To the
extent NL both manufactures and sells in a given country, the impact of
currency exchange rate fluctuations is to some extent mitigated.
NL's interest and dividend income fluctuates based upon the amount of
funds invested and yields thereon. Amounts available for investment and the
yield thereon in 1993 were lower than in 1992 and 1991.
After unsuccessful attempts to gain representation on the board of
directors of Lockheed Corporation, NL disposed of its interest in Lockheed in
1991, and the significant loss from securities transactions in 1991 relates
principally to that disposition. In February 1994, NL settled its lawsuit
against Lockheed and Lockheed's directors, and Lockheed made a cash payment to
NL. See Note 20 to the Company's Consolidated Financial Statements.
Securities transactions in 1992 and 1993 relate principally to U.S. Treasury
securities. NL does not anticipate acquiring marketable securities (other than
U.S. Treasury or similar securities) in the foreseeable future.
- 47 -
49
NL's corporate expenses, net have decreased slightly during each of
the past two years. In 1992, reductions in certain proxy solicitation and
litigation settlement expenses of $5 million and $9 million, respectively,
compared to 1991 were partially offset by an $11 million increase in
environmental remediation costs. Environmental remediation costs were $4
million higher in 1993 than in 1992.
Lower average levels of indebtedness in 1993 and lower DM interest
rates reduced NL's interest expense in 1993 compared to 1992. In addition,
1992 interest expense reflected the benefit of $9 million of capitalized
interest related principally to the Louisiana plant completed in March 1992.
Interest expense increased from 1991 to 1992 due to the net effects of lower
average levels of indebtedness, a $17 million decline in capitalized interest
and a $9 million reduction in NL's accrual for income tax related interest in
1991. Overall, NL expects its October 1993 reduction and refinancing of
certain indebtedness will result in a modest decrease in NL's interest expense.
NL's operations are conducted on a worldwide basis and the geographic
mix of income can significantly impact NL's effective income tax rate. In both
1992 and 1993, the geographic mix, including losses in certain jurisdictions
for which no current refund was available and in which recognition of a
deferred tax asset is not currently considered appropriate, contributed
significantly to its effective tax rate varying from a normally expected rate.
In 1991, realization of the available capital loss carryback of NL's securities
transactions at a relatively low rate due to the alternative minimum tax rates
in prior years also significantly impacted NL's effective tax rate.
NL reported an extraordinary loss of approximately $28 million in 1993
related to the settlement of certain interest rate swaps in conjunction with
prepaying the existing Louisiana plant borrowings and from the write-off of
deferred financing costs related to prepayment of such Louisiana plant
indebtedness and a portion of Kronos' Deutsche mark denominated bank credit
facility.
- 48 -
50
Tremont Corporation - Tremont's consolidated operations consist of
one industry segment, titanium metals operations conducted through its now
75%-owned TIMET subsidiary. Tremont also holds approximately 18% of NL's
outstanding common stock and reports its interest in NL by the equity method.
Discontinued operations represent Tremont's former bentonite mining operations,
which were sold to Baroid in July 1993.
As discussed below, the titanium metals business has been adversely
affected by, among other things, excess worldwide production capacity and
changes in market conditions. Tremont has reported significant losses during
the past two years and expects to report a net loss for 1994. Accordingly,
Valhi expects to report a loss attributable to its equity in Tremont for 1994.
YEARS ENDED DECEMBER 31, CHANGE
---------------------------------- ----------------------
1991 1992 1993 1991-92 1992-93
---- ---- ---- ------- -------
(IN MILLIONS)
Net sales $155.7 $153.9 $151.2 - 1% - 2%
====== ====== ====== ====== ======
Operating income (loss) $ 4.8 $ (9.7) $(16.7) $(14.5) $ (7.0)
General corporate items (1.0) (11.9) 4.3
Interest expense (3.8) (3.7) (4.3)
------ ------ ------
- (25.3) (16.7)
------ ------ ------
Equity in loss of NL:
Equity in NL's loss (.3) (10.9) (15.7)
Provision for market
value impairment - - (29.0)
------ ------ ------
(.3) (10.9) (44.7)
------ ------ ------
Loss before income taxes (.3) (36.2) (61.4)
Income tax benefit
(expense) (1.1) 2.1 1.3
------ ------ ------
(1.4) (34.1) (60.1)
Discontinued operations (.1) .4 7.5
------ ------ ------
Loss before extraordinary
items and cumulative
effect of changes in
accounting principles. $ (1.5) $(33.7) $(52.6) $(32.2) $(18.9)
====== ====== ====== ====== ======
Valhi's equity in Tremont's
losses, including
amortization of basis
differences (*) $ (.4) $(16.6) $(15.1) $(16.2) $ 1.5
====== ====== ====== ====== ======
(*) Excludes (i) Valhi's $22 million impairment provision for an other
than temporary decline in the market value of Tremont common stock in
1992 and (ii) Valhi's $14 million share of Tremont's 1993 impairment
provision for an other than temporary decline in the market value of
NL common stock, which equity is included as a component of Valhi's
impairment charge related to NL. Such impairment provisions are
separately disclosed in Note 2 to the Company's Consolidated Financial
Statements.
- 49 -
51
TIMET's 1993 operating results reflect an 14% decrease in pounds
shipped compared to 1992, partially offset by changes in product mix. The
volume decline occurred in the last half of 1993 (TIMET reported comparative
volume increases for the first half of the year), and reflected several
significant customer order cancellations and delays. Start-up costs related to
TIMET's new VDP titanium sponge facility and other production variances also
adversely impacted operating income comparisons. TIMET's 1993 operating loss
included a $4.7 million restructuring charge related to cost reduction
measures, including closing certain service centers in 1993 and severance costs
associated with workforce reductions expected to occur principally in 1994.
Sales volume in 1992 increased approximately 32% compared to pounds
shipped in 1991 reflecting, in part, an increase in TIMET's market share.
TIMET's average selling prices in 1992 were approximately 15% lower than in
1991 and changes in product mix also adversely affected operating income.
The titanium metals industry continues to be adversely affected by,
among other things, weak demand within the military and commercial aerospace
markets and excess worldwide production capacity. Selling price pressures are
being exacerbated by the increasing availability of relatively inexpensive
titanium scrap, sponge and other mill products principally from Russia and
other CIS countries. Sales of titanium for industrial markets, which currently
account for approximately 45% of TIMET's sales, are improving as the utility,
desalination, and certain other industries increase capital spending.
Tremont expects that TIMET's and the industry's production levels and
shipments over the next few years will remain substantially lower than the peak
levels of the late 1980's and 1990. TIMET also expects industry conditions
will continue to result in adverse selling price pressures. TIMET's efforts to
return to profitability are focused on improving manufacturing processes,
reducing overall costs and developing new markets for titanium products. TIMET
expects its new VDP titanium sponge facility in Nevada to operate at
approximately 60% of capacity during 1994. TIMET also expects to temporarily
close its older Kroll-leach titanium sponge production plant in 1994 until
market conditions substantially improve.
Union workers at TIMET's Nevada facility commenced a work stoppage in
October following expiration of their contract. TIMET has unilaterally
implemented its last contract proposal, which includes modest wage increases,
enhanced profit sharing opportunities and pension improvements over the life of
the contract along with changes in TIMET's medical program and work rules. The
union work stoppage has not materially impacted TIMET's production activities
as production is continuing during the strike utilizing salaried personnel and
outside contract labor. The Ohio union contract, as extended in January 1994,
expires in July 1994. During this period, TIMET and the union will negotiate
towards a new agreement and evaluate possible relocation of certain operations
to other TIMET locations or outside vendors.
UTSC converted its $75 million of debentures into a 25% equity
interest in TIMET in December 1993. In addition to its minority interest in
TIMET, UTSC has the right to acquire up to approximately 20% of TIMET's annual
production capacity of VDP sponge at agreed-upon and formula-determined prices.
- 50 -
52
General corporate items, net include (i) a $5.5 million gain in 1993
from the sale of Tremont's 50% interest in a gold mining venture and (ii)
losses aggregating $3.4 million in 1991 and $5.9 million in 1992 resulting from
changes in estimated net realizable value of certain properties and other
assets held for sale.
Average outstanding borrowings increased in each of the past three
years. Capitalized interest, related primarily to the VDP sponge facility, was
$1.5 million in 1991, $4.9 million in 1992 and $3.1 million in 1993. Interest
expense in 1994 is expected to be slightly higher than in 1993.
Valhi may be deemed to control each of NL and Tremont and,
accordingly, Tremont reports its 18% interest in NL by the equity method.
Similarly to Valhi, Tremont's amortization of basis differences generally
reduces earnings, or increases losses, attributable to NL, as reported by
Tremont compared to the amount that would be expected by applying its ownership
interest to NL's separately-reported earnings.
Tremont's income tax benefit in both 1992 and 1993 varies from a
normally expected rate due primarily to losses, including losses related to NL,
resulting in temporary differences between book and taxable income for which
recognition of a deferred tax asset is not currently considered appropriate.
In 1991, Tremont's equity in losses of affiliates for which no tax benefit was
provided also impacted its effective tax rate.
- 51 -
53
LIQUIDITY AND CAPITAL RESOURCES:
CONSOLIDATED CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------
1991 1992 1993
---- ---- ----
(IN MILLIONS)
Net cash provided (used) by:
Operating activities:
Net income (loss) $ 24.8 $(98.3) $ (79.1)
Depreciation, depletion and amortization 29.4 27.6 25.6
Noncash interest expense 2.2 3.1 10.3
Noncash OPEB expense - 1.0 .6
Deferred income taxes (benefit) 2.7 (27.3) (52.9)
Equity in losses of NL and Tremont 14.6 70.7 159.7
Dividends from NL and Tremont 24.4 10.7 -
Change in assets and liabilities, net (29.1) (4.2) (36.4)
Other, net (64.8) 5.7 5.4
Cumulative effect of changes in accounting
principles - 69.8 (.4)
------- ------ -------
4.2 58.8 32.8
------- ------ -------
Investing activities:
Capital expenditures (26.8) (28.0) (39.1)
Sale (purchase) of securities, net 261.8 (13.6) 99.6
Business unit dispositions, net 6.1 9.7 (.9)
Other, net 22.0 (7.5) 4.3
------- ------ -------
263.1 (39.4) 63.9
------- ------ -------
Financing activities:
Net borrowings (repayments) (259.9) 36.8 (113.1)
Dividends (22.7) (22.8) (5.7)
Other, net (.1) .1 -
------- ------ -------
(282.7) 14.1 (118.8)
------- ------ -------
Net cash provided (used) by operating,
investing and financing activities $ (15.4) $ 33.5 $ (22.1)
======= ====== =======
Operating activities. Depreciation, depletion and amortization for
each business segment is presented in Note 2 to the Company's Consolidated
Financial Statements. The lower volume of fee timber harvested by Medite was a
principal reason for the declines in depreciation, depletion and amortization.
Noncash interest expense consists principally of amortization of original issue
discount ("OID") on Valhi's 12 1/2% Notes and, beginning in the fourth quarter
of 1992, on Valhi's LYONs. The net deferred tax benefits in 1992 and 1993
relate principally to equity in losses of NL and Tremont. Both NL and Tremont
suspended payment of dividends in 1992.
- 52 -
54
Changes in assets and liabilities relate to the relative timing of
sales, production and purchases, including, among other things, significant
seasonal fluctuations related to refined sugar operations. Other, net includes
items, such as the gain on selling Baroid stock in 1991 and losses related to
prepaying 12 1/2% Notes in 1992 and 1993, that are included in the
determination of net income but are excluded from the determination of cash
flow from operating activities.
Cash provided by operating activities is summarized below.
Approximately 80% of the aggregate net change in assets and liabilities during
the last three years relates to Amalgamated as year-to-year fluctuations in the
size of the sugarbeet crop can have a material impact on working capital
levels.
YEARS ENDED DECEMBER 31,
--------------------------------
1991 1992 1993
---- ---- ----
(IN MILLIONS)
Before changes in assets and liabilities:
Amalgamated $ 28.9 $ 27.7 $ 26.6
Medite 16.2 25.7 25.6
Sybra 9.4 10.0 10.3
National Cabinet Lock 5.9 9.0 11.2
Valhi/Valcor corporate and eliminations, net (27.1) (9.4) (4.5)
------ ------ -------
33.3 63.0 69.2
Changes in assets and liabilities, net (29.1) (4.2) (36.4)
------ ------ -------
$ 4.2 $ 58.8 $ 32.8
====== ====== =======
Investing activities. Capital expenditures during the past three
years for each business segment are presented in Note 2 to the Company's
Consolidated Financial Statements and discussed in the individual segment
sections below.
At December 31, 1993, the estimated cost to complete capital projects
in process approximated $36 million ($26 million in firm purchase commitments),
most of which relates to the expansion of Medite's Irish MDF production
facility discussed below. The Company's total capital expenditures for 1994
are estimated at approximately $70 million, including $22 million related to
the Irish expansion and $6 million related to environmental protection and
improvement programs, principally air and water facilities at certain of
Amalgamated's factories. Capital expenditures in 1994 are expected to be
financed primarily from the respective unit's operations or existing credit
facilities.
Net sales of securities in 1993 include sales of U.S. Treasury
securities made in conjunction with the redemptions of 12 1/2% Notes. On a net
basis, cash was used to purchase Treasury securities in both 1991 and 1992.
The purchase of such securities in 1991 was more than offset from the proceeds
of Baroid stock sold, the sale of NL shares pursuant to NL's "Dutch Auction"
self-tender offer and the sale of NL shares to Tremont, which transactions are
described in Note 3 to the Company's Consolidated Financial Statements.
Net cash used from business unit dispositions in 1993 relates to
Medite's plywood plant. Net cash provided in 1992 includes $11 million of
insurance proceeds related to the fire at Medite's Rogue River plant, and in
1991 relates to a Medite unit sold in 1990.
- 53 -
55
Financing activities. Net repayments of indebtedness in 1993 relate
principally to (i) Valhi's redemptions of $235 million principal amount of 12
1/2% Notes, (ii) Valcor's issuance of $100 million of 9 5/8% Senior Notes Due
2003, and (iii) net new borrowings of approximately $39 million under Medite's
Timber Credit Agreement. Net borrowings in 1992 include $94 million of net
proceeds from the issuance of the LYONs and $59 million expended to repurchase
12 1/2% Notes in market transactions. Net borrowing transactions in 1991
include Valhi's repayment of $252 million of parent company bank debt,
principally from the proceeds of Baroid and NL stock sold.
At December 31, 1993, the Company had aggregate unused borrowing
availability of $93 million under subsidiary credit facilities. See Note 11 to
the Company's Consolidated Financial Statements.
REFINED SUGAR
Amalgamated's cash requirements are seasonal in that a major portion
of the total payments for sugarbeets is made, and the costs of processing the
sugarbeets are incurred, in the fall and winter of each year. Accordingly,
Amalgamated's operating activities provide significant cash flow in the second
and third calendar quarters and use significant amounts of cash in the first
and fourth calendar quarters of each year. To meet its seasonal cash needs,
Amalgamated obtains short-term borrowings, primarily pursuant to the
Government's sugar price support loan program and bank credit facilities.
Amalgamated expects to meet its seasonal cash needs for the remainder of the
1993 crop year and for the 1994 crop through borrowings from such sources and
from internally-generated funds.
The effective net Government loan rate available to Amalgamated for
refined sugar from the 1993 crop is approximately 20.7 cents per pound, up from
20.47 cents per pound for the 1992 crop. Borrowings under the Government loan
program are secured by refined sugar inventory and are otherwise nonrecourse to
Amalgamated. At December 31, 1993, approximately 3.6 million hundredweight of
refined sugar inventory with a LIFO carrying value of approximately $67 million
(18.42 cents per pound) was the sole collateral for nonrecourse Government
loans of $76 million.
Amalgamated's capital expenditures in the past three years, which
emphasized equipment to improve productivity, aggregated $38 million and were
financed principally from operations and $18 million of term loan borrowings.
Estimated 1994 capital expenditures approximate $25 million, including $15
million for sugar extraction enhancing equipment and $5 million for
environmental protection and improvement programs, principally air and water
treatment facilities. Capital expenditures in 1995 are also currently expected
to exceed the averages of the past few years and aggregate over $20 million.
In view of, among other things, the level of capital expenditures expected
during the next few years, Amalgamated is exploring additional financing
alternatives.
At December 31, 1993, Amalgamated had $24 million of borrowing
availability under the government loan program and bank credit facilities.
The Company believes the recently enacted North American Free Trade
Agreement will not adversely impact the U.S. sugar industry, and that the new
General Agreement on Tariffs and Trade, finalized in late 1993 but not yet
enacted by Congress, can be supported by the industry.
- 54 -
56
FOREST PRODUCTS
Medite's primary strategic focus is to continue its expansion in the
growing market for MDF with particular emphasis on higher-margin specialty
products and to increase its presence in Europe and Mexico. Medite's present
access to adequate and reliable wood fiber raw materials represents a
significant aspect of its MDF operations, and expanded MDF production
capabilities will generally be directed to those regions providing attractive
long-term availability of wood fiber. Medite also actively manages its fee
timberlands, which are a valuable resource as the existing shortage of Pacific
Northwest public timber available for harvest is expected to continue for the
foreseeable future. In this regard, and as a result of the uncertain supply
and increased cost of government timber, Medite has closed marginal production
facilities, reduced the rate of harvest of its fee timber and adopted a more
sustained yield approach to managing its fee timber holdings.
Medite has commenced an expansion of its Clonmel, Republic of Ireland
MDF plant, which will increase its Irish MDF production capacity by
approximately 75% and increase its worldwide MDF capacity by approximately 25%.
This expansion is expected to be completed in 1995, cost approximately $33
million and will be financed in part by a $26 million multi-currency bank term
loan. In connection with the expansion, Medite obtained approximately $4
million of grants from the Irish government, approximately $2 million of which
will reduce bank borrowings.
Medite's fee timberlands in Southern Oregon contain approximately 645
MMBF of generally second-growth merchantable timber. The average annual timber
growth rate is approximately 4%. Medite's new Rogue River chipping facility
began operations in July 1993 and its new veneer operations resumed in January
1994. These facilities, as well as Medite's Oregon stud lumber mill, are
designed to process the smaller, second-growth timber expected to be available
from company-owned timberlands on a longer-term basis.
At December 31, 1993, Medite had contracts to acquire approximately 20
MMBF of timber from Government sources in 1994. The Federal Timber Contract
Payment Modification Act of 1986 contains certain restrictions on the volume of
Government timber that may be offered for sale, and Medite does not anticipate
acquiring any significant amount of new Government timber contracts in the
foreseeable future. As discussed above, Medite has adjusted its manufacturing
operations in response to the expected timber supply and expects to meet its
longer-term timber needs from its own lands and other private sources.
Medite's capital expenditures in the past three years totaled $35
million and included an aggregate of $11 million in 1992 and 1993 related to
the replacement of the Rogue River facilities, $6 million in 1993 related to
the Irish expansion and over $4 million during the three-year period for
additions to timber and timberland and reforestation activities. Capital
expenditures in 1994 are estimated at $32 million, including $22 million
related to the Irish MDF plant expansion.
At December 31, 1993, amounts available for borrowing under Medite's
existing U.S. and non-U.S. bank credit agreements were $29 million and $26
million, respectively.
As a result of the closure of its plywood operations, Medite has a 105
acre site in Medford, Oregon which is believed to have alternative development
possibilities and is held for sale.
- 55 -
57
FAST FOOD
Sybra, like most restaurant businesses, is able to operate with
nominal working capital because sales are for cash, inventory turnover is
rapid, and payments to trade suppliers are generally not due for 30 days.
During the past three years, Sybra has opened 14 new Arby's
restaurants. Sybra currently plans to open six to ten new Arby's restaurants
during 1994, and the first new store opened in late February. Sybra's 1994
capital expenditures are estimated at $11 million, approximately 75% of which
are for new restaurants, and the remainder for Sybra's continuing program to
remodel and update existing stores. Approximately 40% of Sybra's capital
expenditures in the past three years related to remodeling older stores.
Sybra continually evaluates the profitability of its individual
restaurants and intends to continue to close unprofitable stores when
appropriate. In this regard, Sybra closed eight stores during the past three
years, closed another four stores in January 1994 and may close one or two
additional stores later in 1994.
Sybra's Consolidated Development Agreement with Arby's, Inc. requires
it to open 31 new stores during 1993-1997 in its existing markets, of which
three units had been opened through December 31, 1993. The aggregate cost of
this expansion during the remaining four years of the CDA is estimated at
approximately $23 million, including $8 million in 1994, and is expected to be
financed with a combination of new mortgage and capital lease financing and
internally generated funds. Sybra currently anticipates that its planned
expansion program will enable it to retain its exclusive Dallas/Fort Worth and
Tampa development rights over the term of the CDA.
At December 31, 1993, Sybra had $8 million of borrowing availability
under its existing unsecured revolving credit agreements.
HARDWARE PRODUCTS
In early 1993, National Cabinet Lock completed the relocation of the
Canadian manufacturing operations acquired in June 1992, certain of which
operations were integrated into existing facilities. In late 1993, National
Cabinet Lock completed an expansion of its South Carolina lock facility and
terminated certain low-margin furniture component product lines previously
manufactured in Canada. Capital expenditures for 1994 are estimated at $4
million and are directed principally at capacity-related projects.
At December 31, 1993, National Cabinet Lock's Canadian subsidiary had
$6 million of borrowing availability under its existing revolving credit
agreements.
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58
GENERAL CORPORATE
Valhi's operations are conducted through its wholly-owned subsidiaries
(Amalgamated and Valcor) and through NL and Tremont, publicly- held affiliates
which Valhi may be deemed to control. Valcor is an intermediate parent company
with its operations conducted through wholly- owned subsidiaries (Medite, Sybra
and National Cabinet Lock). Accordingly, Valhi's and Valcor's long-term
ability to meet their respective parent company level obligations is dependent
in large measure on the receipt of dividends or other distributions from their
respective subsidiaries, the realization of their investments through the sale
of interests in such entities and investment income. Various credit agreements
to which subsidiaries 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 the Company's ability to service
parent company level obligations. Valhi has not guaranteed any indebtedness of
its direct and indirect wholly-owned subsidiaries or of NL or Tremont.
Valcor. Valcor was formed in 1993 to hold three of the Company's core
operating businesses and enable the Company to obtain lower cost borrowings
than could have been obtained through a similar-sized issue of Valhi notes. In
the fourth quarter of 1993, Valcor issued $100 million of 9 5/8% Senior Notes
Due 2003 and dividended $75 million of the proceeds to Valhi. The Company
believes that distributions from Valcor's operating subsidiaries (Medite, Sybra
and National Cabinet Lock) will be sufficient to enable Valcor to meet its
obligations, which consist principally of the 9 5/8% Notes. In addition, a
portion of the net proceeds from the Valcor Note issue were retained within the
Valcor group for general corporate purposes, including maintenance of a
liquidity cushion and temporary reduction of subsidiary revolving borrowings.
Valcor has not guaranteed any indebtedness of its subsidiaries. Future Valcor
dividends to Valhi are generally limited to 50% of Valcor's consolidated net
income, as defined, after 1993.
Valhi. At December 31, 1993, Valhi's parent company debt consists
solely of the LYONs, which do not require current cash debt service. The
Company believes that distributions from Amalgamated and Valcor will be more
than sufficient to enable Valhi to satisfy its net parent level expenses. In
addition, Valhi had cash, cash equivalents and trading securities of $39
million at year-end 1993.
Valhi owns 5.5 million shares of Dresser common stock, which shares
are held in escrow for the benefit of holders of the LYONs. The LYONs are
exchangeable, at the option of the holder, for the Dresser shares owned by
Valhi. Prior to the January 1994 merger of Dresser and Baroid, the LYONs were
exchangeable for Baroid common stock held by the Company. Exchanges of LYONs
for Dresser stock would result in the Company reporting income related to the
disposition of the Dresser stock for both financial reporting and income tax
purposes, although no cash proceeds would be generated by such exchanges. As
of February 28, 1994, the market value of the Dresser stock held by Valhi was
$124 million, or approximately $14 million in excess of the LYONs obligation at
that date and equal to the accreted value of the LYONs through June 1995.
Valhi continues to receive regular quarterly Dresser dividends (recently
increased to $.17 per quarter) on the escrowed shares. At such rate, dividends
from Dresser in 1994 would be 36% higher than those received from Baroid in
1993.
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59
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 unconsolidated affiliates, 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, modify its dividend policy, consider the sale of
interests in subsidiaries or unconsolidated 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. From time to time, the Company also evaluates the
restructuring of ownership interests among its subsidiaries and related
companies. The Company routinely evaluates 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.
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60
UNCONSOLIDATED AFFILIATES - NL AND TREMONT
Summarized historical balance sheet and cash flow information of NL
and Tremont is presented below.
NL INDUSTRIES TREMONT CORPORATION
----------------------- -------------------
DECEMBER 31, DECEMBER 31,
----------------------- -------------------
1992 1993 1992 1993
---- ---- ---- ----
(IN MILLIONS)
Cash, equivalents and securities $ 187.9 $ 147.6 $ 14.7 $ 20.3
Other current assets 447.9 319.9 99.9 93.7
Noncurrent securities 23.6 18.4 8.8 7.7
Investment in NL - - 76.5 22.3
Investment in joint ventures 2.4 190.8 11.0 13.6
Other noncurrent assets 64.3 151.2 47.9 18.3
Property and equipment 746.0 378.6 139.5 147.3
-------- -------- ------ ------
$1,472.1 $1,206.5 $398.3 $323.2
======== ======== ====== ======
Current liabilities $ 248.8 $ 232.5 $ 52.4 $ 66.0
Long-term debt 992.0 835.2 124.0 43.5
Accrued OPEB costs 71.8 68.3 51.5 51.7
Deferred income taxes 145.7 139.0 - -
Other noncurrent liabilities 157.8 193.9 21.1 16.4
Minority interest 2.3 2.4 - 27.2
Stockholders' equity (deficit):
Capital and retained earnings (33.6) (143.4) 153.5 126.7
Adjustments, principally foreign
currency translation (112.7) (121.4) (4.2) (8.3)
-------- -------- ------ ------
(146.3) (264.8) 149.3 118.4
-------- -------- ------ ------
$1,472.1 $1,206.5 $398.3 $323.2
======== ======== ====== ======
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
NL INDUSTRIES TREMONT
---------------------------- ---------------------------
1991 1992 1993 1991 1992 1993
---- ---- ---- ---- ---- ----
(IN MILLIONS)
Net cash provided (used) by:
Operating activities $ 58.1 $ (44.7) $ (7.3) $ 24.8 $ (3.7) $ 1.5
Investing activities:
Capital expenditures (195.1) (85.2) (48.0) (30.3) (67.7) (16.3)
Other, net 85.7 320.1 229.9 (113.0) 5.5 19.5
Financing activities:
Net borrowings (repayments) (5.7) (201.4) (154.7) 18.9 55.1 (5.3)
Capital transactions, net (202.5) (3.6) - (3.0) .2 -
Dividends and other, net (35.6) (18.1) (.6) (3.8) (5.3) (.3)
------- ------- ------- ------- ------ ------
$(295.1) $ (32.9) $ 19.3 $(106.4) $(15.9) $ (.9)
======= ======= ======= ======= ====== ======
Cash paid for:
Interest, net of amount capitalized $ 107.6 $ 138.0 $ 91.6 $ 3.9 $ 1.6 $ 1.0
Income taxes (refund) 54.6 31.4 11.9 (3.6) (1.8) (3.4)
- 59 -
61
NL Industries. During 1993, NL's operations continued to use
significant amounts of cash. TiO2 production rates were reduced in late 1992
and during 1993 in order to reduce inventory levels. The $30 million received
from Tioxide in October 1993 related to the exchange of technologies, which is
being recognized as a component of operating income over three years, favorably
impacted 1993 cash flow from operating activities. Other relative changes in
working capital items, which result principally from the timing of purchases,
production and sales, also contributed to the comparative decrease in NL's cash
used by operating activities in 1993. The significant deterioration in NL's
cash flow from operating activities from 1991 to 1992 resulted primarily from
the decline in earnings and the relative change in NL's receivables,
inventories and payables.
Cash provided by investing activities relates primarily to net sales
of marketable securities in each period to fund debt repayments, capital
expenditures and operations, and in 1993 includes $161 million net cash
generated related to the formation of the Tioxide manufacturing joint venture.
NL's capital expenditures during the past three years include an
aggregate of $204 million related to the completion of the Louisiana chloride
process TiO2 plant and an aggregate of $57 million ($30 million in 1993) for
NL's ongoing environmental protection and compliance programs, including a
Canadian waste acid neutralization facility, a Norwegian onshore tailings
disposal system and off-gas desulfurization systems at various operating
facilities. NL's estimated 1994 capital expenditures are $44 million and
include $30 million in the area of environmental protection and compliance,
primarily related to the Canadian waste acid neutralization facility and the
German off-gas desulfurization systems.
Net repayments of indebtedness in 1993 included payments on the DM
bank credit facility of DM 552 million ($342 million when paid), a $110 million
net reduction in indebtedness related to the Louisiana TiO2 plant and $350
million proceeds from NL's October 1993 public offering of debt, all as
discussed below. Net repayments of indebtedness in 1992 included payments on
the DM term loan aggregating DM 350 million ($225 million when paid) and $61
million drawn under Kronos' Louisiana plant credit facilities. Net borrowings
in 1991 included a $115 million Rheox term loan, a $52 million increase in the
Louisiana plant term construction loan and a DM 150 million ($87 million when
paid) reduction in the DM term loan. NL and Kronos have agreed, under certain
conditions, to provide Kronos' principal international subsidiary with up to an
additional DM 125 million through January 1, 2001.
In October 1993, NL (i) completed the formation of the manufacturing
joint venture with Tioxide, including related refinancing of Louisiana plant
indebtedness, (ii) completed a public offering of $250 million of 11.75% Senior
Secured Notes Due 2003 and $100 million proceeds ($188 million principal amount
at maturity) of 13% Senior Secured Discount Notes Due 2005 (collectively, the
"NL Notes"), (iii) prepaid DM 552 million ($342 million when paid) of the DM
bank credit facility and amended the DM loan agreement, and (iv) redeemed the
remaining $10 million of NL's 7 1/2% sinking fund debentures.
The DM bank credit facility, as amended, consists of a DM 448 million
term loan and a DM 250 million revolving credit facility. At December 31,
1993, DM 150 million was available for future borrowings under the revolving
facility. The final maturities of the term and revolving portion of the DM
credit facility were extended to 1999 and 2000, respectively, with the first
payment of the term loan due in 1997.
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62
Upon formation, the joint venture obtained $216 million in new
financing consisting of two equal tranches, one attributable to each partner,
which is serviced through the purchase of the plant's TiO2 output in equal
quantities by the partners. Each partner is required to make capital
contributions to the joint venture to pay principal on their respective portion
of the joint venture indebtedness. Kronos' pro rata share of the joint venture
debt is reflected as outstanding consolidated indebtedness of NL because Kronos
has guaranteed the purchase obligation relative to the debt service of its
tranche.
Formation of the joint venture and related refinancing, issuance of
the NL Notes and prepayment of a portion of the DM bank credit facility
significantly improved NL's liquidity and financial flexibility by (i)
increasing cash and cash equivalents by approximately $75 million, (ii)
reducing total outstanding indebtedness by approximately $109 million, (iii)
providing for approximately DM 150 million of borrowing availability under the
revolving portion of the amended DM bank credit facility, (iv) eliminating the
near-term principal amortization requirements and extending the remaining
principal amortization schedule of the DM bank credit facility, and (v)
replacing approximately $100 million of outstanding debt with the Senior
Secured Discount Notes which do not require cash interest payments for five
years. The NL Notes are intended to be serviced from the cash flow generated
by Kronos' international subsidiaries, principally through a series of
intercompany notes whose terms mirror those of the NL Notes.
Financing activities include treasury stock purchases, including $181
million expended in 1991 in connection with NL's "Dutch Auction" self-tender
offer. Dividends paid were $35 million in 1991 and $18 million in 1992. NL
suspended dividend payments in October 1992.
At December 31, 1993, approximately one-fourth of NL's cash, cash
equivalents and current securities were held by non-U.S. subsidiaries. NL's
subsidiaries had $14 million and $117 million available for borrowing at
December 31, 1993 under existing U.S and non-U.S. credit facilities,
respectively.
NL has taken and continues to take measures to manage its near-term
and long-term liquidity requirements, including cost reduction and containment
efforts, tightening of controls over working capital, deferral and reduction of
capital expenditures, discontinuance of unrelated business acquisition
activities, suspension of dividends, formation of the manufacturing joint
venture and the refinancing discussed above. NL currently expects to have
sufficient liquidity to meet its near-term obligations including operations,
capital expenditures and debt service. A prolonged period of depressed TiO2
selling prices and continued use of cash by operations would, however, over the
long term, have an adverse effect on NL's liquidity and financial condition.
Certain of NL's income tax returns in various U.S. and non-U.S.
jurisdictions, including Germany, are being examined and tax authorities have
proposed or may propose tax deficiencies. In June 1993, German tax authorities
issued assessment reports in connection with examinations of NL's German income
tax returns disallowing NL's claims for refunds, primarily for 1989 and 1990,
aggregating DM 160 million ($92 million at year-end exchange rates), and
proposing additional taxes of approximately DM 100 million ($58 million). NL
has applied for administrative relief from collection procedures and may grant
a lien on certain German assets while NL contests the proposed adjustments.
Although NL believes that it will ultimately prevail, in June 1993 NL
reclassified the DM 160 million of refundable income tax claims disallowed by
the German tax authorities from current assets to noncurrent assets due to the
uncertain timing
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63
of a resolution. NL believes that it has adequately provided accruals for
additional income taxes and related interest expense which may ultimately
result from all such examinations and believes that the ultimate disposition of
all such examinations should not have a material adverse effect on NL's
consolidated financial position, results of operations or liquidity. Pursuant
to the amended DM bank credit facility, any receipt of the refundable German
income taxes will be applied ratably to prepay installments of the term portion
of the DM bank credit facility, with any remaining proceeds of the tax refund
used to permanently reduce the revolving credit portion.
At December 31, 1993, NL had recorded net deferred tax liabilities of
$139 million. NL operates in several tax jurisdictions, in certain of which it
has temporary differences that net to deferred tax assets (before valuation
allowance). NL has provided a deferred tax valuation allowance of $133
million, principally related to the U.S. and Germany, for deferred tax assets
which NL believes may not currently meet the "more likely than not" realization
criteria for asset recognition.
NL has been named as a defendant, PRP, or both, in a number of legal
proceedings associated with environmental matters, including waste disposal
sites currently or formerly owned, operated or used by NL, many of which
disposal sites or facilities are on the U.S. Environmental Protection Agency's
Superfund National Priorities List or similar state lists. On a regular basis,
NL evaluates the potential range of its liability at sites where it has been
named as a PRP or a defendant. NL believes it has provided adequate accruals
($70 million at December 31, 1993) 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. NL is also a defendant in a number of legal proceedings
seeking damages for personal injury and property damage arising out of the sale
of lead pigments and lead-based paints. NL has not accrued any amounts for the
pending lead pigment litigation. Although no assurance can be given that NL
will not incur future liability in respect of this litigation, based on, among
other things, the results of such litigation to date, NL believes that the
pending lead pigment litigation is without merit. Any liability that may
result is not reasonably capable of estimation by NL. NL currently believes
the disposition of all claims and disputes, individually and in the aggregate,
should not have a material adverse effect on NL's 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, capital needs
and availability of resources in view of, among other things, its debt service
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 refinance or
restructure indebtedness, raise additional capital, restructure ownership
interests, sell interests in subsidiaries, marketable securities or other
assets, or take a combination of such steps or other steps to increase or
manage its liquidity and capital resources. Such activities have in the past
and may in the future involve related companies.
- 62 -
64
Tremont Corporation. Tremont's cash flow from operations improved in
1993, despite higher operating losses, in large part as a result of relative
changes in operating assets and liabilities, including TIMET's restructuring
charge accrual.
TIMET's new VDP titanium sponge facility accounted for over two-thirds
of aggregate capital expenditures during the past three calendar years (90% in
1993). Capital expenditures for 1994 are currently estimated at about $3
million, significantly lower than in recent years due principally to the
completion of the VDP plant.
Investing activities in 1993 included aggregate proceeds of
approximately $26 million from the sale of Tremont's interest in a gold mining
venture and the sale of its bentonite mining business, and included purchases
of NL common stock of $92 million in 1991 and $10 million in 1992.
Average outstanding borrowings increased in each of the past three
years due to relative operating needs and funding of TIMET's capital
expenditures. Net borrowings in 1991 and 1992 included $61 million of TIMET
subordinated debentures issued to UTSC, which increased the debentures
outstanding to $75 million at the end of 1992. Dividends paid were $4 million
in 1991 and $5 million in 1992. Tremont suspended payment of dividends in
1992.
In December 1993, UTSC converted its $75 million of debentures into
25% of TIMET's outstanding voting common stock. Such conversion (i) decreased
Tremont's ownership of TIMET to 75%, resulting in recognition of minority
interest of $27 million, (ii) eliminated $75 million of long-term debt from
Tremont's consolidated balance sheet, and (iii) increased Tremont's
consolidated stockholders' equity by about $31 million, net of related deferred
income taxes.
During the past several years, TIMET's combined operations, capital
expenditures and debt service have consumed significant amounts of cash. TIMET
has taken and continues to take measures to manage its near-term and long-term
liquidity requirements including, among other things, continued cost reduction
efforts, deferral and reduction of capital expenditures, sale of certain
assets, deferral of certain payments and other efforts to reduce the level of
working capital, including reducing production rates and closing certain
facilities. At December 31, 1993, TIMET had outstanding borrowings and letters
of credit of approximately $29 million under the $30 million revolving portion
of its bank credit agreement. TIMET is pursuing additional sources of
liquidity. UTSC has allowed TIMET to defer interest payments aggregating
approximately $6 million originally due prior to July 1993 until June 1994, and
TIMET is currently negotiating for a further deferral. TIMET believes these
measures, if successful, will provide it with the liquidity to meet its
near-term obligations including operations, capital expenditures and debt
service. However, the continued consumption of cash would have a further
adverse effect on TIMET's liquidity and financial condition. Neither Tremont
or UTSC have guaranteed any indebtedness of TIMET nor are they obligated to
provide additional funds to TIMET.
Tremont, with its 75% equity interest in TIMET and 18% equity interest
in NL, is principally a holding company. At December 31, 1993, Tremont had
parent level cash, equivalents and securities of approximately $13 million.
Tremont has suspended both its regular quarterly dividend and its unrelated
business acquisition activities. Tremont believes it will have sufficient
liquidity to meet its existing near-term parent company level obligations.
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65
Tremont loaned $25 million to TIMET over the past two years, a portion
of which was contributed to TIMET's capital in 1993. TIMET's repayment of the
remaining $19 million of such loans and related accrued interest, and the
payment of dividends by TIMET, is subject to TIMET achieving certain financial
targets under its bank credit agreement and are not currently permitted.
Approximately one-half of Tremont's consolidated accrued OPEB costs
relate to TIMET's plans, with substantially all of the remainder relating to
retirees of former units from periods prior to the 1990 separation of Tremont
and Baroid for which Tremont retained the obligation.
Tremont periodically evaluates its liquidity requirements, capital
needs and availability of resources in view of, among other things, its debt
service requirements and estimated future operating cash flows. As a result of
this process, Tremont may seek to raise additional capital, restructure
ownership interests, refinance or restructure indebtedness, sell interests in
subsidiaries, marketable securities or other assets, or take a combination of
such steps or other steps to increase or manage its liquidity and capital
resources. Such activities have in the past and may in the future involve
related companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item is contained in a separate
section of this Annual Report. See "Index of Financial Statements and
Schedules" on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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66
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
Valhi's definitive Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after the end of the
fiscal year covered by this report (the "Valhi Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the Valhi Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the Valhi Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the Valhi Proxy Statement. See also Note 19 to the Company's Consolidated
Financial Statements.
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67
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Schedules
The Registrant
The consolidated financial statements and schedules
listed on the accompanying Index of Financial
Statements and Schedules (see page F-1) are filed as
part of this Annual Report.
50 percent-or-less owned persons
Consolidated financial statements of NL Industries,
Inc. (49%-owned), with independent auditors report
thereon, pages F-1 through F-38 inclusive of NL's
Annual Report on Form 10-K for the year ended
December 31, 1993 (Commission File No. 1-640)
included herein as Exhibit 99.1, are filed as part of
this Annual Report.
Consolidated financial statements of Tremont
Corporation (48%-owned), with independent auditors
report thereon, pages F-1 through F-33 inclusive of
Tremont's Annual Report on Form 10-K for the year
ended December 31, 1993 (Commission File No. 1-10126)
included herein as Exhibit 99.2, are filed as part of
this Annual Report.
(b) Reports on Form 8-K
Reports on Form 8-K filed for the quarter ended
December 31, 1993 and the months of January and
February 1994:
October 29, 1993 - Reported Items 5 and 7.
November 8, 1993 - Reported Items 5 and 7.
February 11, 1994 - Reported Items 5 and 7.
(c) Exhibits
Included as exhibits are the items listed in the
Exhibit Index. Valhi will furnish a copy of any of
the exhibits listed below upon payment of $4.00 per
exhibit to cover the costs to Valhi of furnishing the
exhibits. Instruments defining the rights of holders
of long-term debt issues which do not exceed 10% of
consolidated total assets will be furnished to the
Commission upon request.
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68
PAGE NUMBER:
MANUALLY
ITEM NO. SIGNED COPY EXHIBIT INDEX
-------- ----------- -------------
3.1 Restated Articles of Incorporation of the Registrant - incorporated by
reference to Appendix A to the definitive Prospectus/Joint Proxy Statement
of The Amalgamated Sugar Company and LLC Corporation (File No. 1-5467) dated
February 10, 1987.
3.2 By-Laws of the Registrant as amended - incorporated by reference to Exhibit
3.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1992.
4.1 Form of Indenture between the Registrant and NationsBank of Georgia, N.A.,
as Trustee, governing Liquid Yield Option Notes due 2007 - incorporated by
reference to Exhibit 4.1 to a Registration Statement on Form S-2 (No. 33-
49866) filed by the Registrant.
4.2 Indenture dated November 1, 1993 governing Valcor's 9 5/8% Senior Notes due
2003, including form of note - incorporated by reference to Exhibit 4.1 of
Valcor's Quarterly Report on Form 10-Q (File No. 33-63044) for the quarter
ended September 30, 1993.
4.3 Indenture dated October 20, 1993 governing NL's 11 3/4% Senior Secured Notes
due 2003, including form of note, - incorporated by reference to Exhibit 4.1
of NL's Quarterly Report on Form 10-Q (File No. 1-640) for the quarter ended
September 30, 1993.
4.4 Indenture dated October 20, 1993 governing NL's 13% Senior Secured Discount
Notes due 2005, including form of note - incorporated by reference to
Exhibit 4.6 of NL's Quarterly Report on Form 10-Q (File No. 1-640) for the
quarter ended September 30, 1993.
10.1 Form of Intercorporate Services Agreement between the Registrant and Contran
Corporation - incorporated by reference to Exhibit 10.1 of the Registrant's
Annual Report on Form 10-K (File No. 1-5467) for the year ended December 31,
1992.
10.2 Stock Purchase Agreement dated October 30, 1991 between the Registrant and
Tremont Corporation - incorporated by reference to Exhibit 28.1 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1991.
10.3 Valhi, Inc. 1987 Incentive Stock Option - Stock Appreciation Rights Plan -
incorporated by reference to Exhibit 4.1 of a Registration Statement on Form
S-8 (No. 33-41507) filed by the Registrant.
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69
10.4 Valhi, Inc. 1990 Non-Employee Director Stock Option Plan - incorporated by
reference to Exhibit 4.1 of a Registration Statement on Form S-8 (No. 33-
41508) filed by the Registrant.
10.5 Loan Agreement between Medite Corporation and United States National Bank of
Oregon dated July 16, 1993 - incorporated by reference to Exhibit 10.1 of
the Registrant's Quarterly Report on Form 10-Q (File No. 1-5467) for the
quarter ended June 30, 1993.
10.6 Amended and Restated Loan Agreement dated October 15, 1993 among Kronos
International, Inc., the Banks set forth therein and Hypobank International
S.A., as Agent, and Banque Paribas, as Co-Agent - incorporated by reference
to Exhibit 10.17 of NL's Quarterly Report on Form 10-Q (File No. 1-640) for
the quarter ended September 30, 1993.
10.7 Formation Agreement dated as of October 18, 1993 among Tioxide Americas
Inc., Kronos Louisiana, Inc. and Louisiana Pigment Company, L.P. -
incorporated by reference to Exhibit 10.2 of NL's Quarterly Report on Form
10-Q (File No. 1-640) for the quarter ended September 30, 1993.
10.8 Joint Venture Agreement dated as of October 18, 1993 between Tioxide
Americas Inc. and Kronos Louisiana, Inc. - incorporated by reference to
Exhibit 10.3 of NL's Quarterly Report on Form 10-Q (File No. 1-640) for the
quarter ended September 30, 1993.
10.9 Kronos Offtake Agreement dated as of October 18, 1993 by and between Kronos
Louisiana, Inc. and Louisiana Pigment Company, L.P. - incorporated by
reference to Exhibit 10.4 of NL's Quarterly Report on Form 10-Q (File No.
1-640) for the quarter ended September 30, 1993.
10.10 Master Technology and Exchange Agreement dated as of October 18, 1993 among
Kronos, Inc., Kronos Louisiana, Inc., Kronos International, Inc., Tioxide
Group Limited and Tioxide Group Services Limited - incorporated by reference
to Exhibit 10.8 of NL's Quarterly Report on Form 10-Q (File No. 1-640) for
the quarter ended September 30, 1993.
10.11 Lease Contract dated June 21, 1952, between Farbenfabrieken Bayer
Aktiengesellschaft and Titangesellschaft mit beschrankter Haftung (German
language version and English translation thereof) - incorporated by
reference to Exhibit 10.14 of NL's Annual Report on Form 10-K (File No. 1-
640) for the year ended December 31, 1985.
- 68 -
70
10.12 Contract dated September 9, 1971, between Farbenfabrieken Bayer
Aktiengesellschaft and Titangesellschaft mit beschrankter Haftung concerning
supplies and services (German language version and English translation
thereof) - incorporated by reference to Exhibit 10.15 of NL's Annual Report
on Form 10-K (File No. 1-640) for the year ended December 31, 1985.
10.13 Agreement dated February 8, 1984 between Bayer AG and Kronos Titan GmbH
(German language version and English translation thereof) - incorporated by
reference to Exhibit 10.16 of NL's Annual Report on Form 10-K (File No. 1-
640) for the year ended December 31, 1985.
10.14 Registration Rights Agreement dated October 30, 1991, by and between NL and
Tremont - incorporated by reference to Exhibit 4.3 of NL's Annual Report on
Form 10-K (File No. 1-640) for the year ended December 31, 1991.
10.15 Sponge Purchase Agreement dated May 30, 1990 between Titanium Metals
Corporation and Union Titanium Sponge Corporation and Amendments No. 1 and 2
- incorporated by reference to Exhibit 10.25 of Tremont's Annual Report on
Form 10-K (File No. 1-10126) for the year ended December 31, 1991.
10.16 Amendment No. 3 to the Sponge Purchase Agreement between Titanium Metals
Corporation and Union Titanium Sponge Corporation - incorporated by
reference to Exhibit 10.32 of Tremont's Annual Report on Form 10-K (File No.
1-10126) for the year ended December 31, 1993.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Coopers & Lybrand.
23.2 Consent of KPMG Peat Marwick.
23.3 Consent of Arthur Andersen & Co.
99.1 NL Industries, Inc. (File No. 1-640) Annual Report on Form 10-K for the year
ended December 31, 1993 - Item 3 - "Legal Proceedings" and Item 8 -
"Financial Statements and Supplementary Data" (pages F-1 to F-38).
99.2 Tremont Corporation (File No. 1-0126) Annual Report on Form 10-K for the
year ended December 31, 1993 - Item 8 - "Financial Statements and
Supplementary Data" (pages F-1 to F-33).
- 69 -
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By: /s/ MICHAEL A. SNETZER
Michael A. Snetzer, March 10, 1994
(President)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ ARTHUR H. BILGER /s/ HAROLD C. SIMMONS
Arthur H. Bilger, March 10, 1994 Harold C. Simmons, March 10, 1994
(Director) (Chairman of the Board and Chief
Executive Officer)
/s/ NORMAN S. EDELCUP /s/ GLENN R. SIMMONS
Norman S. Edelcup, March 10, 1994 Glenn R. Simmons, March 10, 1994
(Director) (Vice Chairman of the Board)
/s/ ROBERT J. FRAME /s/ MICHAEL A. SNETZER
Robert J. Frame, March 10, 1994 Michael A. Snetzer, March 10, 1994
(Director) (Director and President)
/s/ J. WALTER TUCKER, JR. /s/ WILLIAM C. TIMM
J. Walter Tucker, Jr., March 10, 1994 William C. Timm, March 10, 1994
(Director) (Vice President-Finance and
Administration, Treasurer and Chief
Financial Officer)
/s/ J. THOMAS MONTGOMERY, JR.
J. Thomas Montgomery, Jr.,
March 10, 1994
(Vice President, Controller and Chief
Accounting Officer)
- 70 -
72
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 14(A) AND 14(D)
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
PAGE
----
FINANCIAL STATEMENTS
Reports of Independent Accountants F-3/F-5
Consolidated Balance Sheets - December 31, 1992 and 1993 F-6/F-7
Consolidated Statements of Operations - Years ended
December 31, 1991, 1992 and 1993 F-8/F-9
Consolidated Statements of Cash Flows - Years ended
December 31, 1991, 1992 and 1993 F-10/F-12
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1991, 1992 and 1993 F-13
Notes to Consolidated Financial Statements F-14/F-45
FINANCIAL STATEMENT SCHEDULES
Reports of Independent Accountants S-1/S-3
Schedule I - Marketable securities S-4
Schedule II - Amounts receivable from related parties and
underwriters, promoters, and employees other
than related parties S-5
Schedule III - Condensed financial information of Registrant S-6/S-15
Schedule V - Property and equipment S-16/S-17
Schedule VI - Accumulated depreciation of property and
equipment S-18
Schedule VIII - Valuation and qualifying accounts S-19
Schedule IX - Short-term borrowings S-20
Schedule X - Supplementary income statement information S-21
All other schedules are omitted because they are not applicable or not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
F-1
73
{THIS PAGE INTENTIONALLY LEFT BLANK.}
F-2
74
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Valhi, Inc.:
We have audited the accompanying consolidated balance sheets of Valhi,
Inc. and Subsidiaries as of December 31, 1992 and 1993, and the related
consolidated statements of operations, cash flows and stockholders' equity for
each of the three years in the period ended December 31, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of the refined sugar
(The Amalgamated Sugar Company) and forest products (Medite Corporation)
subsidiaries constituting approximately 48% and 59% of consolidated assets as
of December 31, 1992 and 1993, respectively, and approximately 81%, 81% and 77%
of consolidated net sales for the years ended December 31, 1991, 1992 and 1993,
respectively. These statements were audited by other auditors whose reports
thereon have been furnished to us, and our opinion, insofar as it relates to
amounts included for such subsidiaries, is based solely upon their reports.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based upon our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Valhi, Inc. and Subsidiaries
as of December 31, 1992 and 1993, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 18 to the consolidated financial statements,
in 1993 the Company changed its method of accounting for certain investments in
debt and equity securities in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115 and in 1992 changed its method of accounting for
postretirement benefits other than pensions and income taxes in accordance with
SFAS Nos. 106 and 109, respectively.
COOPERS & LYBRAND
Dallas, Texas
February 25, 1994
F-3
75
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of The Amalgamated Sugar Company:
We have audited the consolidated balance sheets of The Amalgamated Sugar
Company as of December 31, 1992 and 1993, and the related consolidated
statements of income and shareholder's equity and cash flows for each of the
three years in the period ended December 31, 1993 (not presented separately
herein). These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements (not presented
separately herein) referred to above present fairly, in all material respects,
the consolidated financial position of The Amalgamated Sugar Company at
December 31, 1992 and 1993, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1993, in
conformity with generally accepted accounting principles.
As discussed in Note 10 to the consolidated financial statements (not
presented separately herein), in 1992 the Company changed its method of
accounting for postretirement benefits other than pensions and income taxes in
accordance with Statements of Financial Accounting Standards Nos. 106 and 109,
respectively.
KPMG PEAT MARWICK
Salt Lake City, Utah
January 28, 1994
F-4
76
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of Medite Corporation:
We have audited the consolidated balance sheets of Medite Corporation as
of December 31, 1992 and 1993, and the related consolidated statements of
income, stockholder's equity and cash flows for each of the three years in the
period ended December 31, 1993 (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements (not presented
separately herein) referred to above present fairly, in all material respects,
the consolidated financial position of Medite Corporation as of December 31,
1992 and 1993, and the consolidated results of its operations and cash flows
for each of the three years in the period ended December 31, 1993, in
conformity with generally accepted accounting principles.
As discussed in Note 8 to the consolidated financial statements (not
presented separately herein), in 1992 the Company changed its method of
accounting for postretirement benefits other than pensions and income taxes in
accordance with Statements of Financial Accounting Standards Nos. 106 and 109,
respectively.
ARTHUR ANDERSEN & CO.
Portland, Oregon,
January 28, 1994
F-5
77
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1992 AND 1993
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1992 1993
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 44,538 $ 22,189
Marketable securities 127,459 28,518
Accounts and notes receivable 56,864 61,135
Receivable from affiliates 306 272
Inventories 265,262 276,125
Prepaid expenses 9,504 6,126
Deferred income taxes 638 75
---------- --------
Total current assets 504,571 394,440
---------- --------
Other assets:
Marketable securities 44,250 108,800
Investment in affiliates 248,395 74,897
Timber and timberlands 51,591 51,868
Deferred income taxes - 27,723
Other 39,872 42,887
---------- --------
Total other assets 384,108 306,175
---------- --------
Property and equipment:
Land 18,181 18,822
Buildings 41,517 43,522
Equipment 321,720 341,868
Construction in progress 4,081 17,344
---------- --------
385,499 421,556
Less accumulated depreciation 197,184 218,300
---------- --------
Net property and equipment 188,315 203,256
---------- --------
$1,076,994 $903,871
========== ========
F-6
78
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1992 AND 1993
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1992 1993
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 122,180 $117,753
Current maturities of long-term debt 110,279 16,086
Accounts payable and accrued liabilities 251,128 223,528
Payable to affiliates 1,623 43
Income taxes 3,753 4,916
Deferred income taxes - 2,494
---------- --------
Total current liabilities 488,963 364,820
---------- --------
Noncurrent liabilities:
Long-term debt 288,704 302,490
Deferred income taxes 10,771 1,732
Other 29,432 27,328
---------- --------
Total noncurrent liabilities 328,907 331,550
---------- --------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000 shares
authorized; none issued - -
Common stock, $.01 par value; 150,000 shares
authorized; 124,290 and 124,435 shares issued 1,243 1,244
Additional paid-in capital 33,300 33,409
Retained earnings 307,599 222,810
Adjustments:
Currency translation (10,277) (17,776)
Marketable securities (232) 41,075
Pension liabilities - (1,619)
Common stock reacquired, at cost - 10,237 and
10,182 shares (72,509) (71,642)
---------- --------
Total stockholders' equity 259,124 207,501
---------- --------
$1,076,994 $903,871
========== ========
Commitments and contingencies (Note 20)
See accompanying notes to consolidated financial statements.
F-7
79
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1991 1992 1993
---- ---- ----
Revenues and other income:
Net sales $765,653 $811,821 $ 781,154
Securities transactions 63,201 2,113 1,167
Business unit dispositions, net - 3,490 500
Interest and other, net 14,696 17,938 11,191
-------- -------- ---------
843,550 835,362 794,012
-------- -------- ---------
Costs and expenses:
Cost of sales 610,975 634,073 592,979
Selling, general and administrative 101,093 114,500 113,107
Interest 72,173 51,497 38,648
-------- -------- ---------
784,241 800,070 744,734
-------- -------- ---------
Income of consolidated companies
before income taxes 59,309 35,292 49,278
Equity in losses of affiliates (19,667) (70,700) (143,819)
-------- -------- ---------
Income (loss) before income taxes 39,642 (35,408) (94,541)
Income tax benefit (expense) (19,632) 13,171 30,417
-------- -------- ---------
Income (loss) before extraordinary
items and cumulative effect of
changes in accounting principles 20,010 (22,237) (64,124)
Extraordinary items 4,752 (6,277) (15,390)
Cumulative effect of changes in
accounting principles - (69,774) 429
-------- -------- ---------
Net income (loss) $ 24,762 $(98,288) $ (79,085)
======== ======== =========
F-8
80
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1991 1992 1993
---- ---- ----
Income (loss) per common share:
Before extraordinary items $.18 $(.19) $(.56)
Extraordinary items .04 (.06) (.13)
Cumulative effect of changes in
accounting principles - (.61) -
------- ------- -------
Net income (loss) $.22 $(.86) $(.69)
======= ======= =======
Cash dividends per share $.20 $ .20 $ .05
======= ======= =======
Weighted average common shares
outstanding 113,534 113,886 114,098
======= ======= =======
See accompanying notes to consolidated financial statements.
F-9
81
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
(IN THOUSANDS)
1991 1992 1993
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 24,762 $(98,288) $(79,085)
-------- -------- --------
Adjustments:
Depreciation, depletion and amortization 29,403 27,616 25,569
Noncash interest expense (original issue
discount and deferred financing costs) 2,192 3,097 10,267
Noncash OPEB expense - 1,009 585
Deferred income taxes 2,711 (27,270) (52,850)
Equity in losses of affiliates 14,566 70,700 159,747
Dividends from affiliates 24,414 10,740 -
Securities transactions (63,201) (2,113) (1,167)
Business unit dispositions, net - (3,490) (500)
Prepayments of senior subordinated notes - 9,511 7,749
Other, net (1,603) 1,728 (648)
Change in assets and liabilities:
Accounts and notes receivable 54 (3,591) (4,257)
Inventories (14,063) (1,274) (10,863)
Accounts payable and accrued
liabilities (14,585) (4,891) (20,155)
Accounts with affiliates (7,267) 2,269 (1,546)
Other, net 6,824 3,286 355
Cumulative effect of changes in
accounting principles - 69,774 (429)
-------- -------- --------
Total adjustments (20,555) 157,101 111,857
-------- -------- --------
Net cash provided by operating
activities 4,207 58,813 32,772
-------- -------- --------
F-10
82
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
(IN THOUSANDS)
1991 1992 1993
---- ---- ----
Cash flows from investing activities:
Capital expenditures $ (26,779) $ (27,954) $ (39,086)
Business unit dispositions:
Insurance proceeds - 10,887 -
Sale proceeds and other, net 6,105 (1,231) (924)
Proceeds from disposition of:
Marketable and other securities 463,596 280,486 381,395
Property and equipment 186 253 -
Purchases of:
Marketable securities (201,820) (294,105) (281,795)
Stock of affiliates - (4,853) -
Business units - (1,237) -
Loans to affiliates:
Loans (49,675) (66,953) (11,800)
Collections 67,825 66,953 11,800
Other, net 3,667 (1,685) 4,287
----------- --------- ---------
Net cash provided (used) by
investing activities 263,105 (39,439) 63,877
----------- --------- ---------
Cash flows from financing activities:
Notes payable and long-term debt:
Additions 861,998 972,141 681,487
Principal payments, including
retirement premiums (1,121,922) (931,462) (790,308)
Deferred financing costs - (3,830) (4,314)
Loans from affiliates:
Loans 150,000 - 5,400
Repayments (150,000) - (5,400)
Dividends (22,725) (22,753) (5,704)
Other, net (86) 48 53
----------- --------- ---------
Net cash provided (used) by
financing activities (282,735) 14,144 (118,786)
----------- --------- ---------
Net increase (decrease) from operating,
investing and financing activities $ (15,423) $ 33,518 $ (22,137)
=========== ========= =========
F-11
83
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
(IN THOUSANDS)
1991 1992 1993
---- ---- ----
Cash and cash equivalents:
Net increase (decrease) from:
Operating,investing and financing
activities $(15,423) $33,518 $(22,137)
Currency translation (3) (309) (212)
-------- ------- --------
(15,426) 33,209 (22,349)
Balance at beginning of year 26,755 11,329 44,538
-------- ------- --------
Balance at end of year $ 11,329 $44,538 $ 22,189
======== ======= ========
Supplemental disclosures - cash paid for:
Interest, net of amounts capitalized $ 76,545 $53,321 $ 37,028
Income taxes 18,750 13,055 14,764
See accompanying notes to consolidated financial statements.
F-12
84
VALHI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
(IN THOUSANDS)
ADJUSTMENTS
ADDITIONAL -----------------------------------------
COMMON PAID-IN RETAINED CURRENCY MARKETABLE PENSION
STOCK CAPITAL EARNINGS TRANSLATION SECURITIES LIABILITIES
-------- ---------- -------- ----------- ---------- -----------
Balance at December 31, 1990 $1,239 $32,022 $426,603 $(12,345) $(73,530) $ -
Net income - - 24,762 - - -
Dividends - - (22,725) - - -
Adjustments, net - - - 8,511 73,125 -
Other, net 2 596 - - - -
------ ------- -------- -------- -------- -------
Balance at December 31, 1991 1,241 32,618 428,640 (3,834) (405) -
Net loss - - (98,288) - - -
Dividends - - (22,753) - - -
Adjustments, net - - - (6,443) 173 -
Other, net 2 682 - - - -
------ ------- -------- -------- -------- -------
Balance at December 31, 1992 1,243 33,300 307,599 (10,277) (232) -
Net loss - - (79,085) - - -
Dividends - - (5,704) - - -
Adjustments, net - - - (7,499) (221) (1,619)
Cumulative effect of change in
accounting principle - - - - 41,528 -
Other, net 1 109 - - - -
------ ------- -------- -------- -------- -------
Balance at December 31, 1993 $1,244 $33,409 $222,810 $(17,776) $ 41,075 $(1,619)
====== ======= ======== ======== ======== =======
COMMON TOTAL
STOCK STOCKHOLDERS'
REACQUIRED EQUITY
---------- ------------
Balance at December 31, 1990 $(79,351) $294,638
Net income - 24,762
Dividends - (22,725)
Adjustments, net - 81,636
Other, net 6,607 7,205
-------- --------
Balance at December 31, 1991 (72,744) 385,516
Net loss - (98,288)
Dividends - (22,753)
Adjustments, net - (6,270)
Other, net 235 919
-------- --------
Balance at December 31, 1992 (72,509) 259,124
Net loss - (79,085)
Dividends - (5,704)
Adjustments, net - (9,339)
Cumulative effect of change in
accounting principle - 41,528
Other, net 867 977
-------- --------
Balance at December 31, 1993 $(71,642) $207,501
======== ========
See accompanying notes to consolidated financial statements.
F-13
85
VALHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization
Valhi, Inc. is a subsidiary of Contran Corporation which holds, directly
or through subsidiaries, approximately 90% of Valhi's outstanding common stock.
All of Contran's outstanding voting stock is held by trusts established for the
benefit of the 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 each of
Contran and Valhi.
Principles of consolidation
The accompanying consolidated financial statements include the accounts
of Valhi and its majority-owned subsidiaries (collectively, the "Company"). All
material intercompany accounts and balances have been eliminated.
Translation of foreign currencies
Assets and liabilities of subsidiaries whose functional currency is
deemed to be other than the U.S. dollar are translated at year-end rates of
exchange and revenues and expenses are translated at average exchange rates
prevailing during the year. Resulting translation adjustments, and the
Company's equity in translation adjustments of less than majority-owned
affiliates, are accumulated in the currency translation adjustments component
of stockholders' equity, net of related deferred income taxes. Currency
transaction gains and losses are recognized in income currently.
Cash and cash equivalents
Cash equivalents include bank time deposits and government and
commercial notes and bills with original maturities of three months or less.
Marketable securities and securities transactions
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
effective December 31, 1993. See Notes 5 and 18.
Under SFAS No. 115, the Company's portfolio of marketable debt and
equity securities is carried at market. Unrealized gains and losses on trading
securities are recognized in income currently. Unrealized gains and losses on
available-for-sale securities, and the Company's equity in unrealized gain and
loss adjustments of less than majority-owned affiliates, are accumulated in the
marketable securities adjustment component of stockholders' equity, net of
related deferred income taxes. Realized gains and losses are based upon the
specific identification of the securities sold.
F-14
86
SFAS No. 115 superseded SFAS No. 12 under which marketable securities
were generally carried at the lower of aggregate market or amortized cost and
unrealized net gains were not recognized.
Net sales
Refined sugar, forest products and hardware products sales are recorded
when products are shipped. Fast food sales are recorded at the time of retail
sale.
Inventories and cost of sales
Inventories are stated at the lower of cost or market. The last-in,
first-out method is used to determine the cost of substantially all
inventories, except supplies. Supplies and other inventory costs are generally
based on average cost.
Under the terms of its contracts with sugarbeet growers, the Company's
cost of sugarbeets is based on average sugar sales prices during the beet crop
purchase contract year, which begins in October and ends the following
September. Any differences between the sugarbeet cost estimated at the end of
the fiscal year and the amount ultimately paid is an element of cost of sales
in the succeeding year.
Investment in affiliates
Investments in more than 20%-owned but less than majority-owned
companies are accounted for by the equity method. Differences between the cost
of each investment and the Company's pro rata share of the affiliate's
separately-reported net assets are allocated among the assets and liabilities
of the affiliate based upon estimated relative fair values. Such differences
are charged or credited to income as the affiliates depreciate, amortize or
dispose of the related net assets. At December 31, 1993, the unamortized net
difference was $158 million, of which $80 million is goodwill being amortized
over 40 years with substantially all of the remainder attributable to the
affiliates' property and equipment. The remaining unamortized net basis
difference is greater than the Company's $75 million aggregate net carrying
value of its investment in NL Industries, Inc. and Tremont Corporation because
NL reports a shareholders' deficit on its separate historical basis of
accounting.
Timber and timberlands and depletion
Timber and timberlands are stated at cost less accumulated depletion.
Depletion is computed by the unit-of-production method.
Intangible assets and amortization
Goodwill, representing the excess of cost over fair value of individual
net assets acquired in business combinations accounted for by the purchase
method, is amortized by the straight-line method over 40 years. Fast food
restaurant franchise fees and other intangible assets are amortized by the
straight-line method over the periods (10 to 20 years) expected to be
benefitted.
F-15
87
Property, equipment and depreciation
Property and equipment are stated at cost. Maintenance, repairs and
minor renewals are expensed; major improvements are capitalized. Interest
costs related to major long-term capital projects capitalized as a component of
construction costs were $172,000 in 1991, $342,000 in 1992 and $420,000 in
1993.
Depreciation is computed principally by the straight-line and
unit-of-production methods over the estimated useful lives of eight to 40 years
for buildings and three to 20 years for equipment.
Long-term debt
Long-term debt is stated net of unamortized original issue discount
("OID"). OID and deferred financing costs are amortized over the life of the
applicable issue by the interest method. Capital lease obligations are stated
net of imputed interest.
Employee benefit plans
Accounting and funding policies for retirement plans and postretirement
benefits other than pensions ("OPEB") are described in Note 17.
Research and development
Research and development expense was $706,000 in 1991, $901,000 in 1992
and $854,000 in 1993.
Income taxes
Valhi and its qualifying subsidiaries are members of Contran's
consolidated United States federal income tax group (the "Contran Tax Group").
The policy for intercompany allocation of federal income taxes provides that
subsidiaries included in the Contran Tax Group compute the provision for income
taxes on a separate company basis. Subsidiaries make payments to or receive
payments from Contran in the amounts they would have paid to or received from
the Internal Revenue Service had they not been members of the Contran Tax
Group. The separate company provisions and payments are computed using the tax
elections made by Contran. NL and Tremont are separate U.S. taxpayers and are
not members of the Contran Tax Group. Payable to affiliates at December 31,
1992 includes income taxes payable to Contran of $1,612,000; receivable from
affiliates at December 31, 1993 includes income taxes receivable from Contran
of $44,000.
Deferred income tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the income
tax and financial reporting carrying amounts of assets and liabilities,
including investments in subsidiaries and affiliates not included in the
Contran Tax Group.
Income (loss) per share of common stock
Income (loss) per share is based upon the weighted average number of
common shares outstanding. Common stock equivalents are excluded from the
computation because the dilutive effect is either antidilutive or not material.
F-16
88
NOTE 2 - BUSINESS AND GEOGRAPHIC SEGMENTS:
BUSINESS SEGMENT PRINCIPAL ENTITIES
- ------------------- ------------------------------------------
Consolidated business segments (100%-owned)
Refined sugar The Amalgamated Sugar Company
Valcor, Inc.:
Forest products Medite Corporation
Fast food Sybra, Inc.
Hardware products National Cabinet Lock, Inc.
Unconsolidated affiliates
Chemicals NL Industries, Inc. (49%-owned)*
Titanium metals Tremont Corporation (48%-owned)
* Tremont holds an additional 18% of NL.
YEARS ENDED DECEMBER 31,
------------------------------------
1991 1992 1993
---- ---- ----
(IN MILLIONS)
Net sales:
Refined sugar $439.7 $459.2 $ 430.8
Forest products 179.7 194.8 174.3
Fast food 101.5 103.8 111.6
Hardware products 44.8 54.0 64.4
------ ------ -------
$765.7 $811.8 $ 781.1
====== ====== =======
Operating income:
Refined sugar $ 42.0 $ 37.8 $ 37.5
Forest products 8.0 22.0 26.3
Fast food 7.8 8.5 9.7
Hardware products 7.9 10.7 17.5
------ ------ -------
65.7 79.0 91.0
Business unit dispositions, net - 3.5 .5
General corporate income (expense):
Securities transactions 63.2 2.1 1.2
Interest and dividend income 6.0 9.3 5.2
General expenses (7.6) (7.4) (8.9)
Other, net 4.2 .3 (1.1)
Interest expense (72.2) (51.5) (38.6)
------ ------ -------
Income of consolidated companies before
income taxes 59.3 35.3 49.3
------ ------ -------
Equity in losses of affiliates:
NL Industries (19.3) (32.1) (44.7)
Tremont (.4) (16.6) (15.1)
Provisions for market value impairment - (22.0) (84.0)
------ ------ -------
(19.7) (70.7) (143.8)
------ ------ -------
Income (loss) before income taxes $ 39.6 $(35.4) $ (94.5)
====== ====== =======
F-17
89
YEARS ENDED DECEMBER 31,
------------------------------------
1991 1992 1993
---- ---- ----
(IN MILLIONS)
Depreciation, depletion and amortization:
Refined sugar $ 7.1 $ 8.7 $ 9.0
Forest products 14.4 11.0 8.5
Fast food 6.1 6.1 6.2
Hardware products 1.5 1.7 1.7
Corporate .3 .1 .2
------ ------ ------
$ 29.4 $ 27.6 $ 25.6
====== ====== ======
Capital expenditures:
Refined sugar $ 14.2 $ 12.7 $ 11.1
Forest products 4.8 9.7 20.8
Fast food 6.4 4.5 4.3
Hardware products 1.3 1.0 2.7
Corporate .1 .1 .2
------ ------ ------
$ 26.8 $ 28.0 $ 39.1
====== ====== ======
Geographic segments
Net sales - point of origin:
United States $691.0 $722.1 $692.3
Europe & Canada 74.7 89.7 88.8
------ ------ ------
$765.7 $811.8 $781.1
====== ====== ======
Net sales - point of destination:
United States $669.8 $706.6 $686.8
Other North America 16.0 18.2 22.0
Europe 49.3 58.1 44.2
Far East and other 30.6 28.9 28.1
------ ------ ------
$765.7 $811.8 $781.1
====== ====== ======
Operating income:
United States $ 56.8 $ 64.7 $ 74.0
Europe & Canada 8.9 14.3 17.0
------ ------ ------
$ 65.7 $ 79.0 $ 91.0
====== ====== ======
F-18
90
DECEMBER 31,
-------------------
1992 1993
---- ----
(IN MILLIONS)
Identifiable assets
Business segments:
Refined sugar $ 385.8 $369.0
Forest products 165.8 170.6
Fast food 66.9 65.1
Hardware products 23.5 31.3
Corporate 241.4 223.3
Investment in NL & Tremont 248.4 74.9
Intercompany eliminations (54.8) (30.3)
-------- ------
$1,077.0 $903.9
======== ======
Geographic segments:
United States $ 773.3 $771.6
Europe & Canada 55.3 57.4
Investment in NL & Tremont 248.4 74.9
-------- ------
$1,077.0 $903.9
======== ======
Capital expenditures include additions to property and equipment and
timber and timberlands, excluding amounts attributable to business units
acquired in business combinations accounted for by the purchase method.
Corporate assets consist principally of cash, cash equivalents and
marketable securities. Valhi has a wholly-owned captive insurance company
("Valmont") registered in Vermont. Valmont's operations, which are not
significant, are included in general corporate expenses.
At December 31, 1993, the net assets of non-U.S. subsidiaries included
in consolidated net assets approximated $36.4 million.
NOTE 3 - BUSINESS COMBINATIONS AND RESTRUCTURINGS:
NL Industries, Inc. At December 31, 1990, the Company held 68% of NL's
outstanding common stock. Valhi's ownership of NL increased to 69% by July
1991 as a result of NL's purchases of its common stock in market transactions.
In September 1991, NL purchased 11.3 million shares of its common stock at a
price of $16 per share pursuant to a "Dutch Auction" self-tender offer. Valhi
sold 10.9 million shares to NL pursuant to the offer and thereby reduced its
interest in NL to 63%. In December 1991, to complete the Company's plan to
reduce its direct ownership of NL to less than 50% and thereby achieve certain
income tax savings, Valhi sold 7.8 million NL shares to Tremont at a price of
$11.75 per share in a privately-negotiated transaction and further reduced its
direct interest in NL to 48%. The Company recognized a $.8 million pre-tax
loss on the aggregate reduction in its direct interest in NL from 69% to 48%.
During 1992, Valhi's direct interest in NL increased to 49% as a result of
additional NL purchases of its common stock in market transactions. For
comparative purposes, Valhi's interest in NL is reported by the equity method
for all periods
F-19
91
presented. Valhi may be deemed to control each of NL and Tremont and,
accordingly, Tremont reports its 18% interest in NL by the equity method.
Tremont Corporation. At December 31, 1990, the Company held 44% of
Tremont's outstanding common stock and in 1992 purchased additional Tremont
shares for $4.9 million, increasing its interest in Tremont to 48%.
Baroid Corporation. At December 31, 1990, the Company held 42% of
Baroid's outstanding common stock. In May 1991, the Company sold 17.25 million
shares of Baroid common stock in an underwritten secondary offering at a price
to the public of $6.25 per share, which reduced the Company's interest in
Baroid to less than 20%. As a result of this sale and the Company's intent to
hold its remaining interest in Baroid solely as an investment and not for the
purposes of directing the policies, management or control of Baroid, the
Company ceased accounting for Baroid by the equity method effective in May
1991. The Company's $3.3 million equity in undistributed Baroid earnings in
1991, for the period prior to May, is included in other income. In January
1994, Baroid merged with Dresser Industries, Inc. and the Company now holds
approximately 3% of Dresser's outstanding common stock. See Note 5.
Other. In June 1992, National Cabinet Lock purchased certain assets of
a competitor for $1.2 million.
NOTE 4 - BUSINESS UNIT DISPOSITIONS:
YEARS ENDED DECEMBER 31,
----------------------------------
1991 1992 1993
---- ---- ----
(IN THOUSANDS)
Insurance gain on plant destroyed by fire $ - $ 8,490 $ -
Operations permanently closed - (5,000) 500
------- ------- -------
$ - $ 3,490 $ 500
======= ======= =======
The insurance gain relates to Medite's veneer and chipping plant in
Rogue River, Oregon, as insurance proceeds exceeded the net carrying value of
the assets destroyed and cleanup costs. The aggregate insurance proceeds of
$16.5 million included $5.6 million attributable to business interruption
insurance which was recognized as a component of operating income through
August 1993. The amount attributable to business interruption insurance was
based upon estimates, negotiated with the insurance carrier, of the expected
operating profit of the Rogue River operations during each month that the
various operations were originally expected to be down. Medite deemed such
estimates to be reasonable based upon selling prices in effect at the time in
1992 when the estimates were made and the expected construction schedule at
that time.
In 1992, Medite accrued a loss on its plywood business and related
facilities permanently closed in January 1993, most of which related to the net
carrying value of property and equipment in excess of estimated net realizable
sales value. In 1993, Medite changed its estimate of the aggregate loss
primarily because the auction sale proceeds of certain equipment exceeded the
previously estimated net realizable value.
F-20
92
NOTE 5 - MARKETABLE SECURITIES AND SECURITIES TRANSACTIONS:
DECEMBER 31,
-----------------------
1992 1993
---- ----
(IN THOUSANDS)
Current assets - U.S. Treasury securities $127,459 $ 28,518
======== ========
Noncurrent assets - Baroid common stock $ 44,250 $108,800
======== ========
Upon adoption of SFAS No. 115 as of December 31, 1993, the Company
classified its portfolio of U.S. Treasury securities as trading securities and
its Baroid common stock as securities available-for-sale. Cost of the treasury
securities at December 31, 1993 was approximately $28.6 million.
At December 31, 1993, Valhi held 13.7 million Baroid shares (cost -
$44.3 million) with a quoted market price of $8.25 per share, or an aggregate
of $112.8 million. However, because the Baroid common stock is exchangeable
for the Company's LYONs at the option of the LYONs holder (see Note 11), the
carrying value of the Baroid stock is limited to the accreted LYONs obligation.
In January 1994, Baroid and Dresser merged and each share of Baroid common
stock was exchanged for .4 shares of Dresser common stock. As a result, the
LYONs became exchangeable for the 5.5 million Dresser shares now held by the
Company.
At December 31, 1992, the treasury securities were carried at market
value, which was slightly less than their aggregate cost of $127.9 million.
Market value of the Baroid common stock was $76.9 million at December 31, 1992.
Net gains from securities transactions in 1991 include $63.7 million on
the sale of 19.5 million Baroid shares, of which $8.1 million related to 2.3
million shares sold to Contran at the current market price.
NOTE 6 - ACCOUNTS AND NOTES RECEIVABLE:
DECEMBER 31,
----------------------
1992 1993
---- ----
(IN THOUSANDS)
Accounts receivable $53,903 $58,834
Notes receivable 2,579 2,548
Accrued interest 1,705 592
Refundable income taxes - 135
Allowance for doubtful accounts (1,323) (974)
------- -------
$56,864 $61,135
======= =======
F-21
93
NOTE 7 - INVENTORIES:
DECEMBER 31,
----------------------
1992 1993
---- ----
(IN THOUSANDS)
Raw materials:
Sugarbeets $ 54,982 $ 51,689
Forest products 11,890 14,704
Fast food 1,310 1,329
Hardware products 1,110 1,034
-------- --------
69,292 68,756
-------- --------
In process products:
Refined sugar and by-products 49,757 56,798
Forest products 3,961 1,450
Hardware products 2,557 3,179
-------- --------
56,275 61,427
-------- --------
Finished products:
Refined sugar and by-products 101,320 107,158
Forest products 2,638 1,260
Hardware products 2,377 1,901
-------- --------
106,335 110,319
-------- --------
Supplies 33,360 35,623
-------- --------
$265,262 $276,125
======== ========
The current cost of LIFO inventories exceeded the net carrying value of
such inventories by approximately $45 million and $43 million at December 31,
1992 and 1993, respectively. The effect of reductions in certain LIFO
inventory quantities increased consolidated operating income by $.8 million in
1991, $1.9 million in 1992 and $.5 million in 1993.
NOTE 8 - INVESTMENT IN AFFILIATES:
DECEMBER 31,
-----------------------
1992 1993
---- ----
(IN THOUSANDS)
NL Industries $200,197 $60,170
Tremont 48,198 14,727
-------- -------
$248,395 $74,897
======== =======
The Company holds approximately 24.8 million shares of NL common stock
and 3.5 million shares of Tremont common stock. The quoted per share market
prices of NL and Tremont common stock at December 31, 1993 were $4.50 and
$6.875, respectively, or an aggregate quoted market value of $135.8 million.
See Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of this Annual Report on Form 10-K for summarized
information
F-22
94
relating to the results of operations, financial position and cash flows of
each of NL and Tremont.
The carrying value of NL is stated net of a $10.3 million elimination
for Valhi common stock held by NL classified by the Company as common stock
reacquired. See Note 13.
NOTE 9 - OTHER NONCURRENT ASSETS:
DECEMBER 31,
----------------------
1992 1993
---- ----
(IN THOUSANDS)
Intangible assets, net of accumulated
amortization of $6,266 and $7,856:
Goodwill $ 5,666 $ 5,500
Franchise fees 7,991 7,257
Other 9,172 8,323
------- -------
22,829 21,080
Deferred financing costs 3,838 7,817
Prepaid pension cost 4,288 4,864
Property held for sale 4,225 3,853
Other 4,692 5,273
------- -------
$39,872 $42,887
======= =======
Property held for sale is carried at the lower of cost or estimated net
realizable value under current market conditions.
NOTE 10 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
DECEMBER 31,
-----------------------
1992 1993
---- ----
(IN THOUSANDS)
Accounts payable:
Sugarbeet purchases $132,565 $126,430
Other 36,600 36,908
-------- --------
169,165 163,338
-------- --------
Accrued liabilities:
Sugar processing costs 27,043 22,301
Employee benefits 17,503 17,657
Interest 14,082 3,987
Other 23,335 16,245
-------- --------
81,963 60,190
-------- --------
$251,128 $223,528
======== ========
F-23
95
NOTE 11 - NOTES PAYABLE AND LONG-TERM DEBT:
DECEMBER 31,
-----------------------
1992 1993
---- ----
(IN THOUSANDS)
Notes payable - Amalgamated:
United States Government loans $ 76,453 $ 75,518
Bank credit agreements 41,727 42,235
Commercial paper 4,000 -
-------- --------
$122,180 $117,753
======== ========
Long-term debt:
Valhi:
Liquid Yield Option NotesTM ("LYONsTM") $ 99,393 $108,800
Senior subordinated notes 227,348 -
-------- --------
326,741 108,800
-------- --------
Amalgamated:
Bank term loan 18,000 15,000
Other 67 -
-------- --------
18,067 15,000
-------- --------
Valcor:
Valcor - Senior Notes - 100,000
-------- --------
Medite:
U.S. bank credit agreements:
Term loans 18,000 61,000
Revolving credit facilities 4,000 -
Irish bank credit agreements:
Term loan - 1,700
Revolving credit facility 7,096 6,741
State of Oregon term loan - 4,328
Other 445 267
-------- --------
29,541 74,036
-------- --------
Sybra:
Bank credit agreements 16,500 13,387
Capital lease obligations 7,935 7,133
Other 51 41
-------- --------
24,486 20,561
-------- --------
National Cabinet Lock 148 179
-------- --------
398,983 318,576
Less current maturities 110,279 16,086
-------- --------
$288,704 $302,490
======== ========
F-24
96
Valhi
The zero coupon Senior Secured LYONs, $379 million principal amount at
maturity in October 2007, were issued with significant OID to represent a yield
to maturity of 9.25%. No periodic interest payments are required. Each $1,000
in principal amount at maturity of the LYONs is exchangeable, at any time, for
14.4308 shares of Dresser common stock held by Valhi. Prior to the
Baroid/Dresser merger in January 1994, the LYONs were exchangeable for Baroid
common stock (see Note 5). The LYONs are redeemable at the option of the
holder in October 1997 or October 2002 at $404.84 or $636.27, respectively, per
$1,000 principal amount (the issue price plus accrued OID through such purchase
dates). Such redemptions may be paid, at Valhi's option, in cash, Dresser
common stock, or a combination thereof. The LYONs are not redeemable at
Valhi's option prior to October 1997 unless the market price of Dresser common
stock exceeds $35.70 per share for specified time periods. At December 31,
1992 and 1993, the net carrying value of the LYONs per $1,000 principal amount
at maturity was $262.22 and $287.04, respectively, and the quoted market price
was $253 and $330, respectively.
The LYONs are secured by the 5.5 million shares of Dresser common stock
held by Valhi, which shares are held in escrow for the benefit of holders of
the LYONs. Valhi receives the regular quarterly dividend on the escrowed
Dresser shares.
Amalgamated
The United States Government loans are made under the sugar price
support loan program, which program extends through the 1997 crop year ending
September 30, 1998. These short-term nonrecourse loans are collateralized by
refined sugar inventories and are payable at the earlier of the date the
refined sugar is sold or upon maturity. The weighted average interest rate on
Government loans was 3.4% at December 31, 1993.
Amalgamated's principal bank credit agreement (the "Sugar Credit
Agreement") provides for a revolving credit facility in varying amounts up to
$75 million, with advances based upon formula-determined amounts of accounts
receivable and inventories, and a $21 million term loan. Borrowings under the
revolving credit facility bear interest, at Amalgamated's option, at the prime
rate or LIBOR plus 1.25% and mature not later than September 30, 1995. The
term loan bears interest, at Amalgamated's option, at the prime rate plus .25%
or LIBOR plus 1.5% and matures in July 1996. The Sugar Credit Agreement may be
terminated by the lenders in the event the sugar price support loan program is
abolished or materially and adversely modified, and borrowings are
collateralized by substantially all of Amalgamated's assets. Amalgamated also
has a $5 million unsecured line of credit with the agent bank for the Sugar
Credit Agreement. At December 31, 1993, the weighted average interest rate on
Amalgamated's outstanding bank borrowings was 4.9%.
At December 31, 1993, unused credit available to Amalgamated under its
bank credit agreements and the sugar price support loan program aggregated
approximately $24 million.
F-25
97
Valcor
Valcor's unsecured 9 5/8% Senior Notes Due November 2003 are redeemable
at the Company's option beginning November 1998, initially at 104.813% of
principal amount declining to 100% after November 2000. In the event of a
Change of Control, as defined, Valcor would be required to make an offer to
purchase the Valcor Notes at 101% of principal amount. At December 31, 1993,
the quoted market price of the Valcor Senior Notes was $100.75.
Medite
Medite's U.S. bank credit agreement (the "Timber Credit Agreement")
provides for (i) $75 million of term loan financing due in annual installments
of $8 million beginning September 1994 with the balance due September 2000, and
(ii) a $15 million revolving working capital facility through September 1995.
Borrowings generally bear interest at rates 1.75% to 2% over LIBOR, are
collateralized by Medite's timber and timberlands, and borrowings under the
working capital facility are also collateralized by Medite's U.S. receivables
and inventories. The term loan consists of two tranches - a $50 million term
loan (Tranche A) and a $25 million reducing revolving facility (Tranche B).
Medite has entered into interest rate swaps for $26 million of the Tranche A
term loan that results in a weighted average interest rate of 7.6% for such
borrowings. At December 31, 1993, the fair value of the swap agreements, which
mature in 1998 through 2000, is estimated to be a $.1 million liability, which
amount represents the estimated cost to the Company if it were to terminate the
swap agreements at that date. The Company is exposed to interest rate risk in
the event of nonperformance by the other parties to the swap agreements,
however, it does not anticipate nonperformance by such parties.
Medite's Irish subsidiary, Medite of Europe Limited, has bank credit
agreements providing for (i) a $26 million multi-currency term construction
loan repayable in installments from 1995 through 2000 and (ii) a $12 million
multi-currency revolving credit facility through January 1995. Borrowings
under both facilities bear interest at rates based upon LIBOR and are
collateralized by substantially all of Medite/Europe's assets.
At December 31, 1993, the weighted average interest rates on Medite's
outstanding U.S. and non-U.S. bank borrowings, including the effect of the
interest rate swaps discussed above, were 6.3% and 6.7%, respectively, and
amounts available for borrowing under the existing bank credit facilities
aggregated approximately $55 million.
The State of Oregon term loan matures in monthly installments through
March 2008, bears interest at 6.9% and is collateralized by certain of Medite's
property and equipment.
Sybra
Sybra's revolving bank credit agreements provide for unsecured credit
facilities aggregating $21 million with interest generally at LIBOR plus 1.25%.
Borrowings under these agreements mature July 1995, subject to renewal by the
parties through July 1997. At December 31, 1993, the weighted average interest
F-26
98
rate on outstanding revolving borrowings was 4.7% and amounts available for
borrowing aggregated approximately $8 million.
Future minimum payments under capital lease obligations at December 31,
1993, including amounts representing interest, are approximately $1.5 million
in each of the next five years and an aggregate of $4.6 million thereafter.
Capital lease obligations incurred on sale/leaseback and financing transactions
were $3.5 million in 1991.
National Cabinet Lock
National Cabinet Lock's Canadian subsidiary has a bank credit agreement
which provides for a $3.3 million term facility due through 2001 and a $3
million revolving facility through April 1994. Borrowings may be in U.S. or
Canadian dollars, bear interest generally at LIBOR plus .5% and are
collateralized by substantially all of this subsidiary's assets. At December
31, 1993, the full amount of these facilities was available for borrowing.
Other
The quoted market prices of the Valhi LYONs and Valcor Senior Notes are
disclosed above. Substantially all other notes payable and long-term debt of
subsidiaries either reprice with changes in market interest rates or bear
interest at recently fixed market rates, and the book value of such
indebtedness is deemed to approximate market value.
The Indenture governing the Valcor Senior Notes, among other things,
limits Valcor dividends and additional indebtedness and prohibits Valcor from
co-investing with affiliates. Other credit agreements of subsidiaries
typically require the respective subsidiary to maintain minimum levels of
equity, 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. At December 31,
1993, the restricted net assets of consolidated subsidiaries approximated $14
million.
Aggregate maturities of long-term debt at December 31, 1993
YEARS ENDING DECEMBER 31, AMOUNT
- ------------------------- ------
(IN THOUSANDS)
1994 $ 16,894
1995 37,488
1996 11,322
1997 163,761
1998 9,662
1999 and thereafter 129,028
--------
368,155
Less:
Unamortized LYONs OID 44,651
Amounts representing interest on capital leases 4,928
--------
$318,576
========
F-27
99
The LYONs are reflected in the above table as due October 1997, the
first of the two dates they are redeemable at the option of the holder, at the
aggregate redemption price on such date of $153.5 million ($404.84 per $1,000
principal amount at maturity in October 2007).
NOTE 12 - OTHER NONCURRENT LIABILITIES:
DECEMBER 31,
----------------------
1992 1993
---- ----
(IN THOUSANDS)
Accrued OPEB cost $16,984 $17,705
Accrued pension cost 1,117 110
Insurance claims and expenses 6,305 5,141
Other 5,026 4,372
------- -------
$29,432 $27,328
======= =======
NOTE 13 - STOCKHOLDERS' EQUITY:
Common stock
SHARES OF COMMON STOCK
----------------------------------------
ISSUED REACQUIRED OUTSTANDING
------ ---------- -----------
(IN THOUSANDS)
Balance at December 31, 1990 123,935 (10,542) 113,393
Issued 170 24 194
Reacquired - 283 283
------- ------- -------
Balance at December 31, 1991 124,105 (10,235) 113,870
Issued 185 24 209
Reacquired - (26) (26)
------- ------- -------
Balance at December 31, 1992 124,290 (10,237) 114,053
Issued 145 55 200
------- ------- -------
Balance at December 31, 1993 124,435 (10,182) 114,253
======= ======= =======
Common stock issued includes 14,800 shares in 1991, 15,500 shares in
1992 and 47,800 in 1993 to pay accrued employee benefits of $74,000, $87,000
and $239,000, respectively.
Consolidated common stock reacquired at December 31, 1993 includes
679,000 shares representing the Company's proportional interest in shares of
Valhi common stock held by NL. Under Delaware Corporation Law, all shares held
by a less than 50%-owned company are considered to be outstanding. As a
result, shares outstanding for financial reporting purposes differ from those
outstanding for legal purposes.
F-28
100
Options and restricted stock
The Valhi, Inc. 1987 Incentive Stock Option - Stock Appreciation Rights
Plan, as amended, (the "1987 Option Plan") provides for the discretionary grant
of stock options, restricted stock and stock appreciation rights. Valhi's
Board of Directors has increased, subject to stockholder approval, the number
of shares of Valhi common stock that may be issued pursuant to the 1987 Option
Plan from six million to nine million shares. The 1987 Option Plan provides
for the grant of options that qualify as incentive options and for options
which are not so qualified. Options are granted at a price not less than 85%
of fair market value on the date of grant, vest ratably over a five-year period
beginning one year from the date of grant and expire 10 years from the date of
grant. The exercise price of certain options increases annually based upon an
interest factor less Valhi dividends per share paid during the year.
Restricted stock, forfeitable unless certain periods of employment are
completed, is held in escrow in the name of the grantee until the restriction
period expires. At December 31, 1993, 296,400 shares restricted for periods up
to 30 months are included in outstanding shares. No stock appreciation rights
have been granted.
Pursuant to the Valhi, Inc. 1990 Non-Employee Director Stock Option
Plan, options to purchase 2,000 shares of Valhi common stock are automatically
granted once a year to each non-employee director of Valhi. Options are
granted at a price equal to the fair market value on the date of grant, vest
one year from the date of grant and expire five years from the date of grant.
Up to 50,000 shares of Valhi common stock may be issued pursuant to this plan.
Changes in outstanding options are summarized in the table below. At
December 31, 1993, options to purchase 3,095,000 Valhi shares were exercisable
(20,000 shares exercisable at prices lower than the December 31, 1993 quoted
market price of $4.875 per share) and options to purchase 506,000 shares become
exercisable in 1994. At December 31, 1993, an aggregate of 711,000 shares were
available for future grants.
AMOUNT
EXERCISE PAYABLE
PRICE PER UPON
SHARES SHARE EXERCISE
------ ------------ --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Outstanding at December 31, 1990 3,541 $1.00-15.00 $29,995
Granted 621 5.63- 7.25 3,509
Cancelled (214) 1.00-15.00 (2,209)
----- ----------- -------
Outstanding at December 31, 1991 3,948 3.51-15.00 31,295
Granted 8 5.50 44
Cancelled (46) 5.00-15.00 (393)
----- ----------- -------
Outstanding at December 31, 1992 3,910 3.51-15.00 30,946
Granted 620 5.00 3,102
Exercised (5) 3.61 (18)
Cancelled (1) 3.51 (3)
----- ----------- -------
Outstanding at December 31, 1993 4,524 $3.51-15.00 $34,027
===== =========== =======
F-29
101
NOTE 14 - INCOME TAXES:
Summarized below are (i) the components of income (loss) before income
taxes, extraordinary items and cumulative effect of changes in accounting
principles ("pretax income"), (ii) the difference between income tax benefit
(expense) attributable to pretax income and the amounts that would be expected
using the U.S. federal statutory income tax rate of 34% in 1991 and 1992 and
35% in 1993, (iii) the components of income tax benefit (expense) attributable
to pretax income, and (iv) the components of the comprehensive tax benefit
(expense).
YEARS ENDED DECEMBER 31,
-----------------------------
1991 1992 1993
---- ---- ----
(IN MILLIONS)
Pretax income (loss):
United States:
Contran Tax Group:
Consolidated companies $ 51.9 $ 21.9 $ 32.8
Dividends from NL and Tremont 24.4 10.7 -
------ ------ -------
76.3 32.6 32.8
Undistributed equity in losses of NL and
Tremont (44.1) (81.4) (143.8)
------ ------ -------
32.2 (48.8) (111.0)
Non-U.S. subsidiaries 7.4 13.4 16.5
------ ------ -------
$ 39.6 $(35.4) $ (94.5)
====== ====== =======
Expected tax benefit (expense) $(13.5) $ 12.0 $ 33.1
Non-U.S. tax rates .7 1.8 1.8
U.S. state income taxes, net (1.4) (1.7) (1.8)
Incremental U.S. tax and rate differences on equity
in earnings of non-tax group companies (5.0) (.5) (3.6)
Rate change adjustment of deferred taxes - - .1
Other, net (.4) 1.6 .8
------ ------ -------
$(19.6) $ 13.2 $ 30.4
====== ====== =======
Income tax benefit (expense):
Currently payable:
U.S. federal $(12.1) $ (7.0) $ (12.1)
U.S. state (3.4) (2.8) (2.6)
Non-U.S. (1.7) (2.2) (4.3)
------ ------ -------
(17.2) (12.0) (19.0)
Deferred income taxes, principally U.S. (2.4) 25.2 49.4
------ ------ -------
$(19.6) $ 13.2 $ 30.4
====== ====== =======
Comprehensive provision for income tax benefit
(expense) allocable to:
Pre-tax income $(19.6) $ 13.2 $ 30.4
Extraordinary items (.3) 3.2 8.3
Stockholders' equity, principally deferred taxes
allocable to currency translation adjustments 2.0 3.5 4.9
------ ------ -------
$(17.9) $ 19.9 $ 43.6
====== ====== =======
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Changes in deferred income taxes related to adoption of new accounting
standards is disclosed in Note 18.
The components of the net deferred tax liability are summarized below.
DECEMBER 31,
----------------------------------------
1992 1993
------------------- -------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
(IN MILLIONS)
Tax effect of temporary differences relating to:
Inventories $ .1 $ (8.8) $ .1 $ (8.8)
Marketable securities - (.8) - (23.5)
Timber and timberlands - (11.2) - (11.3)
Property and equipment - (19.9) - (18.6)
Capital lease assets and obligations 1.4 - 1.4 -
Accrued OPEB cost 6.8 - 7.2 -
Accrued liabilities and other deductible differences 16.7 - 13.1 -
Other taxable differences - (15.0) - (16.9)
Investments in subsidiaries and affiliates not
members of the consolidated tax group 20.3 - 80.8 -
Non-U.S. tax loss carryforwards .2 - .1 -
Valuation allowance - - - -
------ ------ ------ ------
Gross deferred tax assets (liabilities) 45.5 (55.7) 102.7 (79.1)
Netting of items by tax jurisdiction (44.9) 44.9 (74.9) 74.9
------ ------ ------ ------
.6 (10.8) 27.8 (4.2)
Less net current deferred tax asset (liability) .6 - .1 (2.5)
------ ------ ------ ------
Net noncurrent deferred tax asset (liability) $ - $(10.8) $ 27.7 $ (1.7)
====== ====== ====== ======
The components of the provision for deferred income taxes for 1991 (a
disclosure not required after adopting SFAS No. 109 in 1992) is summarized
below.
AMOUNT
------
(IN MILLIONS)
Depreciation $(1.7)
Undistributed income of subsidiaries and affiliates (2.5)
Reduction in interest in affiliate 7.2
Other, net (.6)
-----
$ 2.4
=====
NOTE 15 - INTEREST AND OTHER INCOME:
YEARS ENDED DECEMBER 31,
----------------------------------
1991 1992 1993
---- ---- ----
(IN THOUSANDS)
Interest and dividends:
General corporate income $ 5,960 $ 9,279 $ 5,211
Sugarbeet growers and other 844 706 562
Currency transactions, net 32 1 (188)
Disposal of property and equipment 81 247 361
Other, net 7,779 7,705 5,245
------- ------- -------
$14,696 $17,938 $11,191
======= ======= =======
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103
NOTE 16 - EXTRAORDINARY ITEMS:
YEARS ENDED DECEMBER 31,
----------------------------------
1991 1992 1993
---- ---- ----
(IN THOUSANDS)
Prepayments of Valhi's 12 1/2% Notes $ - $(9,511) $ (7,749)
Income tax benefit - 3,234 2,712
------ ------- --------
- (6,277) (5,037)
------ ------- --------
Equity in extraordinary items of NL:
Income tax benefit of utilization of tax loss
and tax credit carryforwards 4,917 - -
Prepayments of indebtedness 184 - (15,928)
------ ------- --------
5,101 - (15,928)
Deferred income tax benefit (expense) (349) - 5,575
------ ------- --------
4,752 - (10,353)
------ ------- --------
Extraordinary gain (loss) $4,752 $(6,277) $(15,390)
====== ======= ========
Funds for the prepayment of $235 million principal amount of Valhi 12
1/2% Senior Subordinated Notes during 1992 and 1993 were provided in part from
net proceeds of the LYONs ($95 million), Medite's Timber Credit Agreement ($60
million) and Valcor's Senior Notes ($50 million).
Utilization of tax loss and credit carryforwards are not classified as
extraordinary items subsequent to the adoption of SFAS No. 109.
NOTE 17 - EMPLOYEE BENEFIT PLANS:
Company-sponsored pension plans
Valhi and its subsidiaries maintain various defined benefit and defined
contribution plans and about 40% of the Company's worldwide full and part-time
employees (over 80% of full-time employees) participate in one or more of such
company-sponsored plans. Defined pension benefits are generally based on years
of service and compensation under fixed dollar, final pay or career average
formulas and the related expenses are based on independent actuarial
valuations. The funding policies for U.S. defined benefit plans are to
contribute amounts satisfying funding requirements of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"). Non-U.S. defined benefit
plans are funded in accordance with applicable statutory requirements.
Defined contribution plans. Approximately 90% of full-time U.S.
employees are eligible to participate in contributory savings plans with
Company contributions based on matching or other formulas, and certain of such
employees also participate in Valhi's noncontributory unleveraged Employee
Stock Ownership Plan. At December 31, 1993, 186,000 shares of Valhi common
stock were held by the ESOP, all of which were allocated to participants. The
Company's expense related to the savings plans and the ESOP approximated $2
million in 1991, $2.4 million in 1992 and $2.6 million in 1993.
F-32
104
Defined benefit plans. Approximately 65% of the Company's worldwide
full-time employees are covered by defined benefit plans. The funded status of
the Company's defined benefit pension plans and the components of net periodic
defined benefit pension cost are set forth below. The rates used in
determining the actuarial present value of benefit obligations at December 31,
1993 were (i) discount rate - 7.5% (1992 - 8% to 8.5%), and (ii) rate of
increase in future compensation levels - 4% to 5%. The expected long-term
rates of return on assets used ranged from 7.5% to 10% (1992 - 7.5% to 12%).
Approximately one-half of the aggregate plan assets at December 31, 1993
consist of units in a combined investment fund for employee benefit plans
sponsored by Valhi and its affiliates, including Contran and certain Contran
affiliates. Other plan assets are primarily mutual funds. Assets of the
combined investment fund are primarily investments in corporate equity and debt
securities, short-term cash investments and notes collateralized by residential
and commercial real estate.
PLAN ASSETS EXCEED ACCUMULATED BENEFITS
ACCUMULATED BENEFITS EXCEED PLAN ASSETS
-------------------- --------------------
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
1992 1993 1992 1993
---- ---- ---- ----
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Vested benefits $24,697 $35,141 $ 4,835 $ -
Nonvested benefits 3,017 4,134 394 -
------- ------- ------- -------
Accumulated benefit obligations 27,714 39,275 5,229 -
Effect of projected salary increases 6,619 10,315 4,026 -
------- ------- ------- -------
Projected benefit obligations 34,333 49,590 9,255 -
Plan assets at fair value 32,691 46,040 4,825 -
------- ------- ------- -------
Plan assets over (under) projected benefit obligations (1,642) (3,550) (4,430) -
Unrecognized net loss from experience different from
actuarial assumptions 5,655 7,526 2,204 -
Unrecognized prior service cost 597 938 525 -
Unrecognized net obligations (assets) being amortized
over periods of 9 to 16 years (1,290) (140) 917 -
------- ------- ------- -------
Total prepaid (accrued) pension cost 3,320 4,774 (784) -
Current portion and reclassification, net 968 90 (333) (110)
------- ------- ------- -------
Noncurrent prepaid (accrued) pension cost $ 4,288 $ 4,864 $(1,117) $ (110)
======= ======= ======= =======
YEARS ENDED DECEMBER 31,
-----------------------------------
1991 1992 1993
---- ---- ----
(IN THOUSANDS)
Service cost benefits earned during the year $ 2,068 $ 2,435 $ 2,291
Interest cost on projected benefit obligations 2,710 3,074 3,467
Actual return on plan assets (4,671) (1,978) (6,012)
Net amortization and deferral 1,435 (1,848) 1,766
------- ------- -------
$ 1,542 $ 1,683 $ 1,512
======= ======= =======
F-33
105
The 1992 loss related to the permanent closure of the Company's plywood
operations (see Note 4) includes a pension curtailment loss of $.6 million.
The pension liabilities component of stockholders' equity relates to the
Company's equity in amounts recorded by NL and Tremont, net of related deferred
income taxes.
Multiemployer pension plans
A small minority of the Company's employees are covered by
union-sponsored, collectively-bargained multiemployer pension plans.
Contributions to multiemployer plans based upon collectively-bargained
agreements were $128,000 in 1991, $95,000 in 1992, and $53,000 in 1993. Based
upon information provided by the multiemployer plans' administrators, the
Company's share of such plans' unfunded vested benefits is not significant.
Postretirement benefits other than pensions
Certain subsidiaries currently provide certain health care and life
insurance benefits for eligible retired employees. Under plans currently in
effect, some currently active employees of Amalgamated and Medite may become
eligible for postretirement health care benefits if they reach retirement age
while working for the applicable subsidiary. Substantially all retirees are
required to contribute a portion of the cost of their benefits and certain
current and all future retirees either cease to be eligible for health care
benefits at age 65 or are thereafter eligible only for limited benefits.
The components of the periodic OPEB cost and accumulated OPEB obligation
are set forth below. The rates used in determining the actuarial present value
of the accumulated OPEB obligations at December 31, 1993, were (i) discount
rate - 7.5% (1992 - 7.75%), (ii) rate of increase in future compensation levels
- - 4% to 4.5% (1992 - 4% to 5%) and (iii) rate of increase in future health care
costs - 13.5% in 1994, gradually declining to approximately 6% in 2017 and
thereafter. If the health care cost trend rate was increased by one percentage
point for each year, OPEB expense would have increased $210,000 in 1993, and
the actuarial present value of accumulated OPEB obligations at December 31,
1993 would have increased $1.7 million.
DECEMBER 31,
--------------------
1992 1993
---- ----
(IN THOUSANDS)
Service cost benefits earned during the year $ 498 $ 527
Interest cost on accumulated OPEB obligation 1,279 1,139
Net amortization and deferral - (86)
------ ------
$1,777 $1,580
====== ======
Pay-as-you-go OPEB expense, prior to adoption of SFAS No. 106, was
approximately $1 million in 1991.
F-34
106
DECEMBER 31,
----------------------
1992 1993
---- ----
(IN THOUSANDS)
Actuarial present value of accumulated OPEB obligations:
Retiree benefits $10,484 $ 8,006
Other fully eligible active plan participants 1,848 1,876
Other active plan participants 5,481 5,527
------- -------
17,813 15,409
Unrecognized net gain from experience different
from actuarial assumptions 161 3,150
------- -------
Total accrued OPEB cost 17,974 18,559
Less current portion 990 854
------- -------
Noncurrent accrued OPEB cost $16,984 $17,705
======= =======
NOTE 18 - CHANGES IN ACCOUNTING PRINCIPLES:
Marketable securities (SFAS No. 115). The Company, NL and Tremont each
elected early compliance with SFAS No. 115 effective December 31, 1993. The
cumulative effect of this change in accounting principle is shown in the table
below. The amounts attributable to the Company's investment in NL and Tremont
consist of the Company's equity in the respective amounts reported by NL and
Tremont.
AMOUNT REFLECTED IN
-----------------------------
EQUITY
EARNINGS COMPONENT
-------- ---------
(IN THOUSANDS)
Increase (decrease) in net assets at
December 31, 1993:
Marketable securities $ - $ 64,550
Investment in NL and Tremont 661 (661)
Deferred income taxes (232) (22,361)
----- --------
$ 429 $ 41,528
===== ========
OPEB (SFAS No. 106) and income taxes (SFAS No. 109). The Company, NL
and Tremont each elected (i) early compliance with both SFAS No. 106 and SFAS
No. 109 as of January 1, 1992; (ii) to apply SFAS No. 109 prospectively and not
restate prior years; and (iii) immediate recognition of the OPEB transition
obligation. The cumulative effect of changes in accounting principles
adjustment is shown in the table below. The amounts attributable to the
Company's investments in NL and Tremont consist of the Company's equity in the
respective historical amounts reported by NL and Tremont and applicable
adjustment of the Company's purchase accounting basis differences originally
recorded net-of- tax at rates differing from current rates.
F-35
107
AMOUNT
------
(IN THOUSANDS)
Increase (decrease) in net assets at January 1, 1992:
Inventories $ 2,629
Timber and timberlands 8,606
Investment in NL and Tremont (74,107)
Franchise fees and other intangible assets 5,647
Property and equipment (1,696)
Accrued OPEB cost (16,965)
Deferred income taxes, net 6,112
--------
Loss from cumulative effect of changes in accounting
principles $(69,774)
========
NOTE 19 - RELATED PARTY TRANSACTIONS:
The Company may be deemed to be controlled by Harold C. Simmons.
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties and (b) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. While no
transactions of the type described above are planned or proposed with respect
to the Company (except as otherwise set forth in this Annual Report on Form
10-K), the Company continuously considers, reviews and evaluates, and
understands that Contran and related entities consider, review and evaluate
such transactions. Depending upon the business, tax and other objectives then
relevant, it is possible that the Company might be a party to one or more such
transactions in the future.
It is the policy of the Company to engage in transactions with related
parties on terms, in the opinion of the Company, no less favorable to the
Company than could be obtained from unrelated parties.
Loans are made between the Company and various related parties,
including Contran, pursuant to term and demand notes, principally for cash
management purposes. Related party loans generally bear interest at rates
related to credit agreements with unrelated parties. Interest income on loans
to related parties was $1,694,000 in 1991, $405,000 in 1992, and $73,000 in
1993 and related party interest expense was $625,000 in 1991, nil in 1992 and
$39,000 in 1993.
Contran has an $18 million bank credit agreement which includes a $10
million letter of credit facility. Pursuant to such agreement, Contran may
authorize the banks to issue letters of credit on behalf of Valmont ($2.3
million outstanding at December 31, 1993). Obligations under this Contran
credit agreement are collateralized by certain securities held by Contran.
F-36
108
Under the terms of Intercorporate Services Agreements ("ISAs") with
Contran, Contran provides certain management, administrative and aircraft
maintenance services to the Company, and the Company provides various
administrative and other services to Contran, on a fee basis. The net ISA fees
charged to the Company were approximately $1.2 million in each of the past
three years. Charges from corporate related parties for services provided in
the ordinary course of business were less than $250,000 in each of the past
three years. Such charges are principally pass-through in nature and, in the
Company's opinion, are not materially different from those that would have been
incurred on a stand-alone basis. The Company has established a policy whereby
the Board of Directors will consider the payment of additional management fees
to Contran for certain financial advisory and other services provided by
Contran beyond the scope of the ISAs. No such payments were made in the past
three years.
NL and Tremont are parties to ISAs with Valhi whereby Valhi provides
certain management, financial and administrative services to NL and Tremont on
a fee basis. Baroid and Valhi were parties to a similar agreement terminated
in May 1991. Fees charged to affiliates pursuant to these agreements
aggregated $2.1 million in 1991, $1.8 million in 1992 and $1.0 million in 1993.
In June 1991, Valhi sold 2.3 million Baroid shares to Contran for cash
at the then-current market price of $6.375 per share. See Note 5. The
Company's December 1991 sale of NL common stock to Tremont is described in Note
3. In conjunction with the issuance of the LYONs in October 1992, Valhi
purchased 1.7 million shares of Baroid common stock from Contran at the
then-current market price of $6.375 per share.
COAM Company is a partnership, formed prior to 1991, which has sponsored
research agreements with the University of Texas Southwestern Medical Center at
Dallas (the "University") to develop and commercially market a safe and
effective treatment for arthritis (the "Arthritis Research Agreement") and to
develop and commercially market patents and technology resulting from a cancer
research program (the "Cancer Research Agreement"). At December 31, 1993, COAM
partners are Contran, Valhi and another Contran subsidiary. Harold C. Simmons
is the manager of COAM. The Arthritis Research Agreement, as amended, provides
for payments by COAM of up to $8.4 million over the next 11 years and the
Cancer Research Agreement, as amended, provides for funds of up to $19.7
million over the next 17 years. Funding requirements pursuant to the Arthritis
and Cancer Research Agreements are without recourse to the COAM partners and
the partnership agreement provides that no partner shall be required to make
capital contributions. The Company's contributions to COAM were approximately
$1.1 million in 1991, $1.7 million in 1992 and $2 million in 1993.
F-37
109
NOTE 20 - COMMITMENTS AND CONTINGENCIES:
Legal proceedings
Valhi and consolidated subsidiaries
In November 1987, a complaint was filed in the United States District
Court for the District of Utah against Valhi, Amalgamated, the Amalgamated
Retirement Plan Committee and Harold C. Simmons (Holland, et al. v. Valhi,
Inc., et al., No. 87-C-968G). The complaint, a class action on behalf of
certain retired salaried employees of Amalgamated, alleges, among other things,
that the defendants breached their fiduciary duties under ERISA by amending
certain provisions of a retirement plan for salaried employees maintained by
Amalgamated to permit the reversion of excess plan assets to Amalgamated in
1986. The complaint seeks a variety of remedies, including, among other
things, orders requiring a return of all reverted funds (alleged to be in
excess of $4 million) and a distribution of such funds to retirees and their
beneficiaries, an award of punitive damages, and costs and expenses, including
attorneys' fees. The punitive damage claim was dismissed in April 1989, Valhi
was dismissed as a defendant in the suit and trial was held in July 1991. In
January 1992, the court issued Findings of Fact and Conclusions of Law which
held, among other things, that Harold C. Simmons was not liable for any
violation of law, that the acts which are the subject of the complaint fall
outside of Mr. Simmons' fiduciary function, that Amalgamated was entitled to a
reversion of excess plan assets but that Amalgamated and the Plan Committee had
breached their fiduciary duties under ERISA by calculating the plan
participants' share of the reversion in accordance with regulations issued by
the Pension Benefit Guaranty Corporation ("PBGC") where application of those
regulations resulted in what the court deemed an inequitable distribution to
plan participants. The court held that Amalgamated and the Plan Committee had
a fiduciary duty under ERISA to consider alternative methods for calculating
the plan participants' share of the reversion and, if necessary, to seek
approval from the PBGC to utilize such an alternative method. Pursuant to a
method of calculation that the court found to result in a more equitable
distribution, the plaintiff class was awarded approximately $915,000 plus
interest from July 1, 1986, costs and reasonable attorneys' fees. In April
1992, defendants Amalgamated and the Plan Committee filed a notice of appeal,
and shortly thereafter, the plaintiffs cross-appealed certain issues resolved
in favor of defendants. In November 1992, plaintiffs' appealed the amount of
attorneys' fees the court awarded on behalf of plaintiffs. In September 1993
the United States Court of Appeals for the Tenth Circuit heard oral arguments.
Amalgamated and the Plan Committee continue to believe the action is without
merit, believe the court erred as to certain of its findings and conclusions,
and intend to continue to appeal vigorously the court's decision.
In November 1992, a complaint was filed in the United States District
Court for the District of Utah against Valhi, Amalgamated and the Amalgamated
Retirement Plan Committee (American Federation of Grain Millers International,
et al. v. Valhi, Inc. et al., No. 29-NC-129J). The complaint, a purported
class action on behalf of certain current and retired hourly employees of
Amalgamated, alleges, among other things, that the defendants breached their
fiduciary duties under ERISA by amending certain provisions of a retirement
plan for hourly employees maintained by Amalgamated to permit the reversion of
excess plan assets to Amalgamated in 1986. The complaint seeks a variety of
remedies, including, among other things, orders requiring a return of all
reverted funds (alleged to
F-38
110
be in excess of $8 million) and any profits earned thereon, a distribution of
such funds to the plan participants, retirees and their beneficiaries and
enhancement of the benefits under the plan, and an award of costs and expenses,
including attorney fees. The hearing on the Company's motion to dismiss and/or
for partial summary judgment has been continued. The Company and the Plan
Committee believe the action is without merit and intend to defend the action
vigorously.
In November 1991, a purported derivative complaint was filed in the
Court of Chancery of the State of Delaware, New Castle County (Alan Russell
Kahn v. Tremont Corporation, et al., No. 12339), in connection with Tremont's
agreement to purchase 7.8 million NL common shares from Valhi. In addition to
Tremont, the complaint names as defendants the members of Tremont's board of
directors and Valhi. The complaint alleges, among other things, that Tremont's
purchase of the NL shares constitutes a waste of Tremont's assets and that
Tremont's board of directors breached their fiduciary duties to Tremont's
public stockholders and seeks, among other things, to rescind Tremont's
consummation of the purchase of the NL shares and award damages to Tremont for
injuries allegedly suffered as a result of the defendants' wrongful conduct.
Valhi believes, and understands that Tremont and the other defendants believe,
that the action is without merit. Valhi has denied, and understands that
Tremont and the other defendants have denied, all allegations of wrongdoing and
liability and intends to defend the action vigorously. The defendants have
moved to dismiss the complaint on the ground that the plaintiff lacks standing
to pursue this action, and oral arguments are scheduled for Spring 1994. The
court has granted the plaintiff limited discovery with respect to the motion to
dismiss.
The Company is also involved in various other environmental,
contractual, product liability and other claims and disputes incidental to its
business. The Company currently believes that the disposition of all claims
and disputes, individually or in the aggregate, should not have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity.
NL Industries
Lead pigment litigation. Since 1987, NL, other past manufacturers of
lead pigments for use in paint and lead-based paint and the Lead Industries
Association have been named as defendants in various legal proceedings seeking
damages for personal injury and property damage allegedly caused by the use of
lead-based paints. Certain of these actions have been filed by or on behalf of
large United States cities or their public housing authorities. These legal
proceedings seek recovery under a variety of theories, including negligent
product design, failure to warn, breach of warranty, conspiracy/concert of
action, enterprise liability, market share liability, intentional tort, and
fraud and misrepresentation.
The plaintiffs in these actions generally seek to impose on the
defendants responsibility for lead paint abatement and asserted health concerns
associated with the use of lead-based paints, which was permitted for interior
residential use in the United States until 1973, including damages for personal
injury, contribution and/or indemnification for medical expenses, medical
monitoring expenses, and costs for educational programs. Most of these legal
proceedings are in various pre-trial stages; several are on appeal.
F-39
111
NL is vigorously defending the pending lead pigment litigation and has
not accrued any amounts for such litigation. Although no assurance can be
given that NL will not incur future liability in respect of this litigation,
based on, among other things, results of such litigation to date, NL believes
that the pending lead pigment litigation is without merit. Considering NL's
previous involvement in the lead and lead pigment businesses, there can be no
assurance that additional litigation similar to that currently pending will not
be filed.
Environmental matters and litigation. Some of NL's current and former
facilities, including several divested secondary lead smelters and former
mining locations, are the subject of civil litigation, administrative
proceedings or of investigations arising under federal and state environmental
laws. Additionally, in connection with past disposal practices, NL has been
named a potentially responsible party ("PRP") pursuant to CERCLA in
approximately 80 governmental enforcement and private actions associated with
hazardous waste sites and former mining locations, some of which are on the
U.S. EPA's Superfund National Priority List. These actions seek cleanup costs
and/or damages for personal injury or property damage. While NL may be jointly
and severally liable for such costs, in most cases, it is only one of a number
of PRPs who are also jointly and severally liable. In addition, NL is a party
to a number of lawsuits filed in various jurisdictions alleging CERCLA or other
environmental claims. At December 31, 1993, NL had accrued $70 million in
respect of those environmental matters which are reasonably estimable. It is
not possible to estimate the range of costs for certain sites. The upper end
of range of reasonably possible costs to NL for sites for which it is possible
to estimate costs is approximately $105 million. 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. The imposition of more stringent standards or
requirements under environmental laws or regulations, new developments or
changes respecting site cleanup costs or allocation of such costs among PRPs,
or a determination that NL is potentially responsible for the release of
hazardous substances at other sites, could result in expenditures in excess of
amounts currently estimated by NL to be required for such matters. Further,
there can be no assurance that additional environmental matters will not arise
in the future.
Other litigation. On February 24, 1994, NL settled its lawsuit against
Lockheed Corporation and its directors. The litigation arose out of NL's
claims, among other things, that Lockheed had violated the federal securities
laws by making false and misleading statements about its ESOP that impacted the
value of the Lockheed stock formerly owned by NL. The jury concluded in a
December 1992 verdict that Lockheed violated the anti-fraud provisions of the
federal securities laws and awarded NL $30 million, which gain contingency was
not recorded as income by NL at that time. Both companies appealed. In
connection with the settlement, NL and Lockheed agreed to dismiss the pending
proceedings and to release all claims that each may have against the other.
Under terms of the 1994 settlement, Lockheed made a $27 million cash payment to
NL, resulting in net proceeds to NL of approximately $20 million. NL will
recognize the resolution of this gain contingency in 1994.
F-40
112
In January 1990, an action was filed in the United States District Court
for the Southern District of Ohio against NLO, Inc., a subsidiary of NL, and NL
on behalf of a putative class of former NLO employees and their families and
former frequenters and invitees of the Feed Materials Production Center
("FMPC") in Ohio (Day, et al. v. NLO, Inc., et al., No. C-1-90-067). The FMPC
is owned by the United States Department of Energy (the "DOE") and was formerly
managed under contract by NLO. The complaint seeks damages for, among other
things, emotional distress and damage to personal property allegedly caused by
exposure to radioactive and/or hazardous materials at the FMPC and punitive
damages. A trial was held separately on the defendants' defense that the
statute of limitations barred the plaintiffs' claims. In November 1991, the
jury returned a verdict against six of the ten named plaintiffs, finding that
their claims were time barred. Without denying the plaintiffs' motion to
vacate the verdict, the court certified this action as a class action. A
merits trial is expected to be held in late 1994. Although no assurance can be
given, the Company understands that NL believes that, consistent with a July
1987 DOE contracting officer's decision, the DOE will indemnify NLO in the
event of an adverse decision just as it did when two previous cases relating to
NLO's management of the FMPC were settled; therefore, the resolution of the Day
matter is not expected to have a material adverse effect on NL. In the 1987
decision, the contracting officer affirmed NLO's entitlement to indemnification
under its contract for the operation of the FMPC for all liability, including
the cost of defense, arising out of those two previous cases.
Tremont Corporation
Titanium Metals Corporation ("TIMET"), a 75%-owned Tremont subsidiary,
along with others, including the airline and the engine manufacturers, has been
named in a number of lawsuits arising out of the July 1989 crash of a DC-10
aircraft in Iowa. The majority of the cases naming TIMET have been settled
without payment by TIMET to date, although the possibility of a future claim
for contribution by one or more other defendants exists with respect to certain
of such cases. In addition, TIMET was granted summary judgment in
approximately 15 other cases and approximately 25 cases were dismissed in 1993
but have been refiled by the plaintiffs. The Company understands TIMET
maintains substantial general liability insurance coverage against claims of
this nature and TIMET's insurance carrier has assumed TIMET's defense in the
litigation. The Company understands that TIMET, based upon the information
which TIMET has obtained to date, does not believe that its ultimate liability
in this matter, if any, will exceed its applicable insurance coverage or
otherwise have a material adverse effect on TIMET's consolidated financial
position, results of operations or liquidity.
See also the third paragraph under "Valhi and consolidated subsidiaries"
above (Kahn v. Tremont, et al.).
In addition to the litigation described above, NL and Tremont are
involved in various environmental, contractual, product liability and other
claims and disputes incidental to their respective present and former
businesses. The Company understands that each of NL and Tremont currently
believe the disposition of all claims and disputes, individually or in the
aggregate, should not have a material adverse effect on its respective
consolidated financial position, results of operations or liquidity.
F-41
113
Environmental matters
Valhi and consolidated subsidiaries. The Company's operations are
governed by various federal, state, local and foreign environmental laws and
regulations. The Company's policy is to comply with environmental laws and
regulations at all of its plants and to continually strive to improve
environmental performance in association with applicable industry initiatives
and believes that its operations are in substantial compliance with applicable
requirements of environmental laws. From time to time, the Company may be
subject to environmental regulatory enforcement under various statutes,
resolution of which typically involves the establishment of compliance
programs. At December 31, 1993, the Company has accrued approximately $2
million in respect of environmental cleanup matters, principally related to one
Superfund site in Indiana where the Company, as a result of former operations,
has been named as a PRP. Such accrual does not reflect any amounts which the
Company could potentially recover from insurers or other third parties and is
near the upper end of the range of the Company's estimate of reasonably
possible costs for such matters. The imposition of more strict standards or
requirements under environmental laws or regulations, new developments or
changes in site cleanup costs or allocations of such costs could result in
expenditures in excess of amounts currently estimated to be required for such
matters.
NL and Tremont. In addition to litigation referred to above, certain
other information relating to regulatory and environmental matters pertaining
to NL and Tremont is included in Item 1 - "Business - Unconsolidated Affiliates
- - NL and Tremont" of this Annual Report on Form 10- K.
Concentrations of credit risk
Amalgamated sells refined sugar primarily in the North Central and
Intermountain Northwest regions of the United States. Amalgamated does not
believe it is dependent upon one or a few customers; however, major food
processors are substantial customers and represent an important portion of
refined sugar segment sales. Amalgamated's ten largest customers accounted for
about one-third of its sales in each of the past three years.
Medite's sales are made primarily to wholesalers of building materials
located principally in the western United States, the Pacific Rim, Europe and
Mexico. In each of the past three years, Medite's ten largest customers
accounted for approximately one-fourth of its sales with eight of such
customers in each year located in the U.S.
Sybra's approximately 160 Arby's restaurants are clustered in four
regions, principally Texas, Michigan, Pennsylvania and Florida. All fast food
sales are for cash.
National Cabinet Lock's sales are primarily in the U.S. and Canada. In
each of the past three years, National Cabinet Lock's ten largest customers
accounted for approximately one-third of its sales with at least seven of such
customers in each year located in the U.S.
F-42
114
Operating leases
The Company leases various fast food retail and other facilities and
equipment. Most of the leases contain purchase and/or various term renewal
options at fair market values. In most cases the Company expects that, in the
normal course of business, leases will be renewed or replaced by other leases.
Net rent expense was $5.6 million in 1991, $5.7 million in 1992 and $5.8
million in 1993. Contingent rentals based upon gross sales of individual fast
food restaurants were less than 10% of total rent expense in each of the past
three years.
At December 31, 1993, substantially all future minimum payments under
noncancellable operating leases having an initial or remaining term of more
than one year relate to fast food restaurant facilities.
YEARS ENDING DECEMBER 31, AMOUNT
- ------------------------- ------
(In thousands)
1994 $ 5,430
1995 4,764
1996 4,246
1997 3,436
1998 2,551
1999 and thereafter 9,980
-------
30,407
Less minimum rentals due under noncancellable subleases 1,526
-------
Net minimum commitments $28,881
=======
Capital expenditures
At December 31, 1993, the estimated cost to complete capital projects in
process approximated $36 million, including $23.5 millon related to an
expansion of Medite/Europe's medium density fiberboard plant. Medite/Europe
has entered into certain forward currency contracts to hedge exchange rate risk
on the equivalent of approximately $4 million of equipment purchase commitments
related to its plant expansion. At December 31, 1993, the fair value of such
currency contracts approximated the contract amount.
Timber cutting contracts
Deposits are made on timber cutting contracts with public and private
sources from which Medite obtains a portion of its timber requirements. Medite
records only the cash deposits and advances on these contracts because it does
not obtain title to the timber until it has been harvested. At December 31,
1993, timber and log purchase obligations aggregated approximately $13.5
million under agreements expiring principally in 1994.
F-43
115
Royalties
Royalty expense, substantially all of which relates to fast food
operations, was $3.6 million in 1991, $4.2 million in 1992 and $4.5 million in
1993. Fast food royalties are paid to the franchisor based upon a percentage
of gross sales, as specified in the franchise agreement related to each
individual store.
Income taxes
The Company is undergoing examinations of certain of its income tax
returns, and tax authorities have or may propose tax deficiencies. The Company
believes that it has adequately provided accruals for additional income taxes
and related interest expense which may ultimately result from such examinations
and believes that the ultimate disposition of all such examinations should not
have a material adverse effect on its consolidated financial position, results
of operations or liquidity.
NL is undergoing examinations of certain of its income tax returns in
various U.S. and non-U.S. jurisdictions, including Germany, and tax authorities
have or may propose tax deficiencies. The Company understands that NL believes
that it has adequately provided accruals for additional income taxes and
related interest expense which may ultimately result from such examinations and
believes that the ultimate disposition of all such examinations should not have
a material adverse effect on its consolidated financial position, results of
operations or liquidity.
F-44
116
NOTE 21 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Year ended December 31, 1993
Net sales $171.3 $193.5 $213.2 $203.1
Operating income 16.5 21.5 27.0 26.0
Income (loss):
Before extraordinary items $(60.3) $ (7.1) $ 1.2 $ 2.1
Extraordinary items - - (3.2) (12.2)
Cumulative effect of change
in accounting principles - - - .4
------ ------ ------ ------
Net loss $(60.3) $ (7.1) $ (2.0) $ (9.7)
====== ====== ====== ======
Income (loss) per common share:
Before extraordinary items $ (.53) $ (.06) $ .01 $ .02
Extraordinary items - - (.03) (.10)
Cumulative effect of change
in accounting principles - - - -
------ ------ ------ ------
Net loss $ (.53) $ (.06) $ (.02) $ (.08)
====== ====== ====== ======
Year ended December 31, 1992
Net sales $195.6 $209.6 $207.5 $199.1
Operating income 17.8 22.3 19.5 19.4
Income (loss):
Before extraordinary items $ (1.5) $ .4 $ (.8) $(20.3)
Extraordinary items (.2) - - (6.1)
Cumulative effect of changes
in accounting principles (69.8) - - -
------ ------ ------ ------
Net income (loss) $(71.5) $ .4 $ (.8) $(26.4)
====== ====== ====== ======
Income (loss) per common share:
Before extraordinary items $ (.02) $ .01 $ (.01) $ (.17)
Extraordinary items - - - (.06)
Cumulative effect of changes
in accounting principles (.61) - - -
------ ------ ------ ------
Net income (loss) $ (.63) $ .01 $ (.01) $ (.23)
====== ====== ====== ======
F-45
117
{THIS PAGE INTENTIONALLY LEFT BLANK.}
118
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Stockholders and Board of Directors of Valhi, Inc.:
Our report on the consolidated financial statements of Valhi, Inc. and
Subsidiaries as of December 31, 1992 and 1993 and for each of the three years
in the period ended December 31, 1993 is herein included on this Annual Report
on Form 10-K. As discussed in Notes 1 and 18 to the consolidated financial
statements, in 1992 the Company changed its method of accounting for
postretirement benefits other than pensions and income taxes in accordance with
Statements of Financial Accounting Standards ("SFAS") Nos. 106 and 109,
respectively, and in 1993 changed its method of accounting for certain
investments in debt and equity securities in accordance with SFAS No. 115. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedules listed in the index on page F-1 of
this Annual Report on Form 10-K. These consolidated financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statement schedules based on our audits. We did not audit the financial
statements of the refined sugar (The Amalgamated Sugar Company) and forest
products (Medite Corporation) subsidiaries constituting approximately 48% and
59% of consolidated assets as of December 31, 1992 and 1993, respectively, and
approximately 81%, 81% and 77% of consolidated net sales for the years ended
December 31, 1991, 1992 and 1993, respectively. These statements were audited
by other auditors whose reports thereon were furnished to us and our opinion
expressed herein, insofar as it relates to amounts included for such
subsidiaries, is based solely upon their reports.
In our opinion, based upon our audits and the reports of other
auditors, the financial statement schedules referred to above, when considered
in relation to the basic financial statements taken as a whole, present fairly,
in all material respects, the information required to be included therein.
COOPERS & LYBRAND
Dallas, Texas
February 25, 1994
S-1
119
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Shareholder of The Amalgamated Sugar Company:
Under date of January 28, 1994, we reported on the consolidated
balance sheets of The Amalgamated Sugar Company as of December 31, 1992 and
1993, and the related consolidated statements of income and shareholder's
equity and cash flows for each of the three years in the period ended December
31, 1993 (not presented separately herein). In connection with our audits of
the aforementioned consolidated financial statements, we also audited
consolidated financial statement schedules V, VI, VIII, IX and X (not presented
separately herein). These consolidated financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statement schedules based on our
audits.
In our opinion, such schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly, in
all material respects, the information set forth therein.
KPMG PEAT MARWICK
Salt Lake City, Utah
January 28, 1994
S-2
120
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Stockholder of Medite Corporation:
We have audited in accordance with generally accepted auditing
standards the consolidated financial statements (not presented separately
herein) of Medite Corporation as of December 31, 1992 and 1993 and for each of
the three years in the period ended December 31, 1993, and have issued our
report thereon dated January 28, 1994. As discussed in Note 8 to the
consolidated financial statements (not presented separately herein), in 1992
the Company changed its method of accounting for postretirement benefits other
than pensions and income taxes in accordance with Statements of Financial
Accounting Standards Nos. 106 and 109, respectively. Our audits of the
financial statements were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The financial statement schedules
V, VI, VIII and X (not presented separately herein) are the responsibility of
the Company's management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not a required part of the
basic financial statements. These schedules have been subjected to the
auditing procedures applied in our audits of the basic financial statements
and, in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN & CO.
Portland, Oregon,
January 28, 1994
S-3
121
VALHI, INC. AND SUBSIDIARIES
SCHEDULE I - MARKETABLE SECURITIES (1)
DECEMBER 31, 1993
(IN THOUSANDS)
PRINCIPAL
AMOUNT
OF NOTES/ AMOUNT
NAME OF ISSUER AND NUMBER OF MARKET CARRIED IN
TITLE OF EACH ISSUE SHARES COST VALUE BALANCE SHEET
------------------- --------- -------- -------- -------------
Current assets
Trading securities - U.S. Treasury Notes $ 28,065 $ 28,621 $ 28,518 $ 28,518
======== ======== ======== ========
Noncurrent assets
Available-for-sale securities - Baroid
Corporation common stock (2) 13,675 $ 44,250 $112,816 $108,800
====== ======== ======== ========
(1) The Company adopted SFAS No. 115 effective December 31, 1993.
(2) Valhi's Liquid Yield Option Notes are exchangeable for the Company's
Baroid common stock at the option of the LYONs holders. The carrying
value of the Baroid common stock is therefore limited to the accreted
value of the LYONs obligation.
S-4
122
VALHI, INC. AND SUBSIDIARIES
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES
AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
(IN THOUSANDS)
BALANCE AT BALANCE
BEGINNING AMOUNT AMOUNT AT END
OF YEAR ADDITIONS COLLECTED WRITTEN OFF OF YEAR
---------- --------- --------- ----------- -------
Notes receivable - Contran Corporation:
Year ended December 31, 1991 $18,150 $ 49,675 $ 67,825 $ - $ -
Year ended December 31, 1992 - 66,953 66,953 - -
Year ended December 31, 1993 - 11,800 (11,800) - -
This schedule omits income tax accruals and payments resulting from inclusion
of the Registrant and its qualifying subsidiaries in Contran's consolidated
U.S. federal income tax return and other amounts arising in the ordinary course
of business.
S-5
123
VALHI, INC. AND SUBSIDIARIES
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
DECEMBER 31, 1992 AND 1993
(IN THOUSANDS)
1992 1993
---- ----
Current assets:
Cash and cash equivalents $ 31,565 $ 10,856
Marketable securities 127,459 28,518
Accounts and notes receivable 2,521 2,505
Receivable from subsidiaries and affiliates 5,561 2,061
Deferred income taxes 3,718 1,619
Other 4,823 96
-------- --------
Total current assets 175,647 45,655
-------- --------
Other assets:
Marketable securities 44,250 108,800
Investment in subsidiaries 155,885 39,096
Investment in NL and Tremont 248,395 74,897
Deferred income taxes 13,137 50,744
Other 8,505 9,650
-------- --------
Total other assets 470,172 283,187
-------- --------
Property and equipment, net 415 418
-------- --------
$646,234 $329,260
======== ========
Current liabilities:
Current maturities of long-term debt $ 96,629 $ -
Accounts payable and accrued liabilities 23,560 7,222
Payable to subsidiaries and affiliates 31,769 1,058
Income taxes 1,498 1,464
-------- --------
Total current liabilities 153,456 9,744
-------- --------
Noncurrent liabilities:
Long-term debt 230,112 108,800
Other 3,542 3,215
-------- --------
Total noncurrent liabilities 233,654 112,015
-------- --------
Stockholders' equity:
Capital and retained earnings 269,633 185,821
Adjustments:
Currency translation (10,277) (17,776)
Marketable securities (232) 41,075
Pension liabilities - (1,619)
-------- --------
Total stockholders' equity 259,124 207,501
-------- --------
$646,234 $329,260
======== ========
S-6
124
VALHI, INC. AND SUBSIDIARIES
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
(IN THOUSANDS)
1991 1992 1993
---- ---- ----
Revenues and other income:
Interest and dividends $ 6,492 $ 9,234 $ 5,188
Securities transactions 63,201 2,113 1,167
Other, net 5,192 1,403 752
-------- -------- ---------
74,885 12,750 7,107
-------- -------- ---------
Costs and expenses:
General and administrative 8,527 8,534 9,139
Interest 58,137 40,992 26,563
Other, net (83) 1 1,476
-------- -------- ---------
66,581 49,527 37,178
-------- -------- ---------
8,304 (36,777) (30,071)
Equity in earnings of subsidiaries 32,746 45,550 47,941
Equity in losses of NL and Tremont (19,667) (70,700) (143,819)
-------- -------- ---------
Income (loss) before income taxes 21,383 (61,927) (125,949)
Income tax benefit (expense) (1,373) 39,690 61,825
-------- -------- ---------
Income (loss) before extraordinary items
and cumulative effect of changes in
accounting principles 20,010 (22,237) (64,124)
Extraordinary items 4,752 (6,277) (15,390)
Cumulative effect of changes in accounting
principles - (69,774) 429
-------- -------- ---------
Net income (loss) $ 24,762 $(98,288) $ (79,085)
======== ======== =========
S-7
125
VALHI, INC. AND SUBSIDIARIES
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
(IN THOUSANDS)
1991 1992 1993
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 24,762 $ (98,288) $(79,085)
-------- --------- --------
Adjustments:
Noncash interest expense 1,973 2,966 10,110
Deferred income taxes 5,127 (28,689) (54,636)
Equity in earnings of subsidiaries (32,746) (45,550) (47,941)
Equity in losses of NL and Tremont 14,566 70,700 159,747
Dividends from subsidiaries 46,297 40,937 164,454
Dividends from NL and Tremont 24,414 10,740 -
Securities transactions (63,201) (2,113) (1,167)
Prepayments of senior subordinated
notes - 9,511 7,749
Other, net (1,515) 2,062 2,085
Net change in assets and liabilities (14,977) (3,595) (8,140)
Cumulative effect of changes in
accounting principles - 69,774 (429)
-------- --------- --------
Total adjustments (20,062) 126,743 231,832
-------- --------- --------
Net cash provided by operating
activities 4,700 28,455 152,747
-------- --------- --------
Cash flows from investing activities:
Proceeds from disposition of securities 463,596 280,486 381,395
Purchases of:
Marketable securities (201,820) (294,105) (281,795)
Stock of affiliates - (4,853) -
Loans to subsidiaries and affiliates:
Loans (90,127) (68,953) (11,800)
Collections 115,777 66,953 13,800
Capital expenditures (134) (27) (195)
Other, net (99) (2,161) 3,769
-------- --------- --------
Net cash provided (used) by
investing activities 287,193 (22,660) 105,174
-------- --------- --------
S-8
126
VALHI, INC. AND SUBSIDIARIES
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
(IN THOUSANDS)
1991 1992 1993
---- ---- ----
Cash flows from financing activities:
Notes payable and long-term debt:
Additions $ 25,000 $ 97,637 $ -
Principal payments, including
retirement premiums (284,381) (58,565) (241,715)
Deferred financing costs - (3,830) -
Loans from subsidiaries and affiliates:
Loans 199,494 55,801 27,631
Repayments (220,565) (47,343) (58,895)
Dividends (22,725) (22,753) (5,704)
Other, net (86) 48 53
--------- -------- ---------
Net cash provided (used) by
financing activities (303,263) 20,995 (278,630)
--------- -------- ---------
Cash and cash equivalents:
Net increase (decrease) (11,370) 26,790 (20,709)
Balance at beginning of year 16,145 4,775 31,565
--------- -------- ---------
Balance at end of year $ 4,775 $ 31,565 $ 10,856
========= ======== =========
Supplemental disclosures-cash paid for:
Interest $ 61,577 $ 41,492 $ 26,817
Income taxes (received) (3,158) (11,384) (16,482)
S-9
127
VALHI, INC. AND SUBSIDIARIES
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
NOTES TO CONDENSED FINANCIAL INFORMATION
NOTE 1 - BASIS OF PRESENTATION:
The Consolidated Financial Statements of Valhi, Inc. and Subsidiaries
are incorporated herein by reference. Condensed financial information for all
periods presented is classified based on the Company's organizational structure
as of December 31, 1993, and certain prior year amounts have been reclassified
to conform with the 1993 presentation.
NOTE 2 - MARKETABLE SECURITIES:
DECEMBER 31,
------------------
1992 1993
---- ----
(IN THOUSANDS)
Current assets - U.S. Treasury securities $127,459 $ 28,518
======== ========
Noncurrent assets - Baroid common stock $ 44,250 $108,800
======== ========
The Company adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" as of December 31, 1993 and classified its
portfolio of U.S. Treasury securities as trading securities, and its Baroid
common stock as securities available-for-sale. Cost of the U.S. Treasury
securities at December 31, 1993 was approximately $28.6 million.
At December 31, 1993, Valhi held 13.7 million Baroid shares (cost -
$44.3 million) with a quoted market price of $8.25 per share, or an aggregate
of $112.8 million. However, because the Baroid common stock is exchangeable
for the Company's LYONs at the option of the LYONs holder (see Note 3), the
carrying value of the Baroid stock is limited to the accreted LYONs obligation.
In January 1994, Baroid and Dresser merged and each share of Baroid common
stock was exchanged for .4 shares of Dresser common stock. As a result, the
LYONS became exchangeable for the 5.5 million Dresser shares now held by the
Company, which shares represent approximately 3% of Dresser's outstanding
common stock.
S-10
128
NOTE 3 - LONG-TERM DEBT:
DECEMBER 31,
------------------
1992 1993
---- ----
(IN THOUSANDS)
Liquid Yield Option NotesTM $ 99,393 $108,800
Senior subordinated notes 227,348 -
-------- --------
326,741 108,800
Less current maturities 96,629 -
-------- --------
$230,112 $108,800
======== ========
The zero coupon Senior Secured LYONs, $379 million principal amount at
maturity in October 2007, were issued with significant original issue discount
("OID") to represent a yield to maturity of 9.25%. No periodic interest
payments are required. Each $1,000 in principal amount at maturity of the
LYONs is exchangeable, at any time, for 14.4308 shares of Dresser common stock
held by the Company (see Note 2). The LYONs are redeemable at the option of
the holder in October 1997 or October 2002 at the issue price plus accrued OID
through such purchase date. Such redemptions may be paid, at Valhi's option,
in cash, Dresser common stock, or a combination thereof. The LYONs are not
redeemable at Valhi's option prior to October 1997 unless the market price of
Dresser common stock exceeds $35.70 per share for specified time periods.
The LYONs are secured by the 5.5 million shares of Dresser common
stock held by Valhi, which shares are held in escrow for the benefit of holders
of the LYONs. Valhi receives the regular quarterly dividend (currently $.17
per quarter) on the escrowed Dresser shares.
Aggregate maturities of long-term debt at December 31, 1993
AMOUNT
------
(IN THOUSANDS)
October 1997 - LYONs $153,451
Less unamortized original issue discount 44,651
--------
$108,800
========
The LYONs are reflected in the above table as due in October 1997, the
first of the two dates they are redeemable at the option of the holder, at the
redemption price on such date of $404.84 per $1,000 principal amount at
maturity.
S-11
129
NOTE 4 - INVESTMENT IN AND ACCOUNTS WITH SUBSIDIARIES AND AFFILIATES:
DECEMBER 31,
--------------------
1992 1993
---- ----
(IN THOUSANDS)
Investment in subsidiaries
Amalgamated $ 21,176 $25,245
Valcor 134,709 13,851
-------- -------
$155,885 $39,096
======== =======
Investment in affiliates:
NL Industries $200,197 $60,170
Tremont 48,198 14,727
-------- -------
$248,395 $74,897
======== =======
Receivables:
Loan to Medite $ 2,000 $ -
Income taxes, net 883 -
Other 2,678 2,061
-------- -------
$ 5,561 $ 2,061
======== =======
Payables:
Loan from Amalgamated $ 31,186 $ -
Income taxes, net - 296
Other 583 762
-------- -------
$ 31,769 $ 1,058
======== =======
NOTE 5 - EQUITY IN EARNINGS OF SUBSIDIARIES AND IN LOSSES OF AFFILIATES:
YEARS ENDED DECEMBER 31,
------------------------------
1991 1992 1993
---- ---- ----
(IN THOUSANDS)
Subsidiaries:
Valcor $ 10,134 $ 25,092 $ 28,350
Amalgamated 22,612 20,458 19,591
-------- -------- ---------
$ 32,746 $ 45,550 $ 47,941
======== ======== =========
Affiliates:
NL Industries $(19,327) $(32,110) $ (44,739)
Tremont (340) (16,590) (15,065)
-------- -------- ---------
(19,667) (48,700) (59,804)
Provisions for market value impairment - (22,000) (84,015)
-------- -------- ---------
$(19,667) $(70,700) $(143,819)
======== ======== =========
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130
NOTE 6 - DIVIDENDS FROM SUBSIDIARIES AND AFFILIATES:
YEARS ENDED DECEMBER 31,
---------------------------------
1991 1992 1993
---- ---- ----
(IN THOUSANDS)
Subsidiaries:
Amalgamated $38,681 $19,823 $ 15,522
Valcor 7,616 21,114 148,932
------- ------- --------
$46,297 $40,937 $164,454
======= ======= ========
Affiliates:
NL Industries $22,461 $ 8,675 $ -
Tremont 1,953 2,065 -
------- ------- --------
$24,414 $10,740 $ -
======= ======= ========
Dividends from Valcor in 1993 include (1) $60 million from the
proceeds of new borrowings under Medite's Timber Credit Agreement and (ii) $75
million from the proceeds of Valcor's Senior Notes Due 2003. NL and Tremont
each suspended dividends during 1992.
NOTE 7 - CASH RECEIVED FOR INCOME TAXES:
YEARS ENDED DECEMBER 31,
----------------------------
1991 1992 1993
---- ---- ----
(IN THOUSANDS)
Received from subsidiaries:
Amalgamated $11,338 $12,620 $11,336
Valcor 7,344 7,623 14,294
------- ------- -------
18,682 20,243 25,630
------- ------- -------
Paid to:
Contran 14,086 7,630 8,845
State and foreign tax authorities 1,438 1,229 303
------- ------- -------
15,524 8,859 9,148
------- ------- -------
Cash received for income taxes, net $ 3,158 $11,384 $16,482
======= ======= =======
NL and Tremont are separate U.S. taxpayers and are not members of the
Contran Tax Group.
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131
NOTE 8 - INCOME TAXES:
The components of the provision for income tax benefit (expense)
attributable to income (loss) before extraordinary items and cumulative effect
of changes in accounting principles are presented below.
YEARS ENDED DECEMBER 31,
---------------------------
1991 1992 1993
---- ---- ----
(IN THOUSANDS)
Provision for income tax benefit (expense):
Currently refundable $ 3,405 $13,056 $10,649
Deferred income taxes (4,778) 26,634 51,176
------- ------- -------
$(1,373) $39,690 $61,825
======= ======= =======
The components of the net deferred tax asset at December 31, 1992 and
1993 are summarized below.
DEFERRED TAX
ASSET (LIABILITY)
-------------------
DECEMBER 31,
-------------------
1992 1993
---- ----
(IN THOUSANDS)
Tax effect of temporary differences related to:
Marketable securities $ (751) $(23,498)
Investment in NL and Tremont 17,747 78,844
Accrued liabilities and other deductible differences 6,695 5,420
Other taxable differences (6,836) (8,403)
------- --------
$16,855 $ 52,363
======= ========
Current deferred tax asset $ 3,718 $ 1,619
Noncurrent deferred tax asset 13,137 50,744
------- --------
$16,855 $ 52,363
======= ========
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132
NOTE 9 - CHANGES IN ACCOUNTING PRINCIPLES:
Marketable securities (SFAS No. 115). The Company, NL and Tremont
each elected early compliance with SFAS No. 115 effective December 31, 1993.
The cumulative effect of this change in accounting principle is shown in the
table below. The amounts attributable to the Company's investment in NL and
Tremont consist of the Company's equity in the respective amounts reported by
NL and Tremont.
CUMULATIVE ADJUSTMENT TO
------------------------
EQUITY
EARNINGS COMPONENT
-------- ---------
(IN THOUSANDS)
Increase (decrease) in net assets at
December 31, 1993:
Marketable securities $ - $ 64,550
Investment in NL and Tremont 661 (661)
Deferred income taxes, net (232) (22,361)
------- --------
$ 429 $ 41,528
======= ========
OPEB (SFAS No. 106) and income taxes (SFAS No. 109). The Company, NL
and Tremont each elected (i) early compliance with both SFAS No. 106 and SFAS
No. 109 as of January 1, 1992; (ii) to apply SFAS No. 109 prospectively and not
restate prior years; and (iii) immediate recognition of the OPEB transition
obligation. The cumulative effect of these changes in accounting principles
adjustment is shown in the table below. The amounts attributable to the
Company's investments in NL and Tremont consist of the Company's equity in the
respective historical amounts reported by NL and Tremont and, pursuant to SFAS
No. 109, applicable adjustment of certain of the Company's purchase accounting
basis differences originally recorded net-of-tax at rates differing from
current rates.
AMOUNT
------
(IN THOUSANDS)
Increase (decrease) in net assets at January 1, 1992:
Investment in Amalgamated and Valcor $ (5,704)
Investment in NL and Tremont (74,107)
Deferred income taxes, net 10,037
--------
Loss from cumulative effect of changes in accounting
principles $(69,774)
========
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133
VALHI, INC. AND SUBSIDIARIES
SCHEDULE V - PROPERTY AND EQUIPMENT
(IN THOUSANDS)
BALANCE AT CURRENCY CHANGE IN BALANCE
BEGINNING ADDITIONS TRANSLATION ACCOUNTING AT END
CLASSIFICATION OF YEAR AT COST RETIREMENTS ADJUSTMENTS METHOD (A) OTHER (B) OF YEAR
- ---------------------------- ---------- --------- ----------- ----------- ---------- --------- --------
Year ended December 31, 1991:
Land $ 16,399 $ 2,028 $ - $ - $ - $ - $ 18,427
Buildings 41,895 2,352 (2) - - - 44,245
Equipment 292,623 13,924 (1,466) - - 624 305,705
Construction in progress 2,551 6,614 - - - - 9,165
-------- ------- -------- ------- ------- ------- --------
$353,468 $24,918 $ (1,468) $ - $ - $ 624 $377,542
======== ======= ======== ======= ======= ======= ========
Year ended December 31, 1992:
Land $ 18,427 $ 1,783 $ (3,371) $ (2) $ 1,344 $ - $ 18,181
Buildings 44,245 2,072 (2,404) (254) (2,142) - 41,517
Equipment 305,705 27,930 (11,113) (892) (898) 988 321,720
Construction in progress 9,165 (5,084) - - - - 4,081
-------- ------- -------- ------- ------- ------- --------
$377,542 $26,701 $(16,888) $(1,148) $(1,696) $ 988 $385,499
======== ======= ======== ======= ======= ======= ========
Year ended December 31, 1993:
Land $ 18,181 $ 642 $ - $ (1) $ - $ - $ 18,822
Buildings 41,517 2,137 (22) (110) - - 43,522
Equipment 321,720 21,872 (1,600) (437) - 313 341,868
Construction in progress 4,081 13,283 (13) (7) - - 17,344
-------- ------- -------- ------- ------- ------- --------
$385,499 $37,934 $ (1,635) $ (555) $ - $ 313 $421,556
======== ======= ======== ======= ======= ======= ========
(a) Adjustment of carrying value resulting from adoption of SFAS No. 109.
(b) A 1992 business combination accounted for by the purchase method, and
reclassifications.
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134
VALHI, INC. AND SUBSIDIARIES
SCHEDULE V - PROPERTY AND EQUIPMENT (CONTINUED)
(IN THOUSANDS)
DEPLETION
BALANCE AT CHARGED TO CHANGE IN BALANCE
BEGINNING ADDITIONS COSTS AND ACCOUNTING AT END
CLASSIFICATION OF YEAR AT COST EXPENSES METHOD (A) OF YEAR
- ---------------------------- ---------- --------- ---------- ---------- --------
Timber and timberlands:
Year ended December 31, 1991 $48,131 $ 1,861 $ (5,631) $ - $44,361
Year ended December 31, 1992 44,361 1,253 (2,629) 8,606 51,591
Year ended December 31, 1993 51,591 1,152 (875) - 51,868
(a) Adjustment of carrying value resulting from adoption of SFAS No. 109.
S-17
135
VALHI, INC. AND SUBSIDIARIES
SCHEDULE VI - ACCUMULATED DEPRECIATION OF PROPERTY AND EQUIPMENT
(IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO CURRENCY BALANCE
BEGINNING COSTS AND TRANSLATION AT END
CLASSIFICATION OF YEAR EXPENSES RETIREMENTS ADJUSTMENTS OTHER (A) OF YEAR
- ---------------------------- ---------- ---------- ----------- ----------- --------- --------
Year ended December 31, 1991:
Buildings $ 15,164 $ 2,331 $ - $ - $ - $ 17,495
Equipment 147,930 19,228 (1,260) - (290) 165,608
-------- ------- ------- ----- ----- --------
$163,094 $21,559 $(1,260) $ - $(290) $183,103
======== ======= ======= ===== ===== ========
Year ended December 31, 1992:
Buildings $ 17,495 $ 2,071 $(1,555) $ (65) $ - $ 17,946
Equipment 165,608 21,201 (7,050) (623) 102 179,238
-------- ------- ------- ----- ----- --------
$183,103 $23,272 $(8,605) $(688) $ 102 $197,184
======== ======= ======= ===== ===== ========
Year ended December 31, 1993:
Buildings $ 17,946 $ 2,830 $ (15) $ (31) $ - $ 20,730
Equipment 179,238 20,127 (1,583) (312) 100 197,570
-------- ------- ------- ----- ----- --------
$197,184 $22,957 $(1,598) $(343) $ 100 $218,300
======== ======= ======= ===== ===== ========
(a) Reclassifications.
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136
VALHI, INC. AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR
- ------------------------------- ---------- ---------- ---------- -------
Year ended December 31, 1991:
Allowance for doubtful accounts $1,114 $ 176 $ (115) $1,175
====== ====== ======= ======
Amortization of intangibles:
Goodwill $ 508 $ 169 $ - $ 677
Franchise fees and other 3,583 2,044 (1,734) 3,893
------ ------ ------- ------
$4,091 $2,213 $(1,734) $4,570
====== ====== ======= ======
Year ended December 31, 1992:
Allowance for doubtful accounts $1,175 $ 641 $ (493) $1,323
====== ====== ======= ======
Amortization of intangibles:
Goodwill $ 677 $ 165 $ - $ 842
Franchise fees and other 3,893 1,550 (19) 5,424
------ ------ ------- ------
$4,570 $1,715 $ (19) $6,266
====== ====== ======= ======
Year ended December 31, 1993:
Allowance for doubtful accounts $1,323 $ 31 $ (380) $ 974
====== ====== ======= ======
Amortization of intangibles:
Goodwill $ 842 $ 166 $ - $1,008
Franchise fees and other 5,424 1,571 (147) 6,848
------ ------ ------- ------
$6,266 $1,737 $ (147) $7,856
====== ====== ======= ======
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137
VALHI, INC. AND SUBSIDIARIES
SCHEDULE IX - SHORT-TERM BORROWINGS
(IN MILLIONS, EXCEPT PERCENTAGES)
MAXIMUM AVERAGE WEIGHTED
BALANCE WEIGHTED AMOUNT AMOUNT AVERAGE
CATEGORY OF AGGREGATE AT END AVERAGE OUTSTANDING OUTSTANDING INTEREST RATE
SHORT-TERM BORROWINGS OF YEAR INTEREST RATE DURING YEAR DURING YEAR (A) DURING YEAR (B)
- -------------------------------- ------- ------------- ----------- --------------- ---------------
Year ended December 31, 1991:
United States Government loans $60.8 5.2% $114.5 $61.9 6.7%
Bank credit agreements 25.0 6.4 37.9 20.4 8.7
Commercial paper 20.0 6.2 40.0 29.5 7.1
Year ended December 31, 1992:
United States Government loans $76.5 3.3% $119.7 $68.2 4.2%
Bank credit agreements 41.7 5.2 52.9 32.4 6.0
Commercial paper 4.0 4.4 35.0 20.7 5.0
Year ended December 31, 1993:
United States Government loans $75.5 3.4% $122.7 $74.4 3.5%
Bank credit agreements 42.2 4.8 85.7 50.0 4.8
Commercial paper - - 4.0 1.0 4.5
(a) Based upon average daily balances.
(b) Computed using actual interest charges as a percent of the average
amount outstanding during the year.
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138
VALHI, INC. AND SUBSIDIARIES
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
(IN THOUSANDS)
1991 1992 1993
---- ---- ----
Depreciation, depletion and amortization:
Property and equipment $21,559 $23,272 $22,957
Timber and timberlands 5,631 2,629 875
Goodwill 169 165 166
Franchise fees and other intangible assets 2,044 1,550 1,571
------- ------- -------
$29,403 $27,616 $25,569
======= ======= =======
Advertising $ 9,191 $ 9,349 $ 9,927
======= ======= =======
Maintenance and repairs $26,292 $27,864 $28,110
======= ======= =======
Taxes, other than payroll and income taxes $ 8,335 $ 7,645 $ 7,220
======= ======= =======
S-21