Valhi, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Valhi is a holding company whose consolidated businesses include titanium dioxide (TiO₂) chemicals, component products, waste management, and real estate management and development. The results include BMI and LandWell from January 1, 2014, following Valhi’s acquisition of control in December 2013.
Key financial results
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $491.7 million | $516.0 million | $954.1 million | $1,015.2 million |
| Income (loss) before taxes | $25.2 million | $(75.9) million | $33.6 million | $(145.9) million |
| Net income (loss) | $23.7 million | $(48.6) million | $28.3 million | $(96.8) million |
| Net income (loss) attributable to Valhi stockholders | $15.5 million | $(39.7) million | $16.3 million | $(79.5) million |
| Basic and diluted EPS | $0.05 | $(0.12) | $0.05 | $(0.23) |
| Cash provided by (used in) operating activities | Not separately reported for the quarter | $3.3 million | $(16.6) million |
Q2 gross margin was $104.2 million, or about 21% of sales, versus $17.2 million, or about 3%, a year earlier. First-half gross margin was $190.0 million, or about 20% of sales, versus $30.1 million, or about 3%. The filing reports segment operating income of $46.7 million for Q2 and $69.5 million for the first half; these are not consolidated operating-income figures.
At June 30, 2014, cash and cash equivalents were $255.1 million, restricted cash equivalents were $14.8 million, and marketable securities totaled $259.0 million. Total debt was $929.9 million, including $12.6 million of current maturities, compared with $752.5 million at December 31, 2013. Current assets were $1,108.3 million and current liabilities were $383.8 million. The company reported $224.8 million of borrowing availability across facilities, subject to facility terms; $60 million under the Contran facility was at Contran’s discretion.
Material changes and operating drivers
- Chemicals: Q2 sales fell 8% to $443.5 million; first-half sales fell 9% to $863.6 million. TiO₂ sales volumes declined 8% in both comparisons and average selling prices declined 4% in Q2 and 5% for the first half. Lower feedstock and other production costs, higher production volumes, and favorable currency effects drove segment operating results from losses to income: $46.3 million in Q2 and $73.9 million in the first half, versus losses of $45.3 million and $90.4 million, respectively, in 2013.
- Component products: Sales rose 12% in Q2 to $26.8 million and 16% in the first half to $52.6 million. Segment operating income increased to $3.9 million and $7.2 million, respectively, supported by higher demand and production efficiency.
- Waste management: Q2 sales were $11.9 million and operating loss was $5.0 million. First-half sales were $18.9 million and operating loss was $13.5 million. Lower average disposal prices from waste mix and a high fixed-cost base weighed on results.
- Real estate: Newly consolidated BMI and LandWell reported first-half sales of $19.0 million and operating income of $1.9 million. Land sales contributed $14.9 million of first-half revenue; management said significant operating income was not expected on land currently under contract because of acquisition-date fair-value accounting.
- Other income was $15.3 million in the first half, including $13.4 million of securities earnings. A $5.9 million noncash tax benefit from reducing uncertain-tax-position reserves contributed to Q2 results. The first half of 2013 included a $6.6 million debt-prepayment charge.
Cash, debt, and capital allocation
First-half operating cash flow improved to $3.3 million from cash use of $16.6 million, despite substantial working-capital use, including an $88.7 million increase in receivables. Investing activities used $19.9 million, including $35.2 million of capital expenditures, partly offset by a $17.2 million net release of restricted cash. Financing activities provided $129.2 million; the company reported $480.2 million of borrowings and $309.2 million of principal payments.
In February 2014, Kronos issued a $350 million term loan, using $170 million of proceeds to repay its note payable to Contran. The loan matures in February 2020, bears variable interest, and had a 4.75% average rate through June 30. Valhi reported compliance with debt covenants at quarter-end. The company expected 2014 interest expense to exceed 2013’s, primarily due to higher average debt from the Kronos loan.
Valhi reduced its regular quarterly dividend from $0.05 to $0.02 per share beginning in Q2, citing its financial condition, cash needs, and expected lower subsidiary distributions. First-half dividends paid to Valhi stockholders totaled $23.7 million.
Outlook, risks, and contingencies
- Management expected positive 2014 net income attributable to Valhi stockholders, versus a loss in 2013, citing anticipated chemicals and real-estate operating income, lower expected corporate environmental costs, and the absence of 2013 debt-prepayment losses. This is management’s outlook, not a quantified earnings forecast.
- Management expected 2014 Chemicals operating income to exceed 2013, with lower feedstock costs and higher production volumes as key factors. It also noted that TiO₂ prices had declined, and that further price increases depended on market conditions.
- Management expected approximately $81 million of 2014 capital expenditures, plus approximately $26 million of LandWell development spending, which is included in operating cash-flow needs. It expected adequate liquidity for short- and longer-term obligations, but cautioned that actual results differing from expectations could adversely affect liquidity.
- WCS continued to incur operating losses and relied on intercompany funding. Management said significant operating profit depended on higher volumes, improved utilization, and cost reductions. Shipping-container shortages had constrained disposal volumes; additional containers were expected to enter service in the second half of 2014.
- NL’s California lead-paint case resulted in a January 2014 judgment holding NL and two other defendants jointly and severally liable for $1.15 billion of abatement costs. NL appealed. Valhi did not accrue a loss, concluding that loss was not probable and could not be reasonably estimated; the filing warns that an adverse resolution could materially affect results, financial position, and liquidity.
- Environmental remediation liabilities totaled $126.8 million, including $118 million accrued by NL for approximately 45 sites. NL estimated the upper end of reasonably possible costs for estimable sites at approximately $158 million, including amounts accrued; it could not estimate costs for about five other sites. Additional environmental costs may arise.
- Other exposures include asbestos and silica litigation, tax examinations, and challenges to WCS licenses. The filing reports favorable Texas appellate rulings for WCS, with certain rehearing or further-review periods still relevant. Management stated that disclosure controls were effective and that there were no material changes in internal control during the quarter.
Most important facts for investors to verify
- Whether TiO₂ selling prices, sales volumes, and feedstock costs developed as management expected, and whether chemicals profitability persisted.
- Cash conversion and liquidity, including subsidiary dividend capacity, borrowing availability, debt service, and the effects of the reduced Valhi dividend.
- Progress at WCS in obtaining disposal volumes, resolving shipping constraints, and reducing operating losses and funding needs.
- The appeal and potential financial consequences of the California lead-paint judgment, along with environmental remediation estimates and other litigation exposures.
- Final purchase-price allocation for BMI and LandWell, which remained preliminary, and the timing and economics of future land sales and development.