VALHI, INC. — 2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014. Valhi is a holding company operating through four consolidated segments: chemicals (Kronos), component products (CompX), waste management (WCS), and real estate management and development (BMI and LandWell). Valhi controlled about 93% of its common stock through Contran at year-end.
Key financial results
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $1,862.6 million | $1,863.6 million |
| Operating income (loss) | $170.2 million | $(138.7) million |
| Income (loss) before tax | $112.0 million | $(217.9) million |
| Income tax expense (benefit) | $32.5 million | $(91.0) million |
| Net income (loss) attributable to Valhi stockholders | $53.8 million | $(98.0) million |
| Diluted earnings (loss) per share | $0.16 | $(0.29) |
| Cash from operating activities | $67.3 million | $117.1 million |
| Capital expenditures | $72.7 million | $74.6 million |
| Total debt at year-end | $934.1 million | $752.5 million |
| Cash and cash equivalents at year-end | $255.8 million | $142.8 million |
Year-end restricted cash was $10.6 million; marketable securities totaled $258.3 million. Reported available borrowing capacity was $224.5 million, including $51.3 million under Valhi’s Contran facility, which is available at Contran’s discretion. Total assets were $2,967.2 million and total equity was $813.9 million. Consolidated gross margin was $402.8 million, approximately 21.6% of sales.
Material changes and segment performance
- Chemicals: Sales fell 5% to $1,651.9 million, principally as average TiO₂ selling prices declined 6%; volumes were broadly stable. Lower feedstock and production costs helped lift gross margin to $347.3 million from $109.8 million, and operating income to $156.8 million from a $125.4 million loss. 2013 included Canadian lockout-related costs and a $35 million litigation settlement charge.
- Component products: Sales rose 13% to $103.9 million and operating income increased to $13.6 million from $9.3 million, supported by higher security and marine product demand.
- Waste management: Sales rose to $66.5 million from $39.2 million. Operating loss narrowed to $2.2 million from $22.6 million as shipping-container availability improved and disposal volumes increased, particularly in the second half.
- Real estate: Included for a full year following Valhi’s 2013 acquisition of control. Sales were $40.3 million and operating income was $2.0 million; $31.9 million of sales related to land. Management said current contracted land sales were not expected to generate significant operating income because the land was recorded at acquisition-date fair value.
Fourth-quarter 2014 sales were $432.0 million, operating income $40.5 million, and net income attributable to Valhi stockholders $8.8 million, or $0.03 per share. In fourth-quarter 2013, sales were $400.1 million, operating loss was $4.2 million, and attributable net income was $15.7 million, or $0.05 per share; 2013 included a substantial acquisition-related gain.
Outlook, risks, and unusual items
- Management expected 2015 income from continuing operations attributable to Valhi stockholders to be higher than in 2014, mainly because of improved WCS results; lower insurance recoveries were expected to offset part of that benefit. WCS’s outlook depended on attracting sufficient disposal volumes and larger federal waste streams.
- Kronos expected 2015 sales and production volumes to increase, but operating income to be comparable to 2014 as higher volumes were expected to be mostly offset by lower selling prices. Production was expected to remain below full capacity during improvement projects and extended maintenance shutdowns.
- Expected 2015 capital expenditures were approximately $87 million. Management expected to have sufficient liquidity for near- and medium-term obligations, but noted that actual results differing from expectations could impair liquidity.
- Valhi reduced its quarterly common dividend from $0.05 to $0.02 beginning in the second quarter of 2014, citing results, cash requirements, and lower expected subsidiary distributions. 2014 dividends totaled $0.11 per share; future dividends remain discretionary.
- NL faced a California lead-paint abatement judgment against it and two co-defendants requiring aggregate payment of $1.15 billion. NL appealed and recorded no accrual, concluding a loss was not probable and could not be reasonably estimated. An adverse outcome could materially affect Valhi’s results, financial position, and liquidity.
- Environmental remediation liabilities totaled $118.5 million at year-end, including approximately $110 million accrued by NL for about 47 sites; NL estimated the upper end of reasonably possible costs for estimable matters at $149 million. Costs at five additional sites could not then be estimated.
- Other principal risks include cyclical TiO₂ prices and competition, raw-material supply and cost exposure, foreign exchange movements, debt and interest obligations, dependence on subsidiary distributions, WCS permitting and customer-volume risks, and Henderson real-estate market conditions. Consolidated contractual commitments totaled $2.44 billion, including $531.8 million of TiO₂ feedstock commitments.
- Other notable items: 2014 operating cash flow declined despite the earnings recovery, in part because working-capital changes used $116.9 million. Pension obligations were affected by lower discount rates; accumulated other comprehensive loss increased to $148.6 million. The company reported compliance with debt covenants and effective disclosure controls and internal control over financial reporting.
Investor verification priorities
- Review the California lead-pigment appeal, possible exposure, and the basis for recording no loss accrual.
- Assess the environmental liability estimates, sites with unestimable costs, and potential changes in remediation obligations.
- Examine debt maturities, covenant terms, variable-rate exposure, related-party borrowing arrangements, and the availability of stated credit capacity.
- Confirm whether Kronos can sustain margins amid lower TiO₂ prices and feedstock costs, and whether WCS can maintain higher shipment volumes and improve cash generation.
- Track subsidiary dividend capacity and Valhi’s ability to fund parent-level obligations and its common dividend.
- Evaluate land-sale cash proceeds, development spending, and the assumptions underlying the estimated fair value and revenue recognition for Henderson properties.